[{"messages": [{"role": "system", "content": "Certainly. [Operator Instructions] And our first question comes from the line of Gregory Peters from Raymond James. Your question please."}, {"role": "user", "content": "Well, Good morning. A lot to unpack in your comments. I think what I'd like to do for my question and follow-up would be to focus on, first, slide 5. And I was interested in your comments about the average underlying loss ratio, I think, up 6.5% in first quarter versus the average earned premium being a good guide for 5.7%. I guess the question would be, is the expectation that 6.5% is going to continue? And when will the average earned premium go beyond where the underlying loss ratio deterioration is?"}, {"role": "assistant", "content": "I'll get Mario to dig in on claim expenses. When you look at the 5.7%, I'll remind you -- I'll remind you that remember, this is a number that's been trending up as the rates that we took in 2021 and 2022 start to be earned in. So we would expect that number to continue to increase as we earn in the rates we've already implemented, and so we think this. In terms of claims severity, I'll let Mario give you an update on where we are and what we're thinking about."}, {"role": "assistant", "content": "Yes. So in terms of claims severity, what we disclosed this quarter was across major coverages. We're running in the 9% to 11% range in both physical damage and in injury coverages. Really, the drivers of those costs, if you start with physical damage, we continue to see pretty persistent inflation particularly in parts and labor costs to repair cars. Actually, used car prices or total values for used cars actually came down a little bit in the first quarter in our numbers, but we had a higher percentage of total loss frequency which impacted the mix, so those are really the drivers. And on bodily injury, it's the same things we've been talking about. Medical inflation, medical consumption and attorney representation."}, {"role": "assistant", "content": "So I think the drivers of severity continue to persist. In terms of where they're going forward, it's really anybody's guess, but I think our perspective is, and we've been pretty consistent on this point, we're going to continue to take prices up. We've been doing that really since the fourth quarter of 2021 throughout last year. That continued into the first quarter. We're going to continue to, on a forward-looking basis, implement rate increases to first catch up and then outpace loss cost trends. But our perspective on rates as we continue to need to push more price through the system, and we intend to do that throughout the balance of 2023."}, {"role": "user", "content": "Right. On slide seven, you -- in your comments, you talked about those three states. And I guess, a follow-up question would be, where do you think that's going to go from a rate perspective? I think you said in your comment, Mario, that you expect to file the balance of your full rate need in California. And won't that trigger a different process causing a delay in potential rate approvals? So give us some color on that slide, please."}, {"role": "assistant", "content": "Sure. So first I'll start with as we talked about, we just got approval for a second 6.9% auto rate increase in California. So we're -- going back to the fourth quarter of last year, we've got approval for 26.9% rates. And we've done that by working closely with the department to lay out our data and our loss costs. In those conversations, and I think you've seen some of this across the industry, the department is really encouraging carriers to file for the rate need that they have in their book as opposed to going forward with 6.9% rate increase filings."}, {"role": "assistant", "content": "And it's really based on just the volume of rate filings they're getting. So as we talk to the commissioner and the department, we got -- we're able to secure approval for the 2 6.9% rate increases, and we intend on filing the balance of our rate need going forward. Does that create risk in intervention? It does. But I think we need to get California auto prices back to where they need to be so that we can create the kind of availability for consumers, really, that they deserve in California. So, we're going to work with the department closely, we're going to make that filing, and then we'll see where that takes us going forward."}, {"role": "assistant", "content": "So Greg, I think embedded in your question is will you be challenged on something above 6.9%? The strategy that Guy Hill and team put into place was, take 6.9% -- get 6. 9% don't have to have a consumer advocate come in and look at it, get another 6.9% and then go for the full rate. So what you're seeing us do it in three chunks. Other people have tried to do it other ways. We think this is the right way for us."}, {"role": "user", "content": "Got it, in New York, New Jersey?"}, {"role": "assistant", "content": "Yeah. We got some rate filings pending with the New York department that hopefully will get resolved soon. And then New Jersey, you see, we were able to implement a rate increase and we're going to come back and file another rate increase. So we're working hard to get these three states off of this page."}, {"role": "user", "content": "Got it. Thank you for the answers."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question and our next question comes from the line of Paul Newsome from Piper Sandler. Your question please."}, {"role": "user", "content": "Good morning. I was hoping you could give us a little bit more additional color on the sales inflation rate. Is it fair to say that what we saw in the first quarter was an acceleration of frequency or severity trends that was unexpected? And if so, maybe you could talk about a little bit more of the pieces that were that much worse that may have seemed to have caught some people in the industry off the large."}, {"role": "assistant", "content": "Paul, you're breaking up a little bit, so let me just make sure I get it. So we're talking about auto insurance severity trends first quarter versus -- is that a tick up from what you saw last year? Or is it the level on? If that's the question, I'll just -- Mario can jump into that."}, {"role": "assistant", "content": "Yeah. I guess, what I would say about severity, again, in that 9% to 11% range is it just remains persistently high, I think, is how I would describe it, and that's true across coverages. It's certainly lower than what our expectations were for severity last year, what our ultimate forecast is for 2022. But it still remains at elevated levels, which is why I go back to we're going to need to continue to push rate through the system through the balance of this year to combat that inflation."}, {"role": "user", "content": "Is that -- should we interpret that as a further acceleration of rate? I mean, I think you were expecting to put rate -- more rate anyway, right? I guess the question is do we have a step function up a little bit from where we would have been?"}, {"role": "assistant", "content": "Yes. Paul, I think there's a little bit of -- I mean, when you're looking at the percentages, it gets a little confusing when you're in a high increase environment. So if you looked at the numbers that Mario was talking about, are the percentages up versus the full year of 2022, not versus the first quarter of last year. As you know, the percentages kept going up as we move throughout the year and we adjusted our results, so what we've decided to do is to talk about the percentages up versus the full year."}, {"role": "assistant", "content": "And I think, Mario, it is -- said it well, which is it continues to be high. And so we're trying to -- if you look at the percentage up versus what we thought it was in the first quarter, it would be higher than 10% to 11%, but it's not higher than what we thought the first quarter was at the end of last year. So as it relates to pricing, we're looking at just total loss cost frequency and severity, and we have to -- we believe we have to continue to increase prices this year. As Mario talked about, we were up almost 17% in the Allstate brand last year. I don't know. We don't have a target for what it will be this year. As Mario said, it's going to be what it needs to be."}, {"role": "user", "content": "No, that's helpful. I always appreciate the help, and I'll let some other folks ask questions. Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question. [Operator Instructions] And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question, please."}, {"role": "user", "content": "Hi. Thanks. Good morning. My first question, I just wanted to talk about your RBC ratio. I mean, we see the cat losses and we can see the impact that that would have had on statutory income in the quarter. But you guys also did cut your equity investments in half, which I think could have maybe a 20-point benefit in RBC. Is there a way for you guys to walk through the moving components of RBC in the quarter and give us a sense of where your RBC ratio would be within AIC at the end of the Q1?"}, {"role": "assistant", "content": "Elyse thanks for the question. Let me provide a little overview and then Jesse will jump into the specifics. The headline would be, we don't just look at RBC. And so as Jesse said, so -- I mean, if you step back and say, what are the learnings from the recent bank failures? Having a capital problem is not something that just happens to you like an auto accident, right? It's a result of a series of choices made over time. So in terms of our series of choices, we had this really comprehensive set of processes around those choices that are highly analytical."}, {"role": "assistant", "content": "We look at all kinds of scenarios. We look at it frequently, and as a result of that, we come up with what we think the right amount of capital. It includes things like RBC, it includes things like the rating agencies and includes, in some cases, we are more restrictive in terms of the amount of capital we think we need than other people. So we don't play the game of RBC arbitrage, so to speak, and fool ourselves. With that, Jesse, do you want to talk about how you think about capital and where we're at?"}, {"role": "user", "content": "Yes. Thanks, Tom. I mean I think, as you and I have talked before at least, we try and take a look at our capital position using our sophisticated economic capital model and not just the RBC ratios. We don't -- just to be clear to your specific question, we don't publish and have not published the RBC ratio for this quarter, and so I'm not in a position to take you through the bits and pieces on this call. I think directionally, you and others have noted what the RBC impacts would be. But I think it's more important to think about the way that we manage capital and the way that we look at it on a comprehensive basis, not just an RBC basis."}, {"role": "user", "content": "And I think you've seen reflected in the results that we continue to proactively manage our overall capital position. So again, I go back to our economic capital model, the sophisticated and comprehensive way that we look at capital, including all different sources and uses, and feel confident in our capital position being, as I said in my prepared remarks, above our internal targeted levels."}, {"role": "assistant", "content": "But you shouldn't take the fact that we have less equity as a statement that we thought we needed to save capital. We have less public equity holdings because we didn't think it was a good risk return trade-off, which John [Phonetic] will be happy to talk about if somebody wants to go through. But we think we have plenty of capital on this business."}, {"role": "user", "content": "Thanks. And then my second question, your personal auto underlying loss ratio did improve sequentially, right? There -- some noise, right, as there were some true-ups in the fourth quarter last year. And also, I thought that seasonally, Q1 for auto tends to be better. But I guess you put this all together and you guys are talking about taking -- still earning in some -- a good amount of rate increases, do you think that the personal auto loss ratio peaked in the first quarter? And should we expect it to improve from here?"}, {"role": "assistant", "content": "Well, first, we think the profit improvement plan is working. I would say, Elyse, that if you just summarize the first quarter, I would say we held serve in the face of, if you're a tennis fan, 120-mile an hour serve, which was called continued high increase in severity. How will -- we've returned the ball, and as you point out, it's about where it was last year. It is improved sequentially in the fourth quarter, but you're absolutely right."}, {"role": "assistant", "content": "And there were some other things going around in the fourth quarter related to the first, second and third quarter of last year. So, it's not quite fair to say that it improved. I would just say we held serve. We feel good about where we're going. It's -- in our mind, it's a question of when, not if we will get back to how we make profitability. And that's, of course, dependent on what happens with inflation and costs."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question. And our next question comes from the line of Yaron Kinar from Jefferies. Your question please."}, {"role": "user", "content": "Thank you. Good morning. Maybe starting with the current capital position, the reallocation of some of the investments. Can you maybe talk about how you see the capital in maybe capital market stress scenarios? And I'm sure you run those internally. Any color you can offer around that would be much appreciated."}, {"role": "assistant", "content": "Yaron, I'm not exactly sure. Maybe you can give me another layer down in the question so we can get specific for you?"}, {"role": "user", "content": "Sure. So I think you're talking about, what roughly $4 billion of liquidity or access of the holdco [Phonetic] and I think, $16 billion of liquidity. What happens to those we find capital markets stressed? I don't know if there's another 25% decrease in the equity market, maybe a credit cycle. I'm not exactly sure what kind of scenario to paint because I don't want to put you on the spot with a specific set of declines, but I'm sure you do test this excess capital availability against stresses in the system?"}, {"role": "assistant", "content": "Yes. No, it's a good point. Let me get John to answer that. I'll give you a little over. First, I would just say analytics everywhere. It counts for how we run this place. So whether that's using sophisticated models is where total [Indecipherable] or extending duration or what we're doing with capital. And so when we look at the extension of duration, I think John ran like nine different scenarios, how to do it, what to do it, what -- so we're all over that. When it comes to stress events in the capital markets, we look at all kinds of alternatives there. Everything from -- and what do we do with the government defaults to what do we do if there's more bank failures. And so we have -- and John can tell you sort of how he's thinking about how we allocate assets in the portfolio relative to stress events in today's market."}, {"role": "assistant", "content": "I would say from an overall capital standpoint, which is we got plenty of money. Like you saw our liabilities, they're very predictable, and so nobody is going to run in and say give us back our $10 billion and we don't have it. At the same time, we have a really highly liquid portfolio because so much of it's in investment-grade fixed income. If fixed -- investment-grade fixed income market is completely shut down we would still probably be fine. But -- now probably we would be fine because we were having cash come in terms of unearned premiums every day. So we don't really have any overall liquidity issues. But in terms of capital market stress and how you think about that from an investment decisions and where we're invested today, John can give you some perspective."}, {"role": "user", "content": "Yes. Yaron, thank you so much for the question. Just a piece of data. If we could trade security, we have $5 billion of cash coming in the next year just by things that are rolling off. It's highly integrated into the overall data and analytics and quantitative framework across the enterprise. So I answered this question, I feel confident that scores of people on the investment team to answer too because it's part of the way that we think. We're not managing an investment portfolio separate from the way that we think about the enterprise."}, {"role": "user", "content": "Tom talked a little bit about the duration trade that we did that was highlighted in the materials. That's not taken in isolation of how all the other securities in the portfolio would perform and it's not taken in isolation on how we think about the entire enterprise, what happens in underwriting and other areas. We run probably 100 different scenarios on a daily basis that look back at things that have happened in the past, things that could happen in the future, what that means for returns and what that means for capital. And we subscribe to getting the order of ready, aim, fire, right? So we really aim a lot as we think about our investment profile."}, {"role": "user", "content": "Thanks. And then maybe shifting back to the auto book. Is the piece or the cadence of rate increases that you expect to file in auto kind of similar or to where it was when we ended in 2022? Or do you see maybe additional rate increases are necessary today relative to the plan at the beginning of the year?"}, {"role": "assistant", "content": "Where is the plans at the beginning of the year? So, maybe, I'll give an overview, Mario, with an analogy and you compare it. We're running as fast and as hard as we can on rates everywhere. If we need them, we're really running fast and hard. If we think we're actually adequately priced in some states where we are today, we're still paying attention. We're still on the track. We're still warmed up and ready to run if we need to be."}, {"role": "assistant", "content": "Yeah. What I would add, Yaron, I'm going to go back to a comment I made earlier, which is, we've been pretty consistent on this point of the need to take prices up going back to last year, and that hasn't changed. Now, obviously, we react to new data, new information in real-time and the absolute amount of rate we take is going to be dependent on that updated data. As Tom mentioned earlier, we rely on heavy-duty analytics to manage the business and we respond to what's happening in real-time, so the amount of rate we need will be dependent on how loss costs play out over time for us. But we're going to continue to push rate through the system. We've been successful at that."}, {"role": "assistant", "content": "I wouldn't get too hung up on quarter-to-quarter fluctuations, because that quarterly number is going to bounce around in terms of the rates that were approved in a particular state and the size of those rates. But, I think, thematically, and we go back to what we've been saying now for -- over the last year, which is we're going to continue to take the rate that we need to get auto margins back to where they need to be, which is in the mid-90s targets that we have."}, {"role": "user", "content": "Thanks. And good luck, Mark, with the new role."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question. And our next question comes from the line of Andrew Kligerman from Credit Suisse. Your question, please."}, {"role": "user", "content": "Thank you and good morning. I'm trying to unpack the earlier comment about used car prices coming down a bit, because the Manheim Index was up about 8.6%, and that's kind of a forward-looking indicator. So maybe you could give a little color on what your expectation there is for used car prices? Does that kind of fit in your 9% to 11%? Or could have projected severity increase? Or could it be materially higher as we look out in the year?"}, {"role": "assistant", "content": "Hi, Andrew, it's Mario. Thanks for the question. I guess, what I'd start with, there's a number of indices for used car prices. I think you mentioned one with Manheim that tends to focus on wholesale prices. And I think as we all know, that metric was coming down most of last year. Certainly, in the back half of last year, and then it started to tick up in the end of the fourth quarter and has continued into this year."}, {"role": "assistant", "content": "What I was referring to earlier is actual total loss severity, which tends to lag the Manheim Index and is more a function of retail used car prices, which have improved, and that's what I was referring to in the quarter. What we saw was actually used car -- or, I'm sorry, total loss severity actually improved a little bit year-over-year."}, {"role": "assistant", "content": "In terms of the risk going forward, I think, yeah, if you look at what's happening with the Manheim Index and other indices, certainly, they're headed in a different direction than they were headed for much of last year, which adds risk. We've tried to factor that into our severity expectations in terms of what we're recording that 9% to 11% range. But what we actually saw in the first quarter of this year was a modest improvement in total loss severity."}, {"role": "user", "content": "Got it. All right. Thank you on that. And then it was interesting following National General with auto policies in force now of about $4.6 million off pretty significantly from $4.1 million last year. It looks like you're getting good rate increases. Your combined underlying was 94%, so -- which is pretty decent. So looking forward, it sounds like you haven't fully rolled it out. Is this something that could really catapult your policy in force at a very responsible return? I mean, maybe a little color on how that -- what your expectations over the next year or two for policy growth and doing so profitably?"}, {"role": "assistant", "content": "Andrew thanks for focusing in on National General. For summary, we feel really good about the acquisition of National General. If you just start with the math, the numbers, it's exceeded our expectations and assumptions because as you'll remember, we've mostly bought that so we could reduce our expenses in the independent agent channel by folding, basically having them reverse acquire Encompass, we just happen to buy them first."}, {"role": "assistant", "content": "And so the -- and that's ahead of plan and the numbers are bigger. So we're feeling really good about that, and that's the way we price the deal. You're -- strategically, which is where you're after, we're also getting the benefit of now having a solid plan for an independent agent channel, which we did not before. We've been struggling to get a good platform. So they have good technology, good relationships, as you point out, mostly in the nonstandard stuffing."}, {"role": "assistant", "content": "Mario, I think in his comments, mentioned how we're now taking those relationships and that technology platform and we're putting what we call mid-market, which is basically standard auto and homeowners, on that platform, and that's going to give us great growth opportunities, because we're using the Allstate expertise in both standard auto and -- not to be underestimated, one bit really is our business model and homeowners. We think that's a great growth opportunity and which is basically icing on the cake relative to the acquisition. So we feel really good about we're in that channel. It's part of Transformative Growth. It's part of increasing market share and personal profit liability, and we're pleased with the results."}, {"role": "user", "content": "Awesome. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question. And our next question comes from the line of Josh Shanker from Bank of America. Your question please."}, {"role": "user", "content": "Yeah. Thank you. I want to talk about segmentation and policy count. Obviously, the net decline in the auto policy count was quite high this quarter. Do you have some sort of advice or thoughts to think about how much policy count will decline over this repricing period? But two, I also note that homeowners policy count was flat which suggests in the segmentation, there's different policyholders you're keeping versus different policyholders you're losing. So I thought you might be able to touch on both things."}, {"role": "assistant", "content": "Good.. Mario, why don't you talk about homeowners and what we're doing there to drive growth? As it relates to auto insurance, we just talked about sort of the Allstate brand, I think, which may be the numbers you're referring to, which is down versus Andrew's comment about National General, which is off. On the Allstate piece, there's obviously two components. One is, are you selling more new business? And then the second is what's happening with retention."}, {"role": "assistant", "content": "And as it relates to new business, we've taken the approach that a prospective rate increase is like a new business penalty. So as you know, when you sell a business, you're going to have -- you got expenses. It is getting the customers more to get them right upfront, and then the loss ratio is typically higher for new business than it is for existing business. If you need 10 points of rate on top of what you're currently selling it to, we've factored that into our growth projections on new business and said, well, this -- at the very least, it's an additional 10 points of new business penalty."}, {"role": "assistant", "content": "The worst is that when you raise your prices by 10%, all the money you spent getting the customer is wasted because they go away and you churn it. So we've dialed back new business and advertising not so much because we're trying to manage the P&L but because we're managing the economic growth. And we think needing rate increases and going out and getting a new customer and saying, it's great, you bought it for $1,000. And then six months later saying, well, it was really $1,100 is not a good plan. So we've dialed back new business, and you see that really across the board."}, {"role": "assistant", "content": "And Mario showed in some places, even more aggressively, like New York, New Jersey, and California have kidded Mario that like, you'll know every new business customer we get in New York if we keep this up personally. So that's basically an economic choice. On retention, of course, that's the customer's choice and it depends what happens in the marketplace and what other people are doing. Our retention has gone down. We do model that out. It's really very difficult to take those old models, though and give yourself any kind of good estimate on the current view because a couple of things have changed."}, {"role": "assistant", "content": "One, these are much bigger increases than those models had in them. So those models are based on 5%, 6%, 7%, not on 10%, 12% or 15% or 40% in Texas. And at the same time, those models don't have the kind of competitive environment you're operating in where everybody else is raising rates at the same time. So we've shut down new business because we think it's economic and there's an increased new business penalty associated with being underpriced, and then we're managing to."}, {"role": "assistant", "content": "What we want to do, of course, is we're highly focused on improving customer value because people pay more, you got to do more. And so we're working hard on making sure we do insurance reviews, get our agents for them. Homeowners is another great story that I think we've kind of -- we get so focused on auto. We haven't really told that it's a great business model. Mario can talk about what we're doing to grow that business."}, {"role": "assistant", "content": "Yes. Thanks for the question, Josh. And homeowners, again, as I talked about in the prepared remarks, is a business that we continue to feel really good about in terms of where it's positioned from a profitable growth perspective. And what you saw in the quarter is that we actually increased policy count by about 1.4%. Retention actually picked up by attempt [Phonetic]."}, {"role": "assistant", "content": "And I think there's a couple of things when you kind of unpack what's happening with retention in homeowners because much -- as Tom talked about, we're having to take prices up in auto. The way we're taking price increases is in a highly segmented and targeted way, and that's helping from a retention perspective on homeowners because those bundled customers tend to be our longest-tenured, most profitable customers."}, {"role": "assistant", "content": "We also bundle about 80% of homeowners' policies have on supporting auto line and the retention on a bundled customer where a homeowner that has an auto policy is meaningfully higher than a monoline homeowners, and we're continuing to see the benefit of that. And we've put processes in place both in terms of economic incentives for our agents and sales processes in the call centers on the direct side to incent additional bundling. And we're seeing some nice trends in terms of bundling rates, which is certainly helping homeowner growth through homeowner retention."}, {"role": "assistant", "content": "We're going to continue to look for ways to grow the homeowner business. We think it provides a really compelling risk and return opportunity for us. The results are going to bounce around because there's volatility. This quarter is an example of that with catastrophe losses, but we continue to see our underlying combined ratio and loss ratio improve, and both through leveraging the tactics I talked about for retention production, particularly with bundled customers, we think we can continue to grow that line."}, {"role": "user", "content": "Are the bundlers having the same problem that they get quoted or rate an entire six months later? Or is your pricing such that you can comfortably quote a bundle right now and think that you're going to retain them for 12 months?"}, {"role": "assistant", "content": "Yeah, we're obviously quoting bundled customers right now. And when you look at the business we are writing, we're seeing really nice improvements in terms of quality and lifetime value, which is indicative of that bundling rate. And so yes, we're quoting it. And the other thing you got to remember, and this is true both from a retention and a new business perspective. Bundling, it's an easier experience and a more streamlined experience for customers. There's discounts associated with bundling as well that can help offset higher auto rates and incent customers to stay with us."}, {"role": "user", "content": "Thank you for the details answers."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for our next question. Our next question comes from the line of Brian Meredith from UBS. Your question, please."}, {"role": "user", "content": "Yeah. Thanks. A couple of questions here for you. First one, I'm just curious, I saw your expense ratio is down about 0.1x ad spend. Where are we in this Transformational Growth as far as the expense ratio reduction? How much can we potentially see here additional going forward? And then maybe on the -- an add on to that, what kind of a normalized ad spend as a percentage of earned premium, so we can kind of get a view on what our expense ratio should ultimately end up?"}, {"role": "assistant", "content": "Ye, Brian, this is Mario. Again, expenses as much as Tom talked earlier about, earned premium and loss ratio, we kind of held serve there. We did see the benefit of a lower expense ratio both in terms of the underwriting expense ratio and the adjusted expense ratio. Where we're at in the kind of continuum on the adjusted expense ratio, we set a goal to get that adjusted ratio down to about 2023 by the end of 2024."}, {"role": "assistant", "content": "And we're making really good progress on that, you saw continued progress on that this quarter. We certainly are being helped by higher earned premium which leveraged our cost. But we're continuing to see reductions in both operating costs and distribution-related costs, which are helping the expense ratio. And I talked a little bit earlier about the areas we're focused on, whether it's automation, digitization, sourcing and continuing to drive both operating and distribution costs down."}, {"role": "assistant", "content": "We're going to -- those are really going to be the levers we pull to push the expense ratio ultimately to that goal that we set with Transformative Growth. So we're making good progress, feel really good about that. In terms of the level of marketing spend, certainly, we spent less this quarter on marketing than we did a year ago, and we've pulled that back."}, {"role": "assistant", "content": "I think as Tom said earlier, really from an economic risk and return perspective, it doesn't make a lot of sense for us to invest aggressively in marketing at a time when our prices aren't adequate. But what we will do overtime has more rates and/or, I'm sorry, more states and more markets get to a rate level that we're comfortable with, we're going to surgically lean in. And as one of the components of Transformative Growth, we're going to look to both increase the level and the sophistication of the marketing investment that we make."}, {"role": "assistant", "content": "And that will be commensurate with what we think the opportunity is to grow, so I can't sit here today and give you a specific dollar amount or our target that we're focused on. That's why we gave you the adjusted expense ratio, which excludes marketing costs because we're going to continue to invest in marketing when it makes economic sense and where it makes economic sense for us to lean in."}, {"role": "assistant", "content": "So let me just double click on the Transformative Growth piece. So the third piece of Transformative Growth is to increase the sophistication and investment in customer acquisition. We think, we can and should be able to get new customers cheaper than we do today. There's lots of math we have around that. One of those is telematics, so we were the first out there with continuous telematics. We've been at it for over a decade."}, {"role": "assistant", "content": "We're now taking telematics, and with Arity, we now think we can take telematics into new business, Brian. And actually, not have to have them download our app or put a device in their car to figure out how good a drive they are. We think we can use our sophisticated analytics to price them, using telematics ahead of time, which will maybe -- to better manage your acquisition cost. So lots of work to go there, so plenty of opportunity to grow."}, {"role": "user", "content": "Can I just -- one quick follow-up here. If I think of kind of going forward here, when you're looking at putting rate increases through for the remainder of the year, what's your kind of base case with respect to how you're thinking about inflation here? Are you assuming that the current inflationary environment in, persisting through the remainder of 2023, as you're filing for rates?"}, {"role": "assistant", "content": "Let me finish and make sure we respect for people's time on that question. So first, when you look at overall inflation, the numbers that everybody else sees, that's one set of numbers. If you look at the inflation in what we do, it's of course, dramatically higher. And those are subject to different things. So whether the Fed tightens the economy, it doesn't tighten economic, probably isn't going to do a lot to keep people from having severe accidents, hurting themselves and needing a lot of medical care or then -- or lawyers getting involved in the case, nor will it have a huge impact on what the OEs charge on parts. They tend to charge more in parts based on what they're doing to overall profitability and how many new cars are selling."}, {"role": "assistant", "content": "So if we go into a recession, they sell new cars, I don't expect they're going to cut car's prices. So we think inflation will persist in this business at a higher level than you see from the overall CPI, and that's why we're having to raise prices for our customers. Thank you all for participating today. Thank you for being generous with your time. We're going a few minutes over. Our priorities, make sure we're make money in auto insurance and continue to leverage our superior position in homeowners."}, {"role": "assistant", "content": "As start to grow and execute Transformative Growth, whether that's by getting our costs down, rolling out new products, expanding our National General platform. And then we didn't spend any time today on the great stories we have in the lower oval, which is expanding Protection Services. So a lot of things we're working on hard to create more value for you. Thank you, and we'll see you next quarter."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question is from the line of Paul Cheng with Scotiabank. Paul, your line is now open."}, {"role": "user", "content": "Thank you. Good morning, everyone. Two questions, please. I think the first one is probably for Billy. You talked about the Permian, the good well productivity. Just can you give us a little bit more detail in terms of the test size you're doing over there and whether you're increasing it, especially if you start to do more co-development and how many different landing zones that you are targeting in your program? And second one there, just curious, I mean, I think in the last, say, several months, a lot of investors have been asking why that you go ahead with the expansion in Dorado. And I think last quarter in the conference call, management has said you're looking for the long term. So just curious that what may have triggered, maybe there's a slightly change in your view about the pace on that development? Thank you."}, {"role": "user", "content": "Yes, Paul, this is Billy. Let me give you a little highlights maybe of the Permian program and what we're seeing there. And then I'll probably ask Jeff to give some more detailed color to help explain some of the improvements we're seeing. Overall, we're very pleased with the progress our Permian plans are showing. In general, our results are playing out just as we anticipated. And all of our type curves are modeled and forecasted and the results are meeting or exceeding our forecasted results including the co-development of different targets at the same time. But I'd like to go ahead and turn it over now to Jeff to maybe talk a little bit about the new completion design, and the results that we're seeing and then some of the productivity improvements."}, {"role": "user", "content": "Yes. Thanks, Billy. Paul, this is Jeff. Yes, we're extremely happy with our productivity out of the Delaware. And just to give you a little color, one of the big things that's really improving that is our new completions design or I should say, our improved completion design. So as Billy stated to date, we've tested around 39 wells in the Wolfcamp, and we're seeing an uplift of about 20% or so in the well productivity. And that's in both the early and late life performance of that."}, {"role": "user", "content": "I'll also note that the uplift, we're not just seeing that in one phase. We're seeing both in oil and gas, so kind of across the board. So with these outstanding results, what we've done is we've really expanded this program and we're planning on completing about 70 additional wells in the Wolfcamp this year. So going to be about a 2.5x increase from last year. And we definitely went ahead and taken this into account both our drilling plans and guidance for 2023. So looking forward with this design, had a lot of success in our deeper formations. Our team really plans to continue to kind of test in some of the shallower formations to evaluate its benefits."}, {"role": "user", "content": "One thing that we have observed with this design is that there's varying performance uplift depending on the rock type and the depth of the target. And the design does come with a little bit of a cost increase. So we just want to be mindful about how quickly we're testing it and be strategic at the pace that we're going ahead and put these in the ground. Also, I'd like to point out that the design isn't really new to EOG. It was actually first tested down in our Eagle Ford asset. And this is just an example of the technology transfer in the company of our multi-basin operations. It's really helped us accelerate our learnings throughout the company. And then lastly, with the success that we've seen in the Delaware Basin, we're actively testing it in all of our emerging places throughout the company and really look forward to evaluating those results throughout the year."}, {"role": "user", "content": "And then, Paul, the other part of your question was on Dorado and really what triggered the change of pace that we're thinking about. We put together a plan originally just to remind everybody that really, it was not a huge acceleration in activity planned for. We're only adding eight wells. So the plan never contemplated a huge amount of growth in Dorado to start with. However, we always remain flexible on our program. And that's the benefit of having a multi-basin portfolio as we can move activity around based on market conditions or other factors as they present themselves, naturally, with gas prices remaining weak and moving into the year, it's only natural to think about options that we might be able to explore with Dorado activity. And we are exploring the option to delay some completions that were scheduled for later in the year, and we'll give more color on that as that unfolds."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Cheng. The next question is from the line of Leo Mariani with Roth Capital Partners. Leo, your line is now open."}, {"role": "user", "content": "Yes, hi, I just wanted to follow up a little bit on the buyback versus the special dividend. Obviously, there was no new special dividend, I guess, announced this quarter instead, you got certainly lean on the buyback as you described in March. I just wanted to kind of confirm your thinking around this. I mean it still sounds like the buyback is going to be reserved only for kind of very opportunistic situations where there is this dislocation. And generally speaking, it's probably more reasonable to expect the special going forward with the buyback kind of maybe every once in a while. Is that kind of how to think about it?"}, {"role": "user", "content": "Yes. Leo, this is Ezra Yacob. I think you've summarized it pretty well. Our strategy hasn't really changed. We are committed to returning at least 60% of our free cash flow on an annual basis. Year-to-date, as Tim had mentioned, our cash return commitment is $2.8 billion so it's approximately 50% of what would be our fiscal year free cash flow at the assumed $80 oil price there. And just to recall, the cash return priorities for us, it really begins with the regular dividend as the first priority. The excess free cash flow, as you said, will either come back in the form of special dividends, which we've paid seven of the last eight quarters, we've distributed a special dividend or opportunistic buybacks."}, {"role": "user", "content": "And what we saw in the first quarter when we executed a repurchase was we really saw a dislocation dominantly associated with the banking crisis, and we were able to step in to repurchase approximately $300 million of the stock. So as you pointed out, really in line with our strategy. Now what I would say has changed over the last 18 months since putting the repurchase authorization in place is really the strength of our company. Our primary value proposition, of course, is investing in high-return projects, adding lower-cost reserves to our company's profile, which thereby reduces our breakevens and expands our margins. And so as we continue to execute on this strategy and we continue to strengthen the company, the way we consider dislocations certainly evolves as well."}, {"role": "user", "content": "Okay. That's helpful. And I just wanted to see if there's any more of a robust update on the Utica. I think the last time you guys kind of rolled that out, I think you had four wells on production with a fair bit of history. Just trying to get a sense so there are more wells producing at this point in time in the Utica? And just any thoughts around some of the long-term performance of those prior wells have been on for, I guess, over a year at this point?"}, {"role": "user", "content": "Yes, Leo, this is Ken. We're making excellent progress on our Utica program this year. We currently have a drilling rig actively operating in our northern area, and we're progressing nicely on our gathering and infrastructure projects. The four wells that you talked about that we drilled and completed in 2022 really do continue to deliver our expected performance, and we plan to drill and complete about 15 wells across both our North and Southern areas this year. And we'll have those production results more towards the end of the year. Another thing to note is we also continue to add acreage and look for additional low-cost opportunities to add to our position."}]}, {"messages": [{"role": "system", "content": "Thank you, Leo. The next question is from the line of Scott Hanold with RBC. Scott, please go ahead."}, {"role": "user", "content": "Yes. Thanks. Good morning, and congrats on the quarter. Ezra, maybe if I could pivot back on the buyback conversation. And if you can give us some color on what were the key triggers on the decision to do buybacks? Was it relative valuation of EOG to peers? Was it just the aggregate move? Or is there other things like intrinsic value assessments that kind of generated that process to really kick it off there?"}, {"role": "user", "content": "Good morning, Scott. Yes, this is Ezra. Those are all accurate to the tune of how we kind of look at these opportunities. As we've talked about in the past, it kind of begins with the macro. First of all, right, what's happening on both global and domestic supply and demand balances. As far as dislocations go, we do measure, we look at the intrinsic value of our business relative to different pricing scenarios, both short and long term. And we do evaluate trading multiples, not just at EOG versus the peers, but actually for the entire peer group and see what's happening. And so one comparison that could be made is the dramatic sell-off that the industry saw last summer, which was associated with a pretty dramatic pullback in oil prices, that was really fundamentally supported by a change we felt in the macro outlook. There was a significant announcement there for roughly 300 million barrels of petroleum reserves that would be hitting the market on the supply side from across the globe."}, {"role": "user", "content": "What we saw in the first quarter was not really supported by a big change in the forecast on the fundamentals. Potentially really just triggered from the banking crisis, potentially an increased fear on the demand side from increased recession, but we really feel like most of that has already been priced into the market on the demand side. And so when we saw a pullback there in a dislocation with the market, really, again, associated in late March there with the banking crisis, we really didn't hesitate and we're able to step into the market and do that $300 million share repurchase, and we think we've really created a significant amount of value there for the shareholders."}, {"role": "user", "content": "That's great. Thanks for that. And as my follow-up, one of the things I think tends to get lost or is underappreciated is the premium pricing you all continue to get on your commodities across the board. And can you just give us a sense of as you kind of look forward, do you find more opportunities ahead where you can continue to raise the bar on that as well?"}, {"role": "user", "content": "Hey, Scott, good morning. This is Lance. Thanks for the question. Yes, our realizations continue to be excellent. And I mean when we think about it, it's really just the capability that we have. When you think about the multi-basins that we have, but just our transport position, and then the capacity that we've taken out. You hear us talk a lot about control and having control all the way to the water is exceptionally important. So I would just say, as you think about our position and the price realizations too and then extracting additional premiums, I think our ability to just transact very quickly and with the supply, the scale that we have, I mean we can definitely walk in with further opportunities."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Scott Gruber with Citigroup. Scott, please go ahead."}, {"role": "user", "content": "Yes, good morning. I want to circle back on the Wolfcamp development strategy. After looking at Slide 10 here in the deck, last year, you layered in more Wolfcamp M well. But this year, the percentage of Wolfcamp M will be slowing back down some. Is that impacted by where you'll develop and deploy the new completion design? Or is that a reflection tend to be more selective with where you co-develop the Wolfcamp M? Just what's behind the shift in mix?"}, {"role": "user", "content": "Yes, Scott, this is Jeff. Really, our co-development strategy, it's pretty straightforward. And what we're trying to do is we're just adding in high rate of return targets to our well packages. And really, it's driven by the geology. And obviously, the geology across our acreage, it changes very quickly. So kind of from development unit to development unit, we've really got to strategically dissect what our strategy is going to be there. But from what we're seeing right now, and you can see that on Slide 10 and 11 in our deck, by adding in some of those deeper targets in the lower Wolfcamp or I should say, the lower Upper Wolfcamp and then the middle, we're achieving economics well over our premium hurdle rates and we have some of the tightest co-development spacing out there in the basin. So ultimately, just this approach, I mean, it's improving our total recovery per acre, helping optimize that NPV of the resource, and it's just adding those barrels finding costs below our current Delaware Basin levels."}, {"role": "user", "content": "Got it. And then just one for some more color on the new completion design. You said it was initially developed and rolled out the Eagle Ford. Did it become a dominant design in the Eagle Ford? And will it become the dominant design in the Permian? And how quickly it can be rolled out to some of your new plays?"}, {"role": "user", "content": "Yes, Scott, great question. So yes, the design, as I talked about, it was first utilized in the Eagle Ford. It was back in right around 2016. And we didn't see the same uplift that we see in the Permian. It wasn't quite as extensive, but it really has to do with the difference in rock type and their geological properties between the two plays. But it did provide the application, it proved really beneficial as far as helping lower well costs and reduce our completion time. So yes, it is something that we still do and employ there in the Eagle Ford, and as I said, in a lot of our emerging plays. As far as in the Delaware and our rollout, our plan is to increase, as I said, the year-over-year number by 2.5x what we did last year. And I also did state, there's just a slight cost increase. So we want to be cognizant of how quickly we roll it out. And like anything in our program, we just don't want to outrun our learnings, and we want to make sure that we continue to evolve this technique as we learn."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Derrick Whitfield with Stifel. Derrick, please go ahead."}, {"role": "user", "content": "Good morning all and thanks for taking my questions. With my first question, I wanted to focus on capex cadence throughout 2023. With Q1 coming in better than expected in Q2 projected to be heavier than expected, could you comment on the one to two drivers? And separately, if not part of the answer, could you speak to cadence on non-D&C investments throughout 2023?"}, {"role": "user", "content": "Yes, Derek, this is Billy Helms. So yes, the second quarter capex has gotten to be a little bit higher than the first quarter, and it's mainly due to some non-drilling and completion capital, the indirect or infrastructure and those kind of things that we put in our program that it was recently scheduled to occur at the latter half of the first quarter. It turned out to be pushed into the second quarter. That's the reason the first quarter was under our own capex in the second quarter is a little bit higher. And that really sticks to our original plan. We had always planned for about 52% of our capex to be spent in the first half of the year. And so we're still on target for that in the 48% in the back half, so that's kind of the way the program plays out."}, {"role": "user", "content": "Great. And with my follow-up, I'd like to focus on your operational efficiency gains in the Eagle Ford. Is your gain principally driven by increased Super Zipper activity? And if so, are there practical limitations on the amount of completions you could pursue utilizing this approach?"}, {"role": "user", "content": "Yes, Derek, this is Ken. I'd like to start off by really crediting our team there in San Antonio for driving down that finding cost that you talked about. Really by focusing on improving the efficiency of every portion of the process, we've been able to drive down costs over the past several years and increasing our lateral lengths, while improving targeting and focusing on bit and motor performance in conjunction with the advent of Super Zipper completion operations have really allowed us to improve efficiencies and really drill and complete more lateral footage in a day compared to a few years ago. And that's really showing up on a lower cost basis. And one thing to note is we do have over 10 years of high-return drilling in this play that can sustain our current production levels and continue to expand our margins."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Doug Leggate with Bank of America Merrill Lynch. Doug?"}, {"role": "user", "content": "Good morning. This is John Abbott on for Doug Leggate. Our questions are really on Dorado. We understand that you're going to potentially delay activity this year. But one of the goals that you set out this year was to try to just begin get greater economies of scale into play. When do you think you need to achieve that size and scale, noting that you have additional LNG capacity coming on, exposure in 2026?"}, {"role": "user", "content": "Yes, John, this is Billy Helms. So for Dorado, yes, recently, we had planned to also bring in additional completions. On the drilling side, I would add that we are seeing a tremendous improvement in the efficiency gains there. The team there has done just an excellent job of being able to improve our drilling times, lower our well costs and just increase efficiencies overall. So we're very pleased with the progress we've made. And so I think that increased activity we're seeing on the drilling side is playing out what we're seeing on the drilling results and giving us insights into how we can continue to lower well costs going forward. On the completion side, we have some planned activity here in the second quarter. But beyond that, we're looking at ways, with the flexibility we have in our program, to delay the completion of any wells that would beyond in the second half and really just thinking about how we can leverage some of the learnings from our other programs in play and combine that activity with the activity we have in Dorado by sharing equipment, people and those learnings across our portfolio."}, {"role": "user", "content": "So we don't really feel the need to jump in and complete those wells, but we are evaluating options as they roll out, and we'll see how those present themselves. And then as far as the activities for LNG demand, I guess the unique thing about this play, it didn't take a lot of wells. The wells are very prolific. So we're well ahead of any timing that we would need to add LNG capacity in the future. And then we also have the flexibility of moving gas from other operating areas, multi-basin portfolio to the Gulf Coast. So don't think of the Dorado is just simply applying itself to the LNG market. It's got the opportunity but looking at gas from other players to the Gulf Coast as well through our marketing arrangements."}, {"role": "user", "content": "That's extremely helpful, which leads to the next question. Assuming there was not an issue, it's gas prices, how do you think about the optimal level of production for that play or activity long term? I mean, how big does it kind of get to? How do you think about it from an efficiency program longer term?"}, {"role": "user", "content": "Yes, John, this is Ken. I think the real thing in Dorado is it doesn't take a lot of wells to generate significant volumes out of that play. So I don't know the exact right pace. But what we want to do is we want to develop this at the right pace where we don't outrun our learnings. We're making significant progress as we really get those operational synergies together that Billy talked about. And so that pace of development is really going to be dictated by not outrunning our learnings."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Neal Dingmann with Truist. Neal, please go ahead."}, {"role": "user", "content": "Morning, thanks for the time. My first question, just on the Powder River. I'm just wondering I heard too much on that right. I'm just wondering how do you still feel this competes versus your other premium players? And I know at one time, you suggested you had almost 1,700 locations and I'm just wondering your thoughts around this."}, {"role": "user", "content": "Yes, Neil, this is Jeff. No, we have outstanding results there in the Powder right now, and it's some of the lowest finding costs that we're seeing there in the whole portfolio. So yes, we still have between kind of our full South Powder River Basin and then moving up to our North, about 1,600 net undrilled premium locations. So just looking at our program, everything is on pace this year. The wells are performing as we expected. Q1, we've completed about 15 gross wells, which 2/3 of those were Mowry. And we're seeing a lot of benefits also by getting some consistent activity up there in the Powder. We're running a consistent two to three rigs and one full frac spread with that, which is really allowing them to kind of push their efficiencies. And then we also have a lot of confidence in the play just with the overall performance and stuff with the Mowry. And then from there, as we talked about, we want to go ahead and gather the data in the upper overlying formations like the Niobrara, so we can develop that later in the future. Also, additional confidence in the play, I think, should be said is that the infrastructure acquisition that we had. We had noted that in our 10-Q, we acquired Evolution. And I'll go ahead and let maybe Lance say a couple of things on that."}, {"role": "user", "content": "Yes. No, thanks, Jeff. Yes, just to add to that, on our confidence when we think about the Powder River Basin, we did make a strategic investment there. That was about $135 million, and we view that as a bolt-on acquisition and that's really midstream footprint. There's a plant and gathering system that just overlays our southern acreage. The plant is a first-class asset. It was completed in 2019 and when we think about this, it just really complements our existing gas gathering infrastructure build-out as we have connections in place. So we really look at that as value because we can load that plant, fill the plant very quickly. And there's also other benefits that we see long term as well. As we think about just lowering cash operating costs, gathering, processing expense versus third parties, we'll have control and redundancy, but then also to the confidence we can expand that very quickly. So the last thing I just want to."}, {"role": "user", "content": "Will that plant help the depths there as well? I'm just wondering would you mention with that plant? Would that boost the depths there a little bit as well?"}, {"role": "user", "content": "When we think about that, we think about actually the gathering, processing and transportation expense. So it's absolutely when we think about loading it with our equity gas into that facility and having to control, we're definitely going to see better netbacks. But it's more as we think about just controlling the cost and lowering the cost basis of the company that's going to absolutely make the Powder River Basin and the Southern acres they are more competitive."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Bob Brackett with Bernstein. Bob?"}, {"role": "user", "content": "Good morning. Back to the Wolfcamp co-development. If you're hitting two plus targets in the Wolfcamp versus, say, cherry picking the best zone, all things being equal, you'd expect wells to get worse, yet you're seeing wells get better. Is that attributable completely to the design change?"}, {"role": "user", "content": "No, I'd say it's attributed to our co-development strategy. I mean really, it's been a process over time. So if you look at back in 2016 in the Wolfcamp or I should say our strategy through the whole Permian, we had six unique targets. And kind of fast forward here, we're up to 18 unique targets. And obviously, with that, the spacing has changed both in zone and from a vertical perspective. So our teams have methodically obviously tested this. They've taken into account the actual spacing, how they interact, the depletion to it. And we've come up obviously with the best co-development strategy really to maximize the overall production of those intervals and then obviously maximize the economics related to it."}, {"role": "user", "content": "Great. I guess the follow-up would be, so it sounds like the co-development strategy is driven by that desire to maximize the lack of communication between zones? Or is it more driven by just logistics of having that kit sit in one spot for a longer time?"}, {"role": "user", "content": "No, it's really about maximizing the overall resource there, as you said. So we do have the optimal amount of communication that we're actually able to optimize the recovery and then like I said, really maximize those economics."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Arun Jayaram with JPMorgan. Arun, please go ahead."}, {"role": "user", "content": "Yes, good morning. I wanted to come back to the new completion design. You highlighted how you've tested this on 39 wells, and you plan to go to 70 wells. And my question is, was the 20% uplift relative to wells in the same area or relative to your type curve? And maybe the follow-up is, are the 70 wells contemplated for this calendar year and was that part of your guidance? Did that include that? Or would that reflect an upside risk to your oil guide?"}, {"role": "user", "content": "Yes, Arun, this is Billy. So the uplift we're seeing, part of that was actually baked into our guidance. We didn't bake in the entire amount. So when we put together our plan, we understood that there were going to be some uplift. We did plan on 70 wells to be part of that calendar year program. And we've baked in some of that into our production guidance, knowing that we would see some uplift. I think the uplift is surprising us a little bit more to the upside, but I would say that's already factored into our guidance that we've issued. And then as far as what we're doing there, we were finding that the target is critical. So the rock type is critical too why it works in some areas. And so we're cautiously moving through our program to make sure we test as we go to understand which our targets lend themselves best to this design change and which ones don't because it does cost a little bit more, and we want to be very disciplined on how we apply that across the fields we maximize as Jeff was saying, the economics of the play."}, {"role": "user", "content": "Okay. And just my follow-up is, any update on Beehive and Australia timing?"}, {"role": "user", "content": "Yes, Arun, on Beehive, we're still excited to be able to drill that well, but it's going to be probably in the first half of next year before we're able to get that well drilled. And that's just really due to some timing on permits and those kind of things."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Charles Meade with Johnson Rice. Charles, please go ahead."}, {"role": "user", "content": "Good morning, Ezra, Billy, Ken and the whole EOG team there. I think just a couple of quick ones for me touching on some of the common themes that you've already spoken on for a while. The Dorado, evaluating the slowdown, can you give some insight in your thinking? Is this about the natural gas price falling below your $250 double premium? Or is this about the contango you see in the curve and just the value of just waiting a few months? I recognize those aren't exclusive, but just some insight into what really keyed you guys to want to examine that?"}, {"role": "user", "content": "Yes, Charles, this is Billy. Certainly, it really is not triggered on a specific gas price, but just the overall softness we see in the current market conditions and the need to simply bring more gas on in this current condition. As we talk near term, we understand the near-term softness in the market but medium to longer term, we're still very bullish on the long-term outlook for gas. So we do look at the flexibility we have in the program, and we're evaluating options to be able to successfully push those back in the year. And we're just continue to remain disciplined on our investment to make sure we're maximizing the value to the company over the long term."}, {"role": "user", "content": "Okay. That's helpful. And then just one more quick one on this Wolfcamp completion design. So I got the message, I think, in your response to the last question, that this is not going to be an across-the-board shift that you'd want to make. But presumably, you've confirmed, I think you're talking about 16 targets of works-in. Can you give us a sense does a work-in a quarter of the targets and maybe upside to half or three quarters? Or what's it look like to you guys right now?"}, {"role": "user", "content": "Yes. This is Jeff again. Yes, that is correct. It's not necessarily a one size fits all across. It really does have to do with the geology that we're applying it to. And when looking particularly there in the Permian, we primarily just applied it down in the deeper Wolfcamp targets. So that would basically be just kind of the up or down through the middle in a co-development standpoint. Now we are testing on those shallower targets, but there are quite a few different rock types. So right now, I'd say it's area by area. And from a percentage basis, you kind of hate to put an actual percentage on it. But right now, we're still evaluating that, and it will be a case-by-case basis."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Neil Mehta with Goldman Sachs. Neil?"}, {"role": "user", "content": "Yes, good morning team. My question was on the natural gas liquids market where realizations obviously have been trending lower. I'm just curious on your perspective on what gets NGLs to firm up relative to WTI. And what are you seeing real time in the export markets? Thank you."}, {"role": "user", "content": "Yes, Neil, good morning. This is Lance. Yes, I think you're continuing to see absolutely the export positions that are getting built out. I think as you kind of have to think of those kind of as we think about them kind of more on ethane and more on propane. So continuing to see healthy propane exports. We continue to see the build out. That's a company with that. You're continuing to see the demand as you think about the Far East demand that's going to be the demand pool for those barrels. So continue to see that there could be some firming up there, kind of maybe more longer term, ethane, obviously, is going to flow a little bit more with gas prices, and that's kind of like what you're seeing today."}, {"role": "user", "content": "Great. And then just curious on your guys' perspective on the gas markets as well. You've talked a little bit about slowing down potentially in terms from a drilling perspective, but how do you see the balances moving from here in a weather normal way over the course of the year?"}, {"role": "user", "content": "Yes, Neil, this is Ezra. As I stated kind of in the opening remarks, we still remain constructive on kind of the longer-term gas story for the U.S. We think that the U.S., especially Dorado being a big piece of it has really captured low cost of gas supply that can really compete on the global scale with the amount of LNG that the U.S. is exporting right now, which is at record levels right now for the U.S. combined with the number of projects that have made it through a financial or a final investment decision. And then the additional projects that are still being kind of planned and discussed, the U.S. will be long-term position to be really a global leader in the LNG market."}, {"role": "user", "content": "Now gas is always difficult because it is highly volatile when it comes to things like the short-term pricing on weather. And it's one reason you've heard this morning from both myself, Ken and Billy that the most important thing we look at when we develop Dorado is to really invest in that at the right pace for the long term. We want to make sure that we're not out running our learnings, that we appropriately invest to be able to keep our costs low, and at the end of the day, really keep our margins wide. We want to put in the correct infrastructure to keep our low operating costs because the margins are always pretty skinny on gas and the low-cost producer for gas is going to be able to be exposed to the global market here in the U.S. for the long term."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question is from the line of Josh Silverstein with UBS. Josh, please go ahead."}, {"role": "user", "content": "Yes. Thanks. Good morning guys. Maybe just sticking with gas first. You have an unusually wide gap on your differentials even after reporting the first quarter results. Can you just talk about how you think that may shape over the course of the year, what you're looking for to come in towards the high end versus the low end there?"}, {"role": "user", "content": "Yes, Josh, hey, good morning. This is Lance. I believe when we think about our guidance, I think we were just below the midpoint of the guidance on our realization, so from a guide standpoint. And then you've seen kind of our guidance for like the full year, and we expect a lot of that's going to be driven. Obviously, we have the diversification that we have with our California exposure. You can see on our supplemental slide, Slide eight, you can obviously see the large exposure that we have into the Gulf Coast and then obviously, our JKM exposure as well. So I think we're going to hold with the existing guidance that we have."}, {"role": "user", "content": "Got it. And then just as far as the shareholder return profile, I know you've been thinking about it from a percentage of free cash flow. But how would you think about it from managing like a cash balance standpoint? You've been over $5 billion now for the past few quarters, including paying down the debt maturity in the first quarter. Is $5 billion, $6 billion the right level of cash for EOG? What level of cash would you not want to get over because it feels like there are certain periods where you could return over 100% free cash flow to shareholders if you really want to. Thanks."}, {"role": "user", "content": "Yes, Josh, this is Ezra. When we came out with that cash return guidance with a minimum of 60%, we really did just mean that, that it's a minimum. In fact, last year, we returned excess of this 60% free cash flow to our shareholders. And we started with that 60% because we feel confident on that, especially when we roll in kind of almost a peer-leading regular dividend that we'd be able to compete and deliver that through the cycles. So when we think about a specific target for cash on hand, I wouldn't say that we have a real target. We have spoken about some indicators and things that we strategically think about as far as holding a cash balance. The first, of course, is we like to have a bit of cash on balance just to run the business to make us allow us to stay out of commercial paper. And historically, that's around about $2 billion kind of depending at what point you are in the cycle."}, {"role": "user", "content": "And then in addition to that, we do like to have cash on hand so that we can be strategic and countercyclically invest in opportunities as they arise, whether that's at times investing in casing or line pipe, or last year, we were able to step in and do an acquisition in one of our emerging plays there in the Utica, where we actually purchased approximately 130,000 mineral rights. And then lastly, of course, just the stock repurchase, which we exercised here in the first quarter. We've talked about being able to utilize that opportunistically and really part of our strategy, the reason that you can actually step into a dislocated market and have the confidence to do a buyback is that you've got the strength of the balance sheet, which includes cash on hand. That's really what we're going for. And so I think that provides another compelling reason to carry potentially a higher cash balance than the company has historically done."}]}, {"messages": [{"role": "system", "content": "Thank you. That concludes our Q&A session for today. I'll now turn the call back over to Mr. Yacob for any closing or additional remarks."}, {"role": "user", "content": "I just want to thank everyone for participating on the call this morning. And I especially want to thank our employees for the outstanding results they delivered in this first quarter. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] First question is coming from Shahriar Pourreza of Guggenheim. Your line is open."}, {"role": "user", "content": "Hey guys, good morning."}, {"role": "assistant", "content": "Good morning, Shah."}, {"role": "user", "content": "Good morning. Maybe if could just start with the person in Persimmon Creek project, obviously you pivoted from Missouri to Kansas and included it in the latest cases there. Where is the pathway forward if you're unable to roll the project into the rates there? Does it stay at the parent? And also, any color on how to think about the earnings impact if that were the case versus the $0.05 you originally had in plan? Thanks."}, {"role": "assistant", "content": "So, I'll start off and ask Kirk to supplement. We think the Persimmon Creek asset is a great asset, given the overall cost and its size. It's we think the best value. It's supported by integrated resource plan in terms of both capacity and energy needs. It's well-situated from a transmission perspective. And we think it fits well with the needs that we're going to have in our Kansas jurisdiction, which continue to see ongoing growth, in-demand and across service territory with new customers like Panasonic."}, {"role": "assistant", "content": "So we like the asset. It fits in well with the RP. We think it's a great resource for our customers. So as noted, it was included in our filing on April 25th. It will go through the process. And so, we'll -- along with our other infrastructure investments that we've included."}, {"role": "assistant", "content": "The -- your question on EPS, given that it's rolling through the Kansas jurisdiction, which doesn't have the same piece of requirements, we won't see the earnings contribution in 2023. We'll have a very similar profile in the following years."}, {"role": "user", "content": "Got it."}, {"role": "assistant", "content": "And again, we think it's a great asset."}, {"role": "user", "content": "Got it, perfect. And then David, I know you and Kirk have been working tirelessly with the KCC. Obviously, the capital components of the case have been really well vetted that through the STP. As we kind of get the process started, I realize it's obviously very early innings, but is a settlement possibly here? Do you expect kind of a fully litigated case at this point?"}, {"role": "assistant", "content": "So, Shahr, that's a question we get from many investors. As you can guess, if we filed it on April 25th, probably the -- little speculative for me to be specific as to what will occur. We do think that we have a pretty straightforward rate case. The complexity only really comes from the fact that it's been 5 years since our last general rate case. But the elements are straightforward. There are many major generation retirements. We don't have complexities like some of the things that you can see after this longer time period."}, {"role": "assistant", "content": "So, we think the framing is there for a constructive set of dialogs. This certainly objective to drive towards settlement. Now, that will be in the fall. So, we're ways away. But as you noted, what's a real positive in this case is that we've had the opportunity to preview and go through our capital investment plans in a series of workshops over the last three years."}, {"role": "assistant", "content": "Starting with the STP workshops, as you noted, in 2020 and continuing even to the capital workshop that we had in December. And those were multi-hour workshops attended by all three commissioners the whole time, and it included forward projections on rates. And what we filed is in line with what we laid out in those proceedings."}, {"role": "assistant", "content": "So, we think that sets the groundwork for a constructive set of discussions. And of course, the process will play out as it will. We've got a very highly capable and knowledgeable staff at the KCC. So, we look forward to interacting with them with CURB and with other stakeholders through the process. And we certainly hope that we have a constructive dialog that enables the settlement as we advance through the year. Eight month timeline, as I mentioned, so that rates will go into effect in December and a lot of the crescendo happens in the fall time frame."}, {"role": "user", "content": "Got it, perfect. And then just real quick lastly from me, it's just the ROE tweak from the TDC bill that passed in Kansas, it seems like it could be a modest drag in 2024 and maybe beyond. Is that the case and how are you I guess thinking about potential offsets there? I appreciate it."}, {"role": "assistant", "content": "So, it is a pretty modest impact, Shahr, in the range of roughly $0.04 or so. We think we can absolutely manage that in the context of our business, given our size and our overall earnings power. We think the ultimate resolution was reflecting a constructive dialog. The initial proposal that was issued was to remove the TDC mechanism. But there are concerns by some of why have a different mechanism in place and a lower level of state oversight."}, {"role": "assistant", "content": "So, we're able to get an accommodation that enhance date oversight of transmission, there is [Phonetic] equivalence in the return on equity for different sites, infrastructure investments, but keeps TDC mechanism in place. So, we thought it was constructive outcome overall and one that's very manageable. And as -- it was a sensible approach as we head into 2023 in the rate case here and we are glad we're able to work with parties to get to that outcome."}, {"role": "user", "content": "Fantastic, guys. I appreciate it, very clear-cut. Thank you."}, {"role": "assistant", "content": "Thanks, Shahr."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment while we prepare for the next question. Now, our next question is going to be coming from Michael Sullivan of Wolfe Research. Your line is open."}, {"role": "user", "content": "Hey, good morning."}, {"role": "assistant", "content": "Good morning, Michael."}, {"role": "user", "content": "Hey, David. I wanted to just ask on how things are tracking on the year, just given the mild weather?And then also seeming like Persimmon Creek nickel that you have in guidance isn't going to be realized potentially until next year, now what -- where the offsets are coming from?"}, {"role": "assistant", "content": "So, actually Kirk, you want to take that one? They've been hearing from me for a bit. You want to build it?"}, {"role": "user", "content": "Sure. Michael, good morning. Look, it's early in the year. We had a strong start to the quarter. We've re-evaluated and kind of reset our expectations for the year, including net impact of at least the depth delay, albeit really -- relatively mild delay in terms of realization [Indecipherable] Persimmon Creek. We feel confident we've got means at our disposal to offset that through a number of means."}, {"role": "user", "content": "Obviously, we're pleased with the performance on O&M year-to-date. I mentioned earlier, some of that is relative to timing, but gives us a lot of flexibility throughout the year to pull levers to offset. So, that's really what underpins our confidence in reaffirming that guidance for the year."}, {"role": "assistant", "content": "Yeah, Michael, I'd just note that we had a very mild winter, you saw it across the Midwest. And we're fortunate that we're able to offset that. We're pleased with the solid quarter. I know it -- all companies have to deal with the weather piece, but for us we're able to offset it. And we're pleased with the solid quarter results as opposed to be -- that's something to manage over the course of the year. We -- the team did a real nice job managing it in the context of the quarter. So, we feel good about the year and reaffirming our guidance range."}, {"role": "user", "content": "Okay, great. And on the IRP, I know that's coming in a couple of weeks, can we just get sort of a high-level preview there of maybe just how material changes we should be expecting in terms of new capacity need and some of the moving pieces on cost of renewables post IRA and inflation and all that?"}, {"role": "assistant", "content": "So, Michael, I won't get ahead of the results in terms of the total renewables build-out plans. What I'll note is that beneath the surface of the water there's been a ton of churn, because the combination of -- we didn't include the kind of renewables incentives you see in the IRA in their last RFP update, that law was in effect. So, that's the big change."}, {"role": "assistant", "content": "At the same time, we have bids from our all-source Request for Proposal that we can integrate the capital costs from that real-time market information in the IRP. That's -- most of those costs have trended higher, so there some offsets there."}, {"role": "assistant", "content": "So, beneath the surface there are significant changes in assumptions or commodity costs. We went through a lot of volatility in natural gas prices in the back-half of the year, maybe we're back to low gas forever, but I think we're probably back to is it -- hey, there's potential volatility in natural gas."}, {"role": "assistant", "content": "So there are lot of different factors, but when you -- so to run them through the modeling process which is still ongoing, it reinforces the value of renewables over-time and a lot of it comes down to availability of particularly supply-chain challenges. So, I would note that I think the robust support for renewables as being low-cost opportunity for customers in a long-term resource plan, that it absolutely remains -- in the near-term it's about supply-chain, what's that impact in terms of resources that are available sooner rather than later."}, {"role": "assistant", "content": "Now, some elements that will change in the future, there's a number of different EPA bills. Our EPA rules that are in the mix right now, a couple -- close of an issue, others have been press reports around, so I would not expect this IRP to reflect the greenhouse gas, those all for example. That hasn't been formally issued yet. We've seen a lot of reports on it. Those kind of rules only further reinforce, I expect, a relative value of adding lower-cost resource in the system. I think it will also further reinforce the importance of capacity. The one thing from last year that has changed is -- and there the benefits of having capacity are even higher. We've also seen increases in-demand."}, {"role": "assistant", "content": "So long-winded way -- I'm not giving you new numbers, but the dynamics that support the value to customers of adding renewables, the system are there may be some further impetus to capacity resources, and then some supply-chain issues in the near-term work through. But we're excited about the prospects and we'll obviously have a comprehensive update when that -- when we issued the IRP."}, {"role": "user", "content": "Okay, that's very helpful. Yeah, the -- and your response there was kind of where I wanted to follow-up. I mean at the end-of-the day, in terms of where to expect pushback, is this really just proving lowest cost type thing as long as you can get the reliability where it needs to be? Is that kind of what stakeholders are going to be looking foremost?"}, {"role": "assistant", "content": "Yeah, we look at the lowest overall cost in terms of net present value, the revenue requirement. So it's a -- we're looking at fundamentally what's going to deliver the most value for customers in light of the various incentives. It's a 20-year to 30-year model, so it's complicated. Our 15-year to 20-year model, so there's a lot of it, but that's what it comes down to, is what's going to deliver the best value for our customers while ensuring reliability."}, {"role": "user", "content": "Great, thanks a lot."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment while we prepare for the next question. And again, please wait for your name to be announced before you proceed with your question. And the next question is coming from Durgesh Chopra of Evercore ISI. Your line is open."}, {"role": "user", "content": "Hey, good morning, team. It's straightforward and my questions have been answered. Maybe I was just curious -- and I can follow-up with Pete if you don't have the answer. David, in your prepared remarks you mentioned that the cost savings exceeded the original targets you had when the merger happened. Can you quantify what that looks like? If not, I'll just follow-up with Pete. Thank you."}, {"role": "assistant", "content": "Yeah, I guess it was a few $100 million by which we exceeded, several $100 million overall. Now, that's a core -- across the corporate enterprise and it's a tremendous result that was achieved by our employees. We can get to the exact number, several $100 million in excess to what was initially predicted if you look at the cumulative savings over the 5 years."}, {"role": "user", "content": "Got it, thanks so much."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment while we proceed with the next question. And the next question will be coming from Julien Smith of Bank of America. Your line is open."}, {"role": "user", "content": "Hey guys, good morning. It's Dariusz on for Julien. Thanks for taking the question. Just kind of a high-level one, obviously, you've had several regulatory processes in Missouri and now you're heading into this critical Kansas rate case any learning/takeaways or maybe modifications to your approach that -- from the Missouri processes that you think are applicable as you head into the Kansas process?"}, {"role": "assistant", "content": "Good morning, Dariusz. Hey, you're going to have to make sure you're name leads offer. I keep sees Dariusz on behalf of Julien. Julien has got to share the light. It's great question. I think there are some distinguishing elements between Missouri and Kansas, but there's always things you can learn. In Missouri, we had more complicated legacy issues. We had the Sibley plant retirement that followed, we had the piece of legislation that had been enacted. But the case was under the legacy plant in-service accounting rules, which had a cost cap that had a commodity price surge, had impact in Missouri West. So, some pretty complicated legacy issues that were impacted. No, we don't face it in Kansas."}, {"role": "assistant", "content": "In Missouri, we reached a constructive settlement on key economic issues in our metro jurisdiction, which is the bigger of our two jurisdictions in Missouri, simply in the piece of legislation had the biggest impact in Missouri West. So, the settlement that we reached in Metro is a good template for what we're going to be seeking in Kansas. And in Kansas, we have the benefit of even more extensive dialogs There are STP workshop in both states but the ones in Kansas were -- you probably listened to them, they were more -- quite in-depth and thorough and involved Commissioner, staff, CURB and other stakeholders."}, {"role": "assistant", "content": "So a rate case in Kansas is even more well-situated in terms of the constructive dialog. It's pretty straightforward in settlements. But we strive for trying to get to common ground in the settlements where we can. And I think Missouri Metro is good template for that. And this setup is also more amenable for -- than that we have little less complexity. It has been 5 years. But again, the range of things that we're bringing is little more straightforward."}, {"role": "assistant", "content": "And as a reminder, in Kansas transmission the rate case is focused on our distribution investments, generation, customer systems, really a lot of our grid modernization and customer-facing investments. So, we look-forward to the dialog. We think the case setup is one that will enable a good constructive dialog with the key participants."}, {"role": "user", "content": "Okay, great, thank you for the color there. Appreciate that. And apologies if you touched on this in your opening remarks, but just noticed that there is a bit of a delta between resi and commercial sales in industrial in Q1. Can you maybe talk through any of the high-level drivers there?"}, {"role": "user", "content": "Sure, Dariusz, it's Kirk, good morning. I'd mentioned on the call, yes, we -- our industrial sales are a little bit down. It was largely result of to refining customers, one of which had a pretty high-level comp last year with higher demand, so just kind of normalizing that a little bit. That's one effect of those two customers. The other one had a planned outage this quarter. But for those two customers in the industrial sector, our industrial demand was up year-over-year excluding those two refining customers."}, {"role": "assistant", "content": "Overall, we're pleased with the ongoing demand trajectory, especially on the residential and commercial side. In the industrial, as Kirk mentioned, we can actually isolate it down to two customers."}, {"role": "user", "content": "Okay, excellent. Thank you for the color. I'll pass it along here."}, {"role": "assistant", "content": "Great, thank you, Dariusz."}, {"role": "user", "content": "Thanks, Dariusz."}]}, {"messages": [{"role": "system", "content": "Thank you. And one moment while we prepare for the next question. And our next question will be coming from Paul Patterson of Glenrock Associates. Your line is open."}, {"role": "assistant", "content": "Hey, good morning guys."}, {"role": "assistant", "content": "Good morning, Paul."}, {"role": "assistant", "content": "So, I noticed that there was a labor capitalization benefit it seemed. Could you elaborate a little bit more on that and how it -- how -- what the impact will be sort of in this trajectory, if you follow what I'm saying? In other words, is there going to be more of a benefit going forward in the near term? And is there a flip-around or just if you could just elaborate a little bit more on it?"}, {"role": "assistant", "content": "Sure, Paul and you're -- I applaud your, as always, detailed review of materials. So, we -- like all utilities, we have a rigorous process for reviewing our capitalization rates and making sure we're getting the right -- it's reflecting the underlying activities. We've had a lot of capital investment and there is an appropriate amount that should be -- labor that should we capitalized and a robust methodology that we know the utilities follow."}, {"role": "assistant", "content": "So we're applying that. I think you saw, for example, in our Wolf Creek plant there was a little bit higher capitalization rate, the latent activity that was underway. Our overall trajectory in terms of O&M expenses and capital, we -- it's all part of our planning process, so it's reflected in where our plans are. So,. I wouldn't tee up that you're going to see a major change. What you'll see is ongoing implementation of the adherence to the rules that are in place in that regard."}, {"role": "assistant", "content": "So, it's reflected in our plans and it's underpinned by the rigorous application and the appropriate accounting processes. So -- but I think that what you noticed was in particular driven by some projects at Wolf Creek, our nuclear plant."}, {"role": "assistant", "content": "So I guess what I'm wondering is that so it sounds like it's associated with those projects. And then -- but going forward, does that -- so that is a permanent change I guess, if I'm gathering that correct. It's associated with a specific sort of project activity."}, {"role": "assistant", "content": "Yes, that's right."}, {"role": "assistant", "content": "And that was..."}, {"role": "assistant", "content": "Yeah, that's right, Paul. We -- it did reflect the activities that are underway and the application of the relevant rules that are in place."}, {"role": "assistant", "content": "Okay, and..."}, {"role": "assistant", "content": "We're looking at it and making sure we're following the right approach. If you think about being in an industry like ours, that we're well-benchmarked, we got a great support from our accounting team and our external auditors, so well-established approach is taken that regard and best practices."}, {"role": "assistant", "content": "No, I -- absolutely. I guess, I was just wondering that sort of mechanically does -- what period does that get sort of -- does it -- what period is that amortized over, I guess, I'm sort of wondering. I mean, is it just over the life of plan or is it something that -- is it sort of like an account that gets amortized over short -- just sort of..."}, {"role": "assistant", "content": "Yeah, it really depends on what they're -- yeah, it depends on what they're working on. It's related to an average. It will be a different -- I mean, in other words -- and it gets down to every single project. It's also probably [Speech Overlap] able to get through the hunderds in this, Paul, but it always relates to the work that's underway. And some are shorter, some are longer, it's just the nature of the work."}, {"role": "assistant", "content": "Absolutely. Okay, that's great. And then just on the rate case, Persimmon seems to be allocated I think to the EKC as opposed to both utilities. I just was curious, is there a reason for that or is it what was -- if I was correct in reading that? Is there a reason why it wasn't allocated to both, I guess?"}, {"role": "assistant", "content": "We think it's the best fit for Evergy Kansas Central. So, it really was just where it lines up well with the integrated resource plan needs and overall mix and benefits. Plus it's well-placed for that customer base too. So, it fits well with EKC, that's why it was allocated there."}, {"role": "assistant", "content": "Okay. And then finally, on the depreciation rate change, was there -- I was just wondering -- I mean, I apologize, I read a little while ago, but what was the driver again, can you remind me about the request for a change in depreciation rates in the rate case? Is that -- is there a life issue there that's specific or is it just basically just updating the depreciation rate? Do you follow [Technical Issues]?"}, {"role": "assistant", "content": "I do follow. I think the -- so we did depreciation study that typically happens in rate cases, especially if there has been a relatively long gap. So, this reflects depreciation studies that we've done, it's been 5 years since our last rate review. So, pretty standard process. You bring in an outside expert, you review that work. It's just -- I don't necessarily encourage all investors to read-through the depreciation studies, but you're welcome to it in our publicly-filed testimony, but it's -- I mean I'll keep side."}, {"role": "assistant", "content": "So it's a rigorous review you need to go through as part of the rate case and making sure you're getting the right level of depreciation, the right depreciable lives for your long-lived assets, and that's the [Speech Overlap]."}, {"role": "assistant", "content": "Okay. I really appreciate it. Thank you so much."}, {"role": "assistant", "content": "You bet. Thank you, Paul."}]}, {"messages": [{"role": "system", "content": "Thank you. That concludes the Q&A session. I'll [Technical Issues] the call over to David Campbell for closing remarks."}, {"role": "assistant", "content": "Thank you, Lisa. It was efficient. It's like the first round of the NFL Draft, which I hope everyone enjoyed from the great city of Kansas City. We appreciate all of you joining us this morning. Thank you for your interest in Evergy, and have a great day. That concludes the call."}]}, {"messages": [{"role": "system", "content": "Thank you. Ladies and gentlemen. We will now begin the question-and-answer session. [Operator Instructions]. Given time constraints, please limit yourself to one question and one follow-up. One moment please for your first question. Your first question comes from Ambrish Srivastava with BMO. Please go ahead."}, {"role": "user", "content": "Thank you very much. Excuse me, Kris. And Liam, you guys the spoilters[Phonetic] I have to go back. I don't know, 8 years - 10 years to see a four handle on gross margin, and you have navigated through many quarters. of sequential decline, and I'm going back 10 plus, 15, 20 and you still being able to hold margins. So my first question is, what's going on on the margin front, is it the pricing, is it something structurally different this time versus I'm going back to last 8 years -10 years?"}, {"role": "user", "content": "Yes, Ambrish well. I will take that question of you and so, first of all, Q2 we delivered 50% gross margin, which was within our guidance range. But we started already seeing some of the underutilization charges hitting our income statement in the second quarter. For Q3 -- fiscal Q3, we guided 47% to 48% as we are experiencing 400 basis-points to 500 basis-points of under-utilization charges, which are partially offset by ongoing cost reductions and operational efficiencies that we are driving. And the reason for the underutilization charges is a slower than expected recovery in the Android smartphone markets, as they continue to work down inventory their internal inventory in a somewhat soft demand environment. And initially, we were anticipating a stronger second half of the fiscal year and calendar year, but, we do see some signs of recovery, although. I would say later and slower than initially anticipated. As a result of that we are adjusting our factory utilizations across all our factories that resulting in those 400 basis-points to 500 basis-points of under-utilization charges. And I would like to note that unfortunately those underutilization charges are having a negative impact on the gross margin, but they do not have a negative impact on our cash-flow. And we will continue to generate strong cash flow and maybe last, we have been operating our business at a slightly elevated level of inventory. In anticipation of a stronger recovery in the back-half, now that the recovery is going to be slower than expected, we are also going to adjust our internal inventory levels and right-size that. Again that doesn't help our gross margin, but it will further bolster our strong cash generation."}, {"role": "user", "content": "And my -- just my follow-up is on the gross margin side [Technical Issues] Inventory, you're sitting at 185 days and target level is 85, if I remember correctly, two years ago or three years ago, you had given that to us. So if if it has to come back to that level then that headwind could sustain for more than a quarter, it could be a couple of quarters before inventory at least two-three quarters before it normalizes, am I thinking about it the right way?"}, {"role": "assistant", "content": "Yeah, you think about it the right way. Well, first of all, inventory came slightly down already in Q2 but days were up on lower revenue. And so days will always be elevated in our two slowest seasonal quarters and we'll improve and are stronger seasonal quarters. But we will bring down inventory in absolute dollars, as well as in days of inventory on a normalized level, and that of course will -- as a result of that the gross margin will be on or about the same level for multiple quarters. And then eventually we'll as the business starts improving margins will get back and I'll get back to your to your first question, right. So this is not a pricing issue or this is not a major cost issue. It is just a temporary underutilization issue. Your next question comes from Blayne Curtis with Barclays. Please go ahead."}, {"role": "user", "content": "Hey guys, thanks for taking my question. I have two. Maybe. I wanted to ask, you highlighted the weakness in Android. I think some other customers had seen some inventory correction in our largest customers, so I was curious, what the percentage was in March and if you also have to work-through some inventory at that customer?"}, {"role": "assistant", "content": "So the largest customer in March was approximately 64% of total revenue and in terms of inventory, they manage their supply-chain very well."}, {"role": "user", "content": "Okay. And then a perspective on the guide on broad markets, just kind of curious, it was down a little bit in March, kind of how do you see that trending in June?"}, {"role": "assistant", "content": "Yeah, Blayne. I mean we definitely continue to diversify the broad markets portfolio, it continues to be very strategic for us. We're capturing new design wins every month. Automotive has been strong, we've got a little bit more action going-in WiFi 7 and also in some of the infrastructure market. So that business is looking really strong and also the contribution from the INA portfolio continues to track well. So, still a lot of bright spots there in the other side of the business obviously, Kris mentioned some of unique headwinds in mobile, but there also some really dynamic activity is going on in the broad market space."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Vivek Arya with Bank of America. Please go ahead."}, {"role": "user", "content": "Thanks for taking my question. I wanted to go back to where Skyworks is being the inventory issues, because. Liam and Kris, I remember you guys are very early right and prudent to recognize the weakness in the China market last year. So I thought you had already taken care of the Android issue in any new issues what come with your largest customer. So I just wanted to reconfirm that the weakness you're seeing right now is still Android and not at your largest customer?"}, {"role": "user", "content": "So Vivek that it's correct. The weakness is that Android and you are correct, we have proactively managed that as good as we can in terms of our component inventory in the channel. What we cannot control is the inventory level at the customer, at the phone level and that's where the main culprit is and now we see our customers continue to destock in a soft demand environment."}, {"role": "user", "content": "Alright, [Technical Issues] a follow-up. The fact that you are reducing factory utilization ahead of what is typically your strongest seasonal quarter, should we also be toning down our expectations of mid-teens plus kind of sequential growth that you usually have in September given all these macro factors?"}, {"role": "user", "content": "So we only guide 1/4 at a time here, but sitting here today, we do expect some good sequential growth in September and December. As you know, our largest customer ramps up their new product launches and as in the past, we will have some really good content in those phones that will ramp up in the back-half of the calendar year."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Karl Ackerman with BNP Paribas. Please go ahead."}, {"role": "user", "content": "Yes, thank you. I guess, Kris. I wanted to just follow-up on some of the inventory discussions earlier. Obviously, June tends to be the seasonally weakest period of the year for you, but do you think you're actually shipping in-line with sell-through at this point ahead of this seasonal ramp that you normally see in the second-half of the year."}, {"role": "user", "content": "So not not in the Android ecosystem, we are still shipping below consumption because they still are burning through excess inventory at the phone level."}, {"role": "user", "content": "Got it, got it, okay. And then, I guess similar, just going back to the margin discussion, when would you anticipate underutilization charges to abate, and I guess as you address that question, are there any risks to inventory obsolescence. If you just discuss that as well, that would be very helpful? Thank you."}, {"role": "user", "content": "Right. So this is, as I've said before, this is a multiple quarter event because it just takes time to for those underutilization charges to actually hit the income statement, right. It goes through inventory turns until it hits your income statement, but we are seeing the soft demand environment in Android, it's improving, but slightly slower-than-expected, we are reducing inventory at the same time. And so this is a multi-quarter event."}, {"role": "user", "content": "In terms of excess and obsolete, we don't see any major risk. We've managed pretty well through that."}, {"role": "assistant", "content": "Yeah, and just to jump-in here, this is Liam. Obviously, this is kind of a macro cycle that we're going through. Every company has their own nuances here, but. I would remind you, the cash returns are very-very solid, we paid our bills on capex, free-cash flow margins are going to be sustainable. 30% plus, so there's a lot of positives around that and we'll get through the cycle, we're very we're very-very much focused on execution. And it has been a little tough from some of our customers. And so working with them and getting the inputs that drive our business, but we continue to drive design when penetration and new markets, whether they're in broad or even some of our mobile players and IoT players, but there's a lot of positives there and yeah, we're enjoying a tough a tough cycle, and I think we're doing the right things here to ensure a better future as we go forward, but the business is still quite solid, Cash returns are robust, we've got customer engagements that continue to ramp and we're very confident on the outlook."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Gary Mobley with Wells Fargo. Please go ahead."}, {"role": "user", "content": "Hey guys. Thanks for taking my question. But to ask about your largest customer in the first-half of the fiscal year, we've managed to grow your business with them narrowly, so my question to you is based on the content gains that you may see in the next-generation platform from them, and all other things considered, do you think you can grow your revenue with them for the full-year or more importantly, second half this year versus last year?"}, {"role": "assistant", "content": "Yeah, yeah. I mean, we can't give you the specifics, but we absolutely aspire to drive for a better position in the second half and continuing to cement, new programs that will get into '23 and '24."}, {"role": "user", "content": "Okay. And on OpEx management, you're doing a good job, but it's tamping things down and if not decrease in your OpEx in this tough time. Is that -- does that involve any I guess proactive measures on head count or might in the future?"}, {"role": "user", "content": "Yeah, so we have been doing that and you know Skyworks, we have been doing that consistently in the past, we have the head count when needed. In support of our technology and product roadmaps and when things are getting tougher, we adjust and we've made some a downward adjustments in that area as well. Of course, making sure that we can continue to support our major customers, our major programs and it's really focusing on driving operational efficiencies and trying to trim down some discretionary spending, that's what we focus on."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Edward Snyder with Charter Equity Research. Please go ahead."}, {"role": "user", "content": "Thanks a lot. And look Kris, maybe you can clear it up, do you expect a model to see content up or down or flat in the second-half of this year?"}, {"role": "assistant", "content": "And can you give I missed the first part. Can you give sorry,"}, {"role": "user", "content": "I'm just I'm not looking for revenue guidance because. I just got all king with macro in units and all that. I'm just looking at content in terms of new model releases year-over-year in the second-half, do you expect your content to be up or should we expect it to be flat or down?"}, {"role": "assistant", "content": "Yeah. I mean, we expect it to be up, that's our game plan. There's a lot of new technologies that emerge in the leaders, and we're hanging around the hoop on every one of them. So we've got our team is working with the best customers and the reopen the best opportunity. So we'll have to see how that plays out in the second half, but that's definitely where we're headed."}, {"role": "user", "content": "To in fantasy world, flat units year-over-year, no change at all, you would naturally expect to be higher in revenue, your largest customer in the second half?."}, {"role": "assistant", "content": "That would that would be our plan. Yes,"}, {"role": "user", "content": "Perfect. Okay, and then and the Android. I know it's still kind of a mess, but there are some architectural changes going on in some of the flagship phones, even in the low-end phones that are involved, I don't want to say integration.,but more higher-density modules that will show-up probably the next year or so, and Skyworks is kind of avoid some of that competition in the past just because there's ASP associated with it. But given the -- it kind of separate you Huawei, the domestic suppliers in China, is it like -- is it reasonable to assume the Skyworks would participate more aggressively in Android food chain, say, in 5G smartphone with their entry or flagship in the next two years."}, {"role": "assistant", "content": "Yeah, and. I would say, yes to that, because now as those models in Asia and Android become more complex. That's right up our alley, right. I mean, so our aperture is more to the mid to the high-end, and we want to lift those customers and help them create a better engine or better solution. So we're there and there's a lot there's a lot of upside for us and that characteristic, because we just -- we've been a little bit more high-end play, but as the complexity gets more-and-more embedded that creates more-and-more opportunities for us. It's really, it's hard to hit the hard pitch, right. We know-how to do that, but we also got to take care of the other businesses as well. So we feel good about it. We definitely have the know-how to make it work. And I think it will be part of the -- part of the recovery here as we get through the middle of the year."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Harsh Kumar with Piper Sandler. Please go ahead."}, {"role": "user", "content": "Yeah, hey guys. I was just curious, Liam. If you could give us a sense of how much excess inventory of complete handsets in the Chinese on market. In other words. I guess what I'm trying to understand is, I know you are under shipping, but curious how long or how many quarters it might take for selling do equal to sell-out. right."}, {"role": "assistant", "content": "Harsh, we we don't have a specific number on the number of access inventory on the handset level, but. It is -- It is it is a couple of quarters, right. Initially, we anticipated it to be a couple of quarters, but now it might be a couple of quarters more and that's -- that's what we -- that's the feedback we're getting from a customer's that's the feedback that and remarks that we see by our peers and competitors."}, {"role": "user", "content": "That's fair. And known for my follow-up, if I can ask you, if you can help us out with broadband, do you think that broadband might be up in the June quarter on a sequential basis, or year-over-year basis. Any color would be great."}, {"role": "user", "content": "Right. So our broad markets business. Will be slightly down on a sequential basis into the. June quarter. Again, it's as Liam already talked about that, right. We see certain areas of strength in automotive, some of our industrial markets, but There is some, some inventory overhang and some of the more consumer, enterprise oriented markets. Again, very similar to what has been mentioned by peers and competitors that play in this field."}, {"role": "user", "content": "Fair enough guys. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Ruben Roy with Stifel. Please go ahead."}, {"role": "user", "content": "Thank you. Thanks for letting me ask question. Harsh asked -- the essence of my question Liam, but. I guess, specifically on auto was it up in the March quarter. And do you expect auto to continue to remain strong as you sort of characterized and the reason I'm asking that is obviously there were some long-lead times and that type of thing In auto components, I'm wondering how lead times look? Are they coming in? And what the inventory assessment is in that market specifically, as you think about the rest of the year?"}, {"role": "assistant", "content": "Thank you. Yeah, sure, great question. As you know, we actually hadn't done much in automotive two three years ago and we're now really making great progress. So the good news there, there's is a tremendous amount of new territory that we can cover in automotive. We've already -- we've already won a number of platforms and programs with key OEMs EV players, etc. The partnership with our INA business has been a real catalyst there as well for us. So it's a fast growing part of our portfolio, it has tremendous upside, we have low share relative to the pie and that's going to make for pretty dynamic opportunities as we go forward. It's definitely grower for us this year. Despite all this inventory stuff, we talked about the auto market will will definitely grow."}, {"role": "user", "content": "That's helpful, thanks. Liam. And just a quick follow-up on, Ed's question earlier, and sort of thinking through design activity for next year maybe in Android. How would you characterize that. It seems like there are a lot of insertions moving to-single module, right now, do you -- would you characterize design activity is strong right now ahead of sort of those ramps or do you think that's still something on the come that you guys will be participating in bake-offs[Phonetics] in later this year. What's the timing on that I guess is the question."}, {"role": "assistant", "content": "Yeah, well I mean, as you know, we've been focusing more high-end mid-tier etc., but obviously now the good news is that our customers want, better performance. So we had been a little bit more cautious in engaging in some of the lower-end markets. But some of those products now on the appetite for connectivity has raised, which makes it much more profitable and more in the. Kind of down the alley for Skyworks. So you're going to see more opportunities for us, emerge in the Android cycle. Samsung is doing a lot better, Google is a player now for us, we're doing a lot there. And obviously, the players in China -- China has been a little tough but. I think that that will come back and that will be another catalyst for. So we know-how to make all that stuff. And the stuff is not new at all, we know exactly how to handle it. Automotive, again as a new market that we are doing very well on and I think, we get through some of these macro headwinds will be able to really kind of shine a light on some of these strategic design-wins that we have."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Harlan Sur with JPMorgan. Please go ahead."}, {"role": "user", "content": "Good afternoon, and thanks for taking my question. On broad markets, I think 90 days ago you guys had anticipated driving full year growth in this segment, but as you just mentioned you know you've got dynamics in the consumer IoT market, I think even data enterprise telco markets have continued to soften a bit here, so does the team still believe that they can drive full-year growth in broad markets? Yeah I think Harlan -- I think that's going to be a challenge, right. So we what we said is that, we were expecting some modest Year-over-Year growth on a calendar year basis. But given some of the macroeconomic challenges that we have seen with high inflation and increased interest rates and the impact it has on consumer and enterprise spending. I think this is going to be challenging. Having said that, I mean, looking beyond calendar year '23 into fiscal '24, we do expect our broad markets business to grow in fiscal '24 over fiscal '23. Perfect. And then the team has done a great job proliferating your filter technology. I think last year. I think the team drove about 45% Baw filter attached here, mobile revenues given the design-win pipeline for this year. On new model launches in the second-half, where do you see that attach rate moving to?"}, {"role": "assistant", "content": "Yeah, that attach rate continues to move higher and higher. And there is multiple nodes and bulk acoustic wave. So it's not one that fits all. There's lot of innovation, there's a tremendous amount of R&D and one of the other things that we talked about a little bit as our capital intensity. That's a plus for us is what we've already we've already gone through a pretty significant cycle and raising the capability and technology nodes with Baw. We have a lot of capacity right now that we're ready to roll-on and it's a strategic technology, not many companies know-how to do it. And it can go beyond the smartphone as well, so the applications certainly today are in handsets, but there is a broader set of opportunities where Baw filter is a meaningful part of the strategy and meaningful part of the performance. So what you'll -- you'll be able to see that more as we go through this year and following years."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Kevin Cassidy with Rosenblatt Securities. Please go ahead."}, {"role": "user", "content": "Yes, thanks for taking my question. And I'm just trying to understand though as you cut-back on utilization, what's the shape of being able to bring that back up again. I guess if it -- lead times start to stretch out and that's when build their utilization back up again just kind of what sort of strategy as business starts to come back?"}, {"role": "user", "content": "Yeah, so a lot of it will depend on how strong the business will bounce-back and once we start seeing we already see it. Right. Some of recovery and the Android market. Once that gets stronger, in combination then of course with continue to grow our dropped markets business, as we just indicated in doing well with our largest customer, we will start ramping-up the factory utilizations. But as I said earlier, it's a couple of quarters and then and then that will bounce-back."}, {"role": "user", "content": "Okay, to bring utilization back up, it's just a matter of rehiring people. It doesn't mean new equipment, you've just turn the equipment off?"}, {"role": "assistant", "content": "No, with the equipment there. I mean, we basically, we know how to handle that. The capital, the scale, all that's ready to go. This is just more of a demand issue, but we know-how to handle it. And there's going to be a tremendous amount of activity that will go through those cycles and go through those factories leveraging that capital, which is in great position and has tremendous opportunity over the next several years to populate not only smartphones. As we said, but other bulk acoustic wave type type of engine[Phonetic]."}]}, {"messages": [{"role": "system", "content": "Your last question comes from Matt Ramsay with TD, Cowen. Please go ahead."}, {"role": "user", "content": "Thank you very much, guys. Good afternoon. I guess my first question, some of your peer companies that also have --a pretty high revenue exposure to your largest customer talked about a dynamic of maybe than buying a bit more early in this calendar year. Pulling in some of their own inventory purchases and leaving a bit of air pocket before things ramp-in the back-half, are you guys some of the stuff, reflected in the guidance that type of dynamic or in my -- or is it more lean toward Android as you've mentioned in some of your prepared comments. Thanks."}, {"role": "assistant", "content": "Yeah, it's more towards the Android side at that point, the way we go here and so. I think that's maybe what you're seeing, but -- and there again. I mean, we know-how to manage through it."}, {"role": "user", "content": "Got it. I. I guess, Kris. I wanted to ask a longer-term thing as my follow-up, and it's on free-cash flow. You mentioned that some of the utilization charge things that are going to happen in the short-term with the factories are not cash-flow hits. But given the dynamics in the business, could you talk a little bit about how -- are there any specific floors of free-cash flow that you're managing to in terms of free-cash flow percentage and just how do you think you plan to manage the business over the next two to three years on a cash-flow basis? I think that would be helpful. Thanks."}, {"role": "user", "content": "Yeah, that's a great question. And so our target model is a free-cash flow margin of 30% and last couple of years we have been operating the business in the mid to-high 20s and the reason why we were not at 30% is, as. Liam, just explained, we have made major investments in our technology in our manufacturing assets. Building out very high plus manufacturing capabilities. And but we're looking-forward over the next couple years instead of running capex at 10% or 12% to revenue, we believe that in the next couple of years, we can run the business at mid single-digits as a percent of revenue for capex."}, {"role": "user", "content": "In addition to that, of course, we will continue to grow the business and run the business at high-profit levels and when you combine that with good working capital management. We believe we will be able to sustainably run this business at 30% - 30% plus free-cash flow margin. And again, just in the first-six months of the year here, we've already generated more cash than we did last year, right. With $1.1 billion free-cash flow at 43% free-cash flow margin, but again sustainably well-above 30% for the remainder of or the total of the fiscal year."}]}, {"messages": [{"role": "system", "content": "Our first question will come from Deane Dray with RBC Capital Markets. Your line is now open."}, {"role": "user", "content": "Good morning everyone."}, {"role": "user", "content": "Good Morning Dray"}, {"role": "user", "content": "These are impressive numbers on organic revenue growth and the margins, especially total company margins but that takes me to the first question on Water Infrastructure. And I know this is seasonally the lowest margin for that segment. But you called out three factors: mix, timing of projects, and some investments like in digital. And just hoping if you could size these and maybe give some additional color. Thanks."}, {"role": "user", "content": "Yes, Deane, great question. I think you highlighted some really important points. First of all, Q1 is typically our lowest margin quarter for our Water Infrastructure business. On an EBITDA basis, we were down about 80 bps this quarter. It's really essentially all in gross profit, and it really comes down to two or three items. One, just product mix, a little bit of geographic mix. And we had some larger scale projects this quarter that typically carries modestly lower margins. And then we have been continuing to make some investments in this segment. It talks to the our optimism about its long-term prospects. And those investments have been really focused on increasing our digital selling and solution selling capabilities, and we're seeing proof of that investment come through in our orders momentum and growth. And I think, Deane, when you look forward to the rest of the year, we think that Water Infrastructure margins are going to rebound in Q2 and the rest of the year, in line with our typical seasonality."}, {"role": "user", "content": "All right. That was exactly what I was looking for."}, {"role": "assistant", "content": "Deane, I just offer hey Deane I would just offer a -- this is Patrick, that margin improvement is also supported by what we have in backlog. So these orders that are being won based on these investments support that continued improvement in margins."}, {"role": "user", "content": "That's great. And that kind of takes me to the next question on M and CS and the chip supply. And Patrick, I remember when the spur surface, and it was everywhere that everyone was getting these chip supply shortages and it just accentuate the point that Xylem is from a smart water standpoint, so dependent on semiconductors. But at the time when it was most uncertain, you all said it would be a gradual expectations for a gradual improvement in the supply, and that's exactly how it's been playing out. So where you stand today, how does the backlog look in terms of like past due of MC and S chips and is just should we expect this consistent kind of gradual improvement for the balance of the year? Thanks."}, {"role": "assistant", "content": "Sure. Thanks for the question, Deane. I'll hand it over to Matthew to give more color on it."}, {"role": "assistant", "content": "Good morning Dean Uhm yes, we had, for sure, better-than-expected results in Q1 in metrology. The chip supply continues to be lumpy, but it is continuing to move at a steady incremental pace to your point. Our backlog continues to be 30 percent past due. That was last quarter as well because of the continued orders momentum that we've seen in this business up 8 percent in metrology, in M and CS. And so we're going to continue to expect modest improvement, and we're still managing the variation in supply. And the one thing I would point out, as a lot of you probably remember, is the book-to-bill for automotive and industrial chips is still plus 1. So we're still kind of working through this problem where on the consumer side, you're seeing a little bit more relief. So we're just going to be steady as it goes over the coming quarters, and we'll see those modest improvements. And with those modest improvements, we've taken up our guide from low teens to high teens for 2023 for M and CS."}, {"role": "assistant", "content": "And I would just offer that as well that, one, we've continued to hold on to all of our deals in backlog. There have been no cancellations. And so that's continued to be a good sign as we deliveres we say we're going to deliver. And then certainly, two, as Matthew pointed out, continue to see really strong demand and market wins despite the chip supply challenges. So I think the confidence has grown over the course of the past year more."}, {"role": "assistant", "content": "Great thats really helpful, thank you."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Nathan Jones with Stifel. Your line is now open."}, {"role": "user", "content": "Good morning everyone"}, {"role": "user", "content": "Good morning"}, {"role": "user", "content": "I'm going to follow up on the M&CS guidance, chip supply, etc, etc. I mean, the guidance going from mid-teens to high teens pretty much just considers the outperformance in the first quarter. If you model it out, the dollars of revenue each quarter doesn't really change for the remaining three quarters. I know you guys have talked about better chip supply, you have product redesigns to use more available chips that come in the back half. Is there still a little bit of maybe overly conservative approach to the guidance for M&CS, just given the improvements that you're seeing plus these product redesigns that start coming out, I think, probably in the third quarter?"}, {"role": "user", "content": "Yes, Nate, let me give that a shot. You know first of all, we're really pleased with what we saw from a delivery perspective in Q1, and we've got out of the gate with a fast start this year. When we look at the next quarter for M&CS, we actually think it looks very similar to what we experienced in Q1. So good strong business in metrology, but also the other businesses that we have in analytics and assessment services, when it all comes together, Q1 and Q2 look pretty similar. And then when we look at the back half of the year, we've got embedded in our guide a modest ramp up in the back half. And we've got to continue to monitor the chip supply situation. It is not perfect operationally yet."}, {"role": "assistant", "content": "Yes. I would just add. We're just -- we're trying to be prudent with the guide to Sandy's point in the back half, we still don't have good visibility. We do -- I call it the daily miracle. We're managing decommits and push outs and come in of chips, and we're just trying to manage the guide and be prudent in the second half."}, {"role": "user", "content": "Okay. That makes sense. Maybe just following up on the 30% of backlog that's past due, I anticipate that at some point here, the chip supply is going to get significantly better, and you could probably manufacture more than your customers are going to be ready to take with the backlog likely -- sorry, bottleneck likely becoming utility labor to go and install these things. How do you think about the progression of that 30% past due working that down to whatever a normal level of past due is and actually burning some of this backlog down '24 or '25 as we go along."}, {"role": "assistant", "content": "Yes. We'll progressively work the backlog down as the chips became to be more fluid. The bottleneck is not going to be -- well, the bottleneck now is chip supply, but the next bottleneck will not be our capacity, to your point, it's going to be really working with our customers to make sure they have the deployment capacity. And that's something we're planning on right now and getting ahead and looking out and projecting with our customers through really the end of 2024 in lining up that capacity for deployment. So we're locked up with our customers to make sure that we've got that set up as the chip supply continues to improve, that the deployment capacity does not become a throttle and a bottleneck as we move through the end of the -- through 2023 and through 2024. I would offer up, Nate, as well. As you probably know, Nate, the nature of these deployments at a utility level, these are years in the development and the approval process. And the main concern on the part of utilities is that once they begin to get chip supply, but there's a steady installation progress for them so that there's no concerns by regulators as to whether or not an approved deal was actually ever going to happen. So as long as they're showing steady improvement and deployment, the labor issue will not be a major bottleneck in terms of a major slowdown. And so there'll be a good steady progression."}, {"role": "user", "content": "Great Ill pass it on, thank you for taking my question."}, {"role": "assistant", "content": "Thank you"}]}, {"messages": [{"role": "system", "content": "Our next question will come from Joe Giordano with TD Cowen. Your line is now open. Hello good morning Deck."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "So I guess going through this earnings season, we've heard a lot of companies start talking about changing in customer buying patterns a little bit and maybe April trends being worse than what the average of the first quarter was. So just curious if you have anything to say there. I'm probably talking more on like the industrial side than on the utility side there."}, {"role": "user", "content": "Yes. I mean, Joe, we saw nothing surprising coming out of our April results. Obviously, we're in the process of closing the books there for that month, but nothing has jumped out to be out of the ordinary order change from what we saw in Q1."}, {"role": "assistant", "content": "And Joe, I think it's also safe to say that one of the things that we track, not only in industrial but across the entire portfolio is our bidding pipeline and that bidding pipeline continues to be very healthy and growing consistently. So another good indicator. Matthew, you can probably talk to our channel partners and what you're hearing there in terms of the health of their inventory levels."}, {"role": "assistant", "content": "Yeah so from a channel inventory point of view, we do have really good visibility because we have strong relationship with our channel partners. And overall, I'd say levels are healthy, and they're not sitting on excess inventory. On the industrial front, there's not a lot of inventory that's configured to order, engineer to order, but we have seen good demand in that area, specifically in emerging markets in the first quarter was really strong and resilient in industrial. Utilities, specifically in wastewater opex, that's been really healthy and been really resilient through the past 18 months given our vertical integration in that segment. On the commercial front, we're still not back to 2019 levels given the continued supply challenges and constraints that we feel in the commercial part of our business. And then lastly, which is resi is the smallest portion of our business. It's well stock, and we're seeing a little bit of moderation there."}, {"role": "user", "content": "Fair enough. And then Patrick, on Evoqua, I know you can't say a whole lot, but is there anything you can -- any updates at all on timing or like what's been -- what are you currently waiting on? And then what are you -- what can you say about what you've done internally like to kind of prepare for this coming in? I know you're not just sitting around waiting for approval. So what -- can you maybe give us a little intent what -- how you're getting the organization prep for this? I know your not just sitting around and waiting for approval so maybe you can give us a little insight on the organization's preparation for this?"}, {"role": "assistant", "content": "Sure. Yes. No, thanks, Joe. So just on the transaction itself, as I said in our comments, I mean, really pleased with the progress. I'm proud of the team. I mean there's a ton of work that goes into this from both companies while people doing their day jobs. So a lot of great progress there. There were several countries, obviously, beyond the U.S. that required approval. We've achieved clearance in all of those countries. The only remaining country is China. In China, our filing has been accepted for what we call the short-form review, which typically takes no more than 30 days. And we're moving well through that and don't expect any issues there. And so we've got our shareholder vote coming up on May 11, both set of shareholders. So we will get through that next week. And again, for all those reasons, we continue to expect to close this by midyear. So that's on the transaction closure. You're right. We've got a dedicated integration planning team. I've spent a considerable amount of time with Ron Keating, their CEO and his leadership team."}, {"role": "assistant", "content": "Matthew has spent considerable amount of time with them as well. We've had many, many integration planning meetings. And on the cost side, clear line of sight to what we committed to before, that being $140 million in three years and very simple, straightforward areas. I didn't say simple is easy, but they're simple. We're not going after rabbits here. We're going after big items and deliver those as quickly as possible. And again, what we've always been most excited about is the growth synergy. And so looking there, you're right, they're -- we are somewhat limited on how much detail we can get into until we have final regulatory approvals from a competitive standpoint. But as the teams have worked together, we're even more excited about the top line growth synergies that are out there."}, {"role": "assistant", "content": "As we've mentioned before, we're most excited about the opportunity to deepen our penetration within utilities of the combined portfolio to expand both their international -- their integrated services and solutions business on the industrial side internationally, but also a number of their treatment products that we can take through our channels internationally. We both have efforts going on around digital services and solutions and opportunities to leverage our combined platform there to serve needs for different customer sets around the world. And then there's going to be opportunity in synergy in the areas of R&D and innovation as well as some of our portfolio enhancements in that area. Obviously, Joe, as you know, some of these synergies are going to materialize sooner than later. And we'll be in a position that once we get the transaction closed and an upcoming call to give you more clarity on that in terms of how we're thinking about enhanced growth rates of the new company."}, {"role": "user", "content": "Thanks guys."}]}, {"messages": [{"role": "system", "content": "Thanks you, our next question will come from Mike Halloran with Baird. Your line is now open."}, {"role": "user", "content": "Hey good morning everyone"}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "So following up a little bit on, I think, Nate's first question, so you think about the -- you've seen some steady deployments here, the -- well, you're expecting steady deployments here on the M&CS side over the next period of time here, call it a couple of years, which should give you some pretty good visibility. Does it sound like the lag in deployments and delays and deployments have impacted call it, that order cadence. It seems like the bottom was back half of the year and first quarter saw some nice sequential improvement on that side. I guess I'd like to understand a little bit about what that backfill looks like, what the conversations are looking like from a pipeline perspective on that side? And how you think about the visibility here over the next period of time when you put those two together? The deployment piece and then how that pipeline and thought process with the customers is going?"}, {"role": "assistant", "content": "Yes. Mike, it's Matthew. We feel really bullish on it. You can see our orders growth in Q1 was 8%. Maybe just take a step back and look at AMI adoption in total for the U.S., it's only around 30% today. And there's a very strong value proposition for this offering for our utility partners to make them more productive and more efficient in their business. And that's something -- coming through the pandemic, they've really gotten laser-focused on. And I would say even with digital in general, have really latched on to and started to ramp up their capabilities. So we're very bullish over the long term that will be more and more adoption. We're still kind of in the early innings, kind of 30% in and then when you take a step back and look around the globe, other parts of the world are a decade behind the U.S. in adoption of AMI network. So as we not only work the U.S. marketplace in the U.K., which is also very similar to the U.S., we're now starting to focus on the international front and how we can improve our opportunities there funding for non-revenue water and smart metering really picks up to some of the subsidies that are coming out in Europe."}, {"role": "assistant", "content": "And Mike, it would be worth -- Matthew, maybe if you want to give an update. We haven't talked about the Idrica partnership that we announced last earnings call because that really speaks also to what utilities are doing around the digital side and what we're seeing there in terms of early wins."}, {"role": "assistant", "content": "Yes. Just to reframe it just for folks that were not on the last call, it's exclusive commercial partnership worldwide. It is a SaaS business model. Idrica is headquartered in Valencia, Spain. They're a leader in what we call data management and analytics. And as we're out talking to a lot of our utility customers, the biggest pain point we hear from these partners is they need to have a singular platform to integrate all of their applications and data. They have multiple applications, passwords, login, siloed information and this really gives us the platform much like a smartphone, like an iOS platform to be able to integrate all these disparate systems."}, {"role": "assistant", "content": "It's a proven platform. It's been deployed at over 300-plus utilities. What I'd like to say a lot is built by a utility operator for utilities. They actually understand the utility workflows, which is really important, coupled with our application knowledge that we have as an OEM. Our teams are building strong commercial momentum. Sandy talked about the investments that we're making around the globe, especially in Europe, on digital investments and solution selling to deploy this platform. And we built a significant funnel over the past three months, and it's really also to enable us to pull through a significant amount of Xylem content. And I would say on the next call, we'll be in a much better position to kind of get into some detail on that as it matures over the next 90 days."}, {"role": "user", "content": "Thanks for that, and then maybe a similar conversation, obviously, you don't have the deployment component necessarily with the core utility pieces within your infrastructure business, but maybe a similar conversation about bidding pipeline, thoughts, domestic versus international and the ability to maintain the momentum on the pump and the treatment side there?"}, {"role": "assistant", "content": "Yes. So I'd say, in Water Infrastructure, the utility business, obviously, the opex is very strong around the world. We haven't seen a really slow down in capex either. If you think about Europe specifically, they're will wedded to making sure they spend their capex. And although I'm not going to get in -- go down the rabbit hole of the infrastructure bill, but over time, that will start to drip out and start to really provide long-term support and demand in the utility space with Water Infrastructure, both in the U.S. and around the world. There's other programs like the European Recovery and Resiliency Act, you've got the AMP cycle in the U.K. And all these are coming online in the next -- anywhere from six to 12 to 18 months to really buoy and lift the demand signal for that sector."}, {"role": "assistant", "content": "And Mike, a couple of other proof points. So the -- we look very much at the treatment bidding pipeline because that's a leading indicator for the health of the wastewater side of the utilities and that bidding pipeline continues to grow off of record levels to our backlog in Water Infrastructure itself, was up 14% in the quarter. So really indicating strong health there in that part of the business."}, {"role": "user", "content": "Great really appreciate it everyone, thanks."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you our next question will come from Scott Davis with Melius Research. Your line is now open"}, {"role": "user", "content": "Good morning team."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "I was just kind of curious on how you guys think about the kind of long-term growth algorithm of industrial versus industrial production indicators and kind of when I think about the ebbs and flows, there's so much of the installed base that's probably inefficient at this point could be pulled out. And there's all these new projects, mega projects that we talk a lot about, including some pretty high intensity stuff like semi fabs, I would imagine you guys have a lot of content on. So is there any way to kind of quantify or think about growing two times IP or three times or 1.5 times. I'm just kind of curious how you guys think about internal."}, {"role": "assistant", "content": "Yes, Scott, great question. So I'll put a caveat upfront and say, once we close the transaction with Evoqua, we'll be able to talk much more around how we view their growth outlook and the growth outlook of the combined company both stand-alone but also through the revenue synergies that we're targeting. But as we just look at our respective participation in the industrial piece of the business, I would say for Xylem because of the nature of what we currently sell into the industrial base tends to be more of a GDP kind of business. We're selling into the periphery of manufacturing facilities. And so as long as the facilities are up and running, they're burning through various types of pumps that we sell replacement into. It's a good business, good steady, but it's going to typically be in that low single digit, sometimes mid-single-digit kind of growth."}, {"role": "assistant", "content": "When you look at what Evoqua does, they're providing very different water management services into the so-called industrial users of water. And what drives the growth there, which historically has been in that kind of at least mid-single digit, if not even higher than that, depending upon where they are in the cycle is -- and this is where we do believe it will outpace broader GDP growth, is because of the increased demands coming in to those users around: one, making sure they have access to sustainable water supply to keep their operations up and running. The value of water to them is not the price they pay per gallon or liter. They don't -- it's not a big number for them. The value order to them is when they don't have it and they're operating in water-stressed areas and they have production stoppage and it's lost revenue and margin. The second is the increased regulatory pressure on them to manage their discharge of wastewater. And so fines, penalties, but also reputational concerns they have and making sure they're seen as responsible citizens in the community. So those are the pressures that we see are really driving the demand right now in that part of what we call the industrial sector of water, and we see that continuing."}, {"role": "user", "content": "That's super helpful, Patrick. Am I correct to assume that a semiconductor fab is going to have a pretty large TAM for you guys?"}, {"role": "assistant", "content": "Yes. That is correct."}, {"role": "user", "content": "Oh okay, Ill pass it on thank you."}, {"role": "assistant", "content": "Thank you Scott."}]}, {"messages": [{"role": "system", "content": "Thank you our next question will come from Andy Kaplowitz with Citigroup. Your line is now open."}, {"role": "user", "content": "Good morning everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Probably for Matthew, I know you've been working on a number of initiatives to enhance Xylem's productivity. Obviously, Xylem raised revenue guidance nicely for '23. I think you kept your margins. So maybe just more color to the progress you're making and what would you see going forward there?"}, {"role": "assistant", "content": "Yes. I mean I'll start this off and then maybe turn it over to Sandy to kind of wrap this up. But we see really good momentum in driving productivity, Andy in the business. There are several different areas that we're addressing in doing that, whether it's across simplifying our portfolio, reducing SKUs, making our factories more efficient, in what we build and really moving the long tail out. In terms of footprint, I mean, continued factory rationalization is, obviously, another point that we're looking at. Also within our M&CS business as we continue to move that business forward, getting after productivity there has been a focus area of ours, it's been kind of 2.5% of spend, and we need to get that up around 3.5%, 4%, 4.5%, which is kind of typical of the other two segments. So that's another big focus area as well. And also within M&CS too, if you kind of unpack the backlog, the shift to water, the water mix will pick up over time and provide some nice drop-through in high-calorie margin. So it's a combination of things that we're looking at holistically across the business to make sure, over time, we continue to build sequential momentum in the margin line."}, {"role": "user", "content": "Yes. What I'd add on top of that, Andy, is obviously, we're very focused on margin expansion and are the goals we set for our organization for 2023 contemplated significant margin expansion. I think we've gotten out of the gate with a good start there. And if we look at what we're thinking about the rest of the year, one of the items that we're focused on is what do the incremental margins look like and our guide contemplates 30% incremental margins at a period where we're continuing to make investments and a period of time where we don't have the most optimal mix as we work on the deployment. So I think we feel good about where we've landed and we're going to continue to be focused on productivity through the rest of the year. And we're going to be focused on making sure that our discretionary costs remain tight."}, {"role": "assistant", "content": "Yes. We're not anywhere by no means satisfied yet with even where we are saying margins are going to be this year. Obviously, we're going to continue to run hard to drive those up even more. But again, we feel it's responsible, prudent guide at this point in time."}, {"role": "user", "content": "Very helpful guys. And then, Patrick, you talked a little bit about Europe and the U.S. in terms of regions, but I think China has been a bit of a drag on your performance in the past. It seems to look a little better in Q1. But what are you seeing out of that region in the near term or going forward?"}, {"role": "assistant", "content": "Yes. No, thanks for the question, Andy. It has been talked about a lot. And it really is an emerging bright spot for us because we absorbed some pretty challenging numbers there last year. And you know that on the long term bull on China, just given where they are in the overall investment cycle from a water standpoint. So orders in Q1 and revenue were both up high single digit and outperformed there. Really encouraged by the reopening across China and what's happening from a GDP standpoint there. It really sets us up for a pretty strong year. I would say that we're seeing a faster recovery in the industrial and commercial piece of the market there than we are utilities. But utilities based upon our bidding pipeline and backlog are set to recover in the second half. So that's a further tailwind for us. And again, the funnel remains very healthy there. So encouraged by it. Still a long way to go, but we expect it to be a tailwind this year."}, {"role": "user", "content": "Very helpful, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. This concludes the Q&A portion of today's call. I would now like to turn the floor back over to Patrick Decker for any additional or closing remarks."}, {"role": "assistant", "content": "Well, again, thanks, everybody, for your continued interest and questions and the support. Look forward to catching up with you on our next earnings call. And I'm sure we'll see many of you at various conferences between now and then. As always, stay safe. And I look forward to speaking to you again."}]}, {"messages": [{"role": "system", "content": "Certainly, we will go take -- go-ahead and take our first question from Erik Woodring of Morgan Stanley."}, {"role": "user", "content": "Hey, good afternoon guys. Thank you so much for taking the questions. Tim, maybe if we start with you. If we go back to the December quarter and the shutdowns -- the production shutdowns around the time. I think the question a lot of -- a lot of us were asking was, how should we think about the deferral of demand versus destruction of demand, March quarter was quite strong, 2% year-over-year, iPhone growth and so as we sit here in May. How have you seen that customers that weren't able to purchase during the December quarter behave, meaning, are you seeing that the deferred purchases to March and June, could they be deferring purchases to later and hopes of buying a new iPhone? Just how should maybe we think about the cadence of that? And then I have a follow-up. Thanks"}, {"role": "assistant", "content": "Yes, hi, Eric, it's hard to quantify this, but we do believe we did recapture some amount of sales in the March quarter. As we did see the iPhone performance, accelerate relative to December quarter. The production levels for the whole quarter, were where we wanted them to be. So supply was not an issue during Q2."}, {"role": "user", "content": "Okay, perfect. Thank you for that color. And Tim, maybe to follow-up. It's been three or four quarters now that you've mentioned emerging markets like India and others. And I imagine having just opened two new stores in the country, it's clearly an important market for you. So maybe can you just talk about why you see India is such an important market and others, how you think about monetization trends in the country, and specifically what you have to do within the country to really ensure that India becomes maybe a more material mix of your business? And that's it from me. Thanks so much."}, {"role": "assistant", "content": "Yeah, sure. Looking at the business in India, we did side a quarterly record and grew very strong double digits year-over-year, so it was quite a good quarter for us. Taking a step-back, India is an incredibly exciting market. It's a major focus for us. I was just there, and the dynamism in the market, the vibrancy is unbelievable. Over-time, we've been expanding our operations there to serve more customers and three years ago, we launched the Apple store online. And then as you just mentioned, we launched two stores just a few weeks ago, and they're off to a great start one in Mumbai and one in Delhi. We've got a number of channel partners in the country as well that we are partnering with and we are very happy with how that's going. Overall. I couldn't be more delighted and excited by the enthusiasm, I'm seeing for the brand there. There are lot of people coming into the middle-class and. I really feel that India is at a tipping point and it's great to be there."}, {"role": "assistant", "content": "On other emerging markets. We had a stellar quarter in emerging markets overall, as I've mentioned, with records set-in a number of different places. Including Indonesia and Mexico, the Philippines, Saudi Arabia, Turkey, UAE and then quarterly records in Brazil, India and Malaysia. And so it was a great quarter for emerging markets in general. Despite the headwinds of the currency, that Luca mentioned, and so we're putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics, etc, a great opportunity for us in those markets."}, {"role": "assistant", "content": "Thanks, Eric. Can we have the next question please"}, {"role": "user", "content": "Great. Thank you very much."}, {"role": "assistant", "content": "Our next question is from Mike Ng of Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Hey, good afternoon. Thank you very much for the question. It is encouraging to hear about the record installed-base across iPhone and across all devices. It's been. I think double-digit growth over the last few years across the active devices. I was just wondering, is that a good way to think about the installed-base growth going-forward. And then for the iPhone installed-base specifically, I was just wondering if you could provide a little bit of texture around how you think about the growth there whether regionally or by first smartphones versus switchers and then I have a quick follow-up."}, {"role": "assistant", "content": "Yeah, if you look at the installed-base of active devices now, overall, it's more than $2 billion, as you know, we announced in January that we surpassed that in this quarter, our Q2, rather we set new records across each of the geographic segments, and each of the major product categories and that's despite declines in current quarter sales in particular in Mac and iPad. This is a huge asset for us, It's a testament to the overall customer satisfaction and engagement and loyalty of our customers. And so we view this as as a major asset for us. The iPhone base is well over one billion active devices, we see thus as, the upgrade rates and these sorts of things, may change quarter-to-quarter depending upon macroeconomic but. If you back up and look at the installed base, we feel great about the the size of it and the rate that it's growing."}, {"role": "user", "content": "Great. Excellent. And then, it was also encouraging to see the number of devices per iPhone user continue to grow. I was just wondering if you could talk about the opportunity to continue to increase that number of Apple devices per iPhone user, and if you have any color around how the monetization per user may differ from those -- for lack of better words super users versus those that may not be as deep into the ecosystem. Thanks."}, {"role": "assistant", "content": "We try really hard to design our products in such a way that they work seamlessly together. And so whether that's the watch or the Mac, so that you can start work in on one device and finish it on the other. And so there are, good deal of people out there that have multiple Apple devices and I think this is a testament to the customer satisfaction and loyalty that we've been able to get from the incredible design that our engineering teams do on our products."}, {"role": "user", "content": "Excellent, thank you, Tim. Thanks, Michael."}, {"role": "assistant", "content": "Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Shannon Cross of Credit Suisse."}, {"role": "user", "content": "Thank you very much. Thank you for taking my question, Tim can you talk a bit about AI, obviously that's more than the topic of the day. It seems like the topic of the year. Just how do you think about it through your products and services. I know you use it in different ways. But also if you can just give us any thoughts you have on Generative AI and and -- I don't know where you see it going, not sure what you want to say on it, but I'm really curious this is your take? Thank you."}, {"role": "assistant", "content": "Yeah, thanks for the question, Shannon. As you know, we don't comment on product roadmaps. I do think it's very important to be delivered and thoughtful and how you approach these things. And there's a number of issues that need to be sorted as is being talked about in a number of different places, but the potential is certainly very interesting. And we've obviously made enormous progress integrating AI and machine-learning throughout our ecosystem and we weaved into products and features for many years as you probably know. You can see that in things like fall detection and crash detection and ECG, these things are not only great features they're saving people's lives out there and so it's it's absolutely remarkable. And so we are -- we view AI as huge, and we'll continue weaving it in our products on a very thoughtful basis."}, {"role": "user", "content": "Okay, thank you. And then can you talk a bit about your shift of manufacturing and diversification of manufacturing footprint. I'm curious, obviously you have a very tight network in China. So how is it going to move to some of these other regions, are you seeing any impact from a margin perspective or just any thoughts you have on what you've seen as you started to shift more-and-more outside of China, whether it's growth or it's actual production? Thank you."}, {"role": "assistant", "content": "Our supply-chain is truly global. And we are investing all over the world. We're investing in the U.S., we're investing in a number of other countries as well and so we make products everywhere. We'll continue to invest everywhere and we'll continue to look for ways to optimize the supply-chain, based on what we learn each and every day and week and so forth, to ensure that we can deliver the the best products and services for our customers. If you sort of step-back and look at how we performed over the last three years on the supply-chain, despite this parade of horribles, if you will, between the pandemic and the chip shortages and macroeconomic kind of factors, the supply-chain has been incredibly resilient. And we feel-good about what we are and what our plans are."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, Sharon. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Wamsi Mohan of Bank of America. Please go ahead."}, {"role": "user", "content": "Yes. Thank you. Tim, you had called out on December quarter earnings that Pro models were significantly constrained. Do you see a catch-up on the PRO model specifically in the March quarter and was the mix better than typical? And do you see that mix re normalizing here in the June quarter? And maybe you can comment on the channel inventory levels as well for iPhones? And I have a follow-up."}, {"role": "assistant", "content": "Sure. It's hard to quantify, Wamsi. But we do believe, we did recapture some amount of sales in the March quarter. And obviously, we had to set the channel at the right levels and we're very comfortable with the channel inventory that we have on a forward basis. So we do think there were some, but it's difficult to quantify it."}, {"role": "user", "content": "Okay. Thanks, Tim, And Tim, as a follow-up, you launched so many services around Apple Pay. most recently you mentioned buy now pay later high-yield savings account, where do you see the expansion in the payments ecosystem over-time? And do you look at the payments ecosystem as a standalone revenue opportunity or is it more about making the devices even more inseparable from us? Thank you."}, {"role": "assistant", "content": "What we're trying to do with our payments work is that sort of like we've done on the Watch where we're focused on helping people live a healthier day. On the our financial products, we're helping people to have a better financial health. And so things like the Apple Card and the fact that it has no fees. This is like the savings account, which has, as you mentioned, it's very attractive yield. So we're trying to help our users and these things -- but these things have to stand-on their own, obviously. But we're very user focus and so we're listening to them and provide things are -- provide them pinch points and and orchestrate our roadmaps around that. Buy now pay later, is another one that we've just gotten out of the shoe. But on the savings account in -- specifically, we are very pleased with the initial response [Indecipherable], it's been incredible."}, {"role": "user", "content": "Thanks, Tim."}, {"role": "assistant", "content": "Thanks, Wamsi. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from David Vogt of UBS. Please go ahead."}, {"role": "user", "content": "Great, thanks for taking my question, Tim. I just wanted to go back to maybe kind of dig into the restocking of inventory in the channel versus what we're hearing from a demand perspective, that appears to be a little bit softer in the March quarter from some of your larger carriers that exhibited relatively weak upgrade rates. So just wanted to kind of get a sense for where you're seeing demand signals today, vis-a-vis how you're thinking about it, maybe a month ago or even three months ago? And is there sort of an acceleration in demand or any sort of signals that you might want to share with us at this point? And then. I have a follow-up."}, {"role": "assistant", "content": "I don't want to go into what we're seeing in Q3. Other than the guidance that Luca has given. But for Q2, I think you're probably referencing primarily U.S. carriers. And if you look at our geographic distribution of our performance. It was lower in the Americas, which is primarily -- predominantly, the United States. And a part of that is, I believe it's macroeconomic, a part is that there were more promotional activity in the year ago quarter. And so, I think -- I think that's what you're seeing there. The -- where our results were really stellar during this quarter was really in the emerging markets. And where we couldn't be prouder of the results that we had there."}, {"role": "user", "content": "Great. That's helpful and then just quickly on Services. Are you see anything in terms of consumers' behavior, other than sort of the macro that you mentioned and tough comps on digital advertising and mobile gaming. Are you seeing users of all the disparate services change and what they're using, how they're using and time spent with an Apple service now that we're technically hopefully fully past COVID with China almost fully reopened? I'm just trying to get a sense for how user or consumer behavior has changed over the last three months to six months. Thanks,"}, {"role": "user", "content": "David. It's Luca, as you said, of course, we got the issue around them. The macroeconomic environment, particularly in advertising and in mobile gaming. But outside of those areas, behavior of customers continues to be pretty consistent. We are doing particularly well, obviously in some of the services that we've launched more recently like payments, where our growth rates are very strong. As the adoption of Apple Pay and Apple Card and now the new services that Tim mentioned and the adoption continues to increase. Cloud is an area that continues to grow very consistently, users want to store more photos and videos and more content on their devices. And so they adopt our cloud services. And in general, the model in the App Store around paid subscriptions continues to grow very strongly. I mentioned, we now have more than 975 million paid subscriptions on the platform and that's almost twice as much what we had only three years ago. So obviously the growth in subscriptions is very strong."}, {"role": "user", "content": "Great. Thanks guys."}, {"role": "assistant", "content": "All right, thanks David. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Samik Chatterjee of JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi.Thanks for taking my questions. I guess, maybe if I can follow-up on David's question here on Services. In the past, pre pandemic the growth rate there was more about sort of mid-teens. The growth rates today where you stand, even if you back-out FX impact is more about low-double-digit. So one of the questions that we get often from investors and wanted to get your thoughts on is, even as the installed-base growth seems to have accelerated. Are these more cyclical drivers that are depressing growth at this point from returning to that level or do you see more of a rollout on the monetization that you need to do to get back to those growth levels? And have a follow-up please."}, {"role": "user", "content": "Samik, It's [Indecipherable] the areas we're seeing the impact on the macro-environment, as I mentioned is digital advertising, as you know obviously the microenvironment is not helping on that front and mobile gaming, where we've seen a bit of a slowdown, partly, due to the macro-environment, partly due to the fact that we had very elevated usage during the COVID years. But outside of those areas, we continue to see very healthy growth rates."}, {"role": "user", "content": "Okay, and maybe if I can just follow-up on -- this is more of a macro question. I don't know if we'll Luca or Tim, want to take this, but obviously the macro is not sort of helpful at this point, but what you're sort of implying in terms of your guide is momentum for your products remains pretty stable, you're actually guiding to modest uptick ex-FX for the overall business. I mean, what are you seeing in terms of customer sort of spending trends and overall does the consumer sort of continue to deteriorate in terms of spending patterns and is your sort of momentum here just a function of share gains? How should we think about sort of where the consumer is versus what your products are doing independent of that?"}, {"role": "user", "content": "Part of it, Samik is what Tim was talking about we having great momentum in emerging markets, and those are markets where our share is low, it gives us a great opportunity to grow over-time. It also helps us with the growth of the installed-base, because you can imagine any places where -- where our market-share is low, we tend to add a lot of switchers, people that are new to the Apple ecosystem that increases the installed-base and over the longer-term. It obviously improves our ability to monetize on services as well."}, {"role": "user", "content": "Thank you. Thanks for taking my question."}, {"role": "assistant", "content": "Alright. Thanks. Samik. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Amit Daryanani of Evercore."}, {"role": "user", "content": "I have two as well. I guess first-off on gross margins for the June quarter, they seem to be holding up fairly well, especially given the fact that sales are going down on a sequential basis. So, Luca. I'm wonder if you can just touch on what's driving the strength in gross margins sequentially it's offsetting the lack of leverage, if you may, and then I also noticed that the range of your gross margin guidance is 50 basis-points, it's typically 100, what does that entail? What does that mean?"}, {"role": "user", "content": "So the -- you're right. I mean, we are guiding to a fairly stable level of gross margins, are there a very-high level. We're very happy with the gross margins that we are having this cycle. For the first time in several quarters, Foreign-exchange -- we expect foreign-exchange to be flat on a sequential basis at the gross margin level, unfortunately is still a headwind at the revenue level but at gross margin level, sequentially, we expect foreign-exchange, not to be a factor and so the seasonal loss of leverage that you you're referring to we expect to be offset by cost-savings. And so that should give us that level of margins. As you know, you were asking about 50 basis-points, we have guided to 50 basis-points of a range before as well, this year in particular because of the 14th week in the -- during the December quarter, we are a bit late in the calendar year, right, and so we have a bit more visibility around margins for the June quarter."}, {"role": "user", "content": "Got it. That's helpful. And then. I guess, Tim if I just go back to the India discussion a bit, perhaps you could just contrast what you're seeing in India today versus what you saw in China, maybe a decade or so ago. Is that a reasonable ramp [Indecipherable] India would have or could it be different from the lessons you've seen in China."}, {"role": "assistant", "content": "I think each each country is different and has their own journey and. So I hesitate to compared to March, but what I do see in India is a lot of people entering the middle-class and hopeful that we can convince some number of them to buy an iPhone. And we'll see how that works out, but right now it's working out well."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, Amit. Operator, can we have the next question, please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Krish Sankar of TD Cowen. Please go ahead."}, {"role": "user", "content": "Yeah. Hi -- hi, thanks for taking my question. The first question. I had is for Tim. Tim, you've primarily been a consumer-centric company, but it seems like the line is blurring [Phonetic] with the iPhone, iPad, your hardware products being used to corporate applications. So is there a way to segment, how much of your revenues today are coming from enterprises versus consumer? And does the Floor, Corporate IT spend impact your outlook for iPhone, iPad, Mac, etc. And then I have a follow-up."}, {"role": "assistant", "content": "Internally, we have our estimates for how much is enterprise versus consumer, and the enterprise business is growing. We have been focusing a lot on BYOD programs and there is more-and-more companies that are leaning into those and giving employees the ability to select. Which is placed to our benefit, I believe because. I think a lot of people want to use the MAC at work or an iPad at work. And so, but we're certainly primarily a consumer company in terms of our revenue is obviously."}, {"role": "user", "content": "Got it, Tim, Thanks for that. And then just as a follow-up, obviously, lot of question on the India retail opening. I'm just kind of curious, you also mentioned that you hope to convert lot of of folks in to iPhone there. Where do you think the biggest opportunity is, is it like primarily hardware business like the iPhone, iPad wearables etc, or do you think there is a service opportunity in India longer-term too. Thank you very much."}, {"role": "assistant", "content": "I think there's an opportunity across the board including in Services. Obviously, the ARPUs are lower in India for when you're talking about. TV and movie streaming or music ARPUs are much lower than other regions, but if you look at it over a long arc of time. I think there's good opportunity across the board."}, {"role": "user", "content": "Thanks a lot, Tim."}, {"role": "assistant", "content": "Yeah."}, {"role": "assistant", "content": "Thanks, Krish. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Aaron Rakers of Wells Fargo. Please go ahead."}, {"role": "user", "content": "Yeah. Thanks for taking the questions. I guess my first question is, I'm going to go back to kind of the geographical dynamics. I'm curious as we all think about the reopening attributes of China, just how you would characterize the shaping of demand, you saw through the course of this last quarter and kind of how you're thinking about the impact of that re-openings playing out over the next couple of quarters?"}, {"role": "assistant", "content": "If you look at if you look at China our revenue came in a negative 3% for the quarter year-over-year, but we actually grew on a constant-currency basis. And we also accelerated as compared to the December quarter, which as you know, had 14 weeks in it and was a negative 7% on a reported basis. And so we were, pleased with how we did and with the acceleration that we saw with the re-opening. And we'll see how we do this quarter, but if you look at the top-selling smartphones in urban, China, based on a survey from Cantor, we have four of the top five. And I think in all of the third-party data I've seen on the market itself in the smartphone space, we believe we gained share during Q2. So we feel good about it. It also -- China has a lot of very good metrics in terms of new buyers. For example, on the Mac about six out of 10 customers are buying the Mac for the first time, same thing on iPad. If you look over at the Watch, it's more than three out of four customers are buying the watch for the first time. And so the, buyer metrics, if you will are very, very good. And our Services business hit an all time record in China during the quarter."}, {"role": "user", "content": "Yeah. Very helpful, Tim. As a quick follow-up, I want to go back to Amit's question on gross margin. You talked about FX, the lessening impact there. I'm just curious of -- when you look at your gross margin, obviously got mix attributes kind of potentially continuing to drive that higher. But I'm curious on the current environment, how you would characterize the component pricing dynamics and what you're thinking about in this current quarter's guidance?"}, {"role": "assistant", "content": "Yeah, the environment on the component side is favorable. We've seen component prices decline during the March quarter and we expect the same during the June quarter."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you, Aaron. Operator, can we have the next question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Sidney Ho of Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Great. Thanks for taking my question. I was hoping if you can talk about the linearity of the March quarter and perhaps the first 4.5 weeks of the current quarter, it looks like things are slowing down quite a bit elsewhere, but if my math is right your fiscal third quarter guidance imply product revenue will be little bit lower than seasonal average on a sequential basis, any color would be helpful? Thanks."}, {"role": "user", "content": "When we said that, we expect our performance during the June quarter at the revenue level to be similar. to the one that we've just reported for the March quarter. Keep in mind there is -- we always have differences in the launch timing across our products and also that, especially over the last few years we've seen certain amount of supply disruptions, sometimes it was COVID related, sometimes, it was related to specific component shortages. Just to remind you, in the June quarter a year ago, we had the full-quarter impact of the launch for both of the iPhone SE and the iPad Air, which leads to a more difficult compare. So, I think it's important to keep those things in mind."}, {"role": "user", "content": "Okay, that's helpful. Maybe as a quick follow-up, you talked about Apple Pay Later, how has the feedback been so far and how do you expect the adoption of our debt service over the next few quarters? Thank you."}, {"role": "assistant", "content": "The feedback for both Apple Pay Later, and the savings products that have both been really good and we think both of them help customers live a better -- healthier financial life, and so we're very excited about the first days of both of them."}, {"role": "user", "content": "Okay, thank you."}, {"role": "assistant", "content": "Thank you, Sidney. Operator, can we have the last question please."}]}, {"messages": [{"role": "system", "content": "Our next question is from Harsh Kumar of Piper Sandler. Please go ahead."}, {"role": "user", "content": "Yeah. Hey guys, thanks for squeezing me in. Tim, you're one of the largest chip companies, you're not a component maker, you actually use your own products, but we almost never hear in any context of you guys being a beneficiary -- Apple being a beneficiary for either the Chip Act money or the R&D tax credit that's been proposed. I was just curious, if you're eligible for any of those? And then I've got a follow-up."}, {"role": "assistant", "content": "I don't see, Apple participating and the Chips Act directly, but we would be a beneficiary indirectly because some of our partners would hopefully be recipients of it and therefore put in additional capacity. And so on that sort of indirect basis, we would -- we would have the benefit."}, {"role": "user", "content": "Understood. And thanks for the clarification. Luca, I wanted to clarify your comments about June when you're saying June performance will be similar to March, I assume assume on a year-on year basis, which should be June should be down about two something odd percentage, is that a fair way. And then my question that, I wanted to ask maybe another one for Tim was, what do you think is the largest opportunity in your Services offering? I mean, you're doing a great job, you just kind of record, but surely, there must be areas where you think you can do better?"}, {"role": "user", "content": "Yes, so to the -- to your question around the June performance. Yes on a year-over-year basis. So, comparable to the March quarter on a year-over-year basis."}, {"role": "assistant", "content": "Harsh. I think we can do better on everything and so I wouldn't -- I wouldn't [Indecipherable] just point to one of them. If you look at tjhe number of active devices and the growth of active devices, I think our Services are underpenetrated in a number of different ways. And so the way that, I look at it is, there is opportunity in many of them."}, {"role": "user", "content": "Understood. Thanks, Tim."}, {"role": "assistant", "content": "Yeah."}, {"role": "assistant", "content": "All right. Thank you, Harsh. A replay of today's call will be available for two weeks on Apple podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 493- 4362 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me with additional questions At 408-862-5119. Thanks again for joining us."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]. And our first question will come from Ben Swinburne of Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Thank you. Good afternoon. Bob, I wanted to ask you about what you learned on sort of two topics over the last several months. One is around the price increase on Disney+. You've sort of commented that you think it went well. Obviously, we can see the subscriber trends. And you sound optimistic that the company can continue to drive ARPU over time. Maybe if you could just talk a little bit about what you've seen in the customer base and reaction and engagement that gives you confidence around pricing power for Disney+ looking ahead."}, {"role": "user", "content": "And then a similar question around the cost rationalization and reorg at the company, now that you're sort of deep into that. What have you learned about the opportunity for that to drive better financial results for the company? And Christine sort of teased it that there might be more opportunities to maybe exceed expectations. But do you think there's more to do, I guess, is the short question on that cost side. Thank you very much."}, {"role": "assistant", "content": "Thanks, Ben. On the first question regarding price increases, first, we were pleasantly surprised that the loss of subs due to what was a substantial increase in pricing for the non-ad supported Disney+ product was de minimis. It was some loss, but it was relatively small. That leads us to believe that we, in fact, have pricing elasticity."}, {"role": "assistant", "content": "With that in mind, I think one of the things that we not only have discovered, but that we believe we have to do, is that we've got to widen the delta between the ad-free service and the non-ad supported service. Because we clearly would like to drive more subs to the ad-supported service, which we did in the quarter, by the way. The obvious reason, because of the ARPU potential of the ad service Disney+."}, {"role": "assistant", "content": "And in fact, as we look to this upfront and after careful and considerable discussion with our sales team, led by Rita Farrow, we see that there's going to be a substantial growth in digital advertising in this upfront. I mean, quite substantial. Suggesting for the obvious reason because digital advertising is so attractive to advertisers, that there's an opportunity for us to really lean into ad supported. And again, raising our prices on the ad-free, keeping the prices on the ad-supported relatively modest, maybe perhaps no increases, increasing the delta, driving more subs in the higher ARPU direction."}, {"role": "assistant", "content": "So we're heartened by it and we are optimistic. And that is one of the strategies that we believe will help lead us ultimately to profitability and growth, along with the second thing that you mentioned, which is the cost rationalization. And I'll tag team with Christine on this. Clearly, as she mentioned, we're on a path to meeting or exceeding $5.5 billion in growth -- sorry, in cost reductions that we mentioned last quarter. That comes in two categories, content spend and SG&A."}, {"role": "assistant", "content": "I'm going to let Christine handle the SG&A. But on the content spend, we said at the time, most of that will come starting in 2024 and into 2025 because we were committed to so much content already in 2023."}, {"role": "assistant", "content": "I'll let Christine handle the timing of the SG&A reductions and what potential impact that would have. Clearly, again, the price increases, pushing more viewers -- sorry, more subscribers to the ad-supported and the cost containment are among the things we are doing to get to profitability."}, {"role": "assistant", "content": "Yes. Hi, Ben. I'll just further elaborate on some of the SG&A progress that we've had. And thanks for picking up that. I did tease that by saying that we would meet or exceed our targets of $2.5 billion. But, as we've gotten into this, there's been great cooperation throughout the entire company, which has been really rewarding because we're looking at this and, of course, there's the reality of headcount reductions and we're going through those. But there's also other things that we're finding more and more opportunities on eliminating redundancies, looking at ways to become more effective by utilizing resources, people and other resources across other businesses. But we're really leaning into all the opportunities. There's technology which we've also seen a lot of good progress. Some of it will be, and I say some, will be realized in the balance of this year, really at the end of the fiscal year. But the real impact is going to help us in 2024."}, {"role": "assistant", "content": "But, once again, since we're all into it, I think, once again, having it be companywide and having it be something that all of our business leaders have embraced, we are looking for a real comprehensive look throughout the SG&A buckets."}, {"role": "assistant", "content": "And one more thing to add to that, Ben. We launched Disney+ in many, many markets around the world, including many very low ARPU markets. And not only did we launch in those markets, but we spent a lot of money on marketing in those markets and we spent money on local content. So, as we rationalize this business and we head in the direction of profitability, clearly, we're looking at opportunities to reduce expenses in those markets where the revenue potential just isn't there."}, {"role": "user", "content": "Thanks. Thank you both."}, {"role": "assistant", "content": "Operator, next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Phil Cusick of J.P. Morgan. Please go ahead."}, {"role": "user", "content": "Hi. Great to see the parks doing so well. Christine, can you dig into the contribution from Shanghai and where that is relative pre-COVID and to its potential? And, Bob, Florida is such a big part of the value of the company, but you have this political issue that only seems to get more press. It seems like you're stuck with this fight. So, how should investors think about the risk, both the near-term and long-term business for Disney? Thank you."}, {"role": "assistant", "content": "Hi, Phil. Yes, let me address our results at Shanghai. They were incredibly positive this quarter. We've been really gratified to see the bounce back from the pandemic closures that we had. We're not going to get into too many specifics, but suffice it to say that the business is doing extremely well on both an attendance and a per cap basis. We see that momentum continuing, and we also have some new attractions. We've talked about Zootopia coming later this year, and we believe that that is going to drive even further attendance and spending at the park. But Shanghai is doing extremely well, and we've been really gratified to see that bounce back. Like I said, it was closed for quite a long period of time during the pandemic."}, {"role": "assistant", "content": "Regarding Florida, I've got a few things I want to say about that, Phil. First of all, the case that we filed last month made our position and the facts very clear, and that's really that this is about one thing and one thing only, and that's retaliating against us for taking a position about pending legislation. And we believe that in us taking that position, we are merely exercising our right to free speech."}, {"role": "assistant", "content": "Also, this is not about special privileges or a level playing field or Disney in any way using its leverage around the State of Florida, but since there's been a lot said about special districts and the arrangement that we had, I want to set the record straight on that too. There are about 2,000 special districts in Florida, and most were established to foster investment and development, where we were one of them. It basically made it easier for us and others, by the way, to do business in Florida, and we built a business that employs, as we've said before, over 75,000 people and attracts tens of millions of people to the state. So while it's easy to say that the Reedy Creek Special District that was established for us over 50 years ago benefited us, it's misleading to not also consider how much Disney benefited the State of Florida."}, {"role": "assistant", "content": "And we're also -- we're not the only company operating a special district. I mentioned 2,000, the Daytona Speedway has one, so do the Villages, which is a prominent retirement community, and there are countless others."}, {"role": "assistant", "content": "So the goal here is leveling the playing -- if the goal is leveling the playing field, then a uniform application of the law or government oversight of special districts needs to occur or be applied to all special districts."}, {"role": "assistant", "content": "There's also a false narrative that we've been fighting to protect tax breaks as part of this, but in fact, we're the largest taxpayer in central Florida, paying over $1.1 billion in state and local taxes last year alone, and we pay more taxes, specifically more real estate taxes, as a result of that special district."}, {"role": "assistant", "content": "And we all know there was no concerted effort to do anything to dismantle what was once called Reedy Creek Special District until we spoke out on the legislation. So this is plainly a matter of retaliation while the rest of the Florida special districts continue operating basically as they were."}, {"role": "assistant", "content": "And I think it's also important for us to say our primary goal has always been to be able to continue to do exactly what we've been doing there, which is investing in Florida. We're proud of the tourism industry that we created, and we want to continue delivering the best possible experience for guests going forward. We never wanted, and we certainly never expected, to be in the position of having to defend our business interests in federal court, particularly having such a terrific relationship with the state, as we've had for more than 50 years."}, {"role": "assistant", "content": "And as I mentioned on our shareholder call, we have a huge opportunity to continue to invest in Florida. I noted that our plans were to invest $17 billion over the next ten years, which is what the state should want us to do. We operate responsibly, we pay our fair share of taxes, we employ thousands of people, and by the way, we pay them above the minimum wage, substantially above the minimum wage dictated by the State of Florida. And we also provide them with great benefits and free education."}, {"role": "assistant", "content": "So I'm going to finish what is obviously kind of a long answer by asking one question. Does the state want us to invest more, employ more people, and pay more taxes, or not? Thanks."}, {"role": "user", "content": "Thanks, Bob."}, {"role": "assistant", "content": "Operator, next question please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Michael Nathanson of MoffettNathanson. Please go ahead."}, {"role": "user", "content": "Thanks. I have two. Bob, first for you is, what do you think the impact of the slowdown in your DTC content spending will have on global subscriber growth, and then what does the move to one app in the US offer as a solution?"}, {"role": "user", "content": "And, Christine, any help on future cash content spending? You said this year is flat. Is this the peak year, and then we start seeing declines from this year? Any help there on future cash content spending will be helpful. Thanks."}, {"role": "assistant", "content": "Michael, when we launched the service -- let me remind everyone, it was only three-and-a-half years ago, so we're still a startup in many ways. The goal was, as you know, global subs, and we wanted to flood the so-called digital shelves with as much content as possible to achieve, obviously, as much sub growth as possible."}, {"role": "assistant", "content": "And now, as we grow the business in terms of the global footprint, we realize that we made a lot of content that is not necessarily driving sub growth, and we're getting much more surgical about what it is we make. So, as we look to reduce content spend, we're looking to reduce it in a way that should not have any impact at all on subs. We believe that there's an opportunity for us to focus more on real sub drivers."}, {"role": "assistant", "content": "And one interesting example, and I should also throw marketing in, too, where when you make a lot of content, everything needs to be marketed. You're spending a lot of money marketing things that are not going to have an impact on the bottom line, except negatively, due to the marketing costs."}, {"role": "assistant", "content": "One thing we also know is that our films, those that are released theatrically, big tentpole movies in particular, are great sub drivers. But we were spreading our marketing costs so thin that we were not allocating enough money to even market them when they came on the service, as witnessed by the ones that are coming up, including Avatar, Little Mermaid, Guardians of the Galaxy, Indiana Jones, Elemental, et cetera, where we actually believe we have an opportunity to lean into those more, put the right marketing dollars against it, allocate more from -- basically away from programming that was not driving any subs at all."}, {"role": "assistant", "content": "So, I guess this is part of the maturation process. As we grow into a business that we had never been in, we're learning a lot more about it. Specifically, we're learning a lot more about how our content behaves on the service and what it is consumers want."}, {"role": "assistant", "content": "Hi, Michael. I'll address your question on content spend. As you know, this is an area that Bob is spending a lot of time working with our creative teams on. But when you think about that $30 billion overall, and Bob's targeted annualized saving in the $3 billion range, I just want to remind everyone that the sports component of that amount is now over 30%, just due to the contractual rate increases that we've had in our contract rights, our sports rights."}, {"role": "assistant", "content": "The other thing is, in fiscal 2023, we said that we're going to be roughly comparable to last year. Remember, last year we came in slightly below $30 billion. And this estimate does not include any potential impacts from the writers' strike. We have not estimated that, because that's a new development, and we haven't really quantified what that would be, because we don't know how long it's going to last. But in general, what we're really doing is looking at a lower volume of content, as I mentioned in my comments. And Bob is, once again, going through all of the development slates, and really looking at not only our Disney-branded, but also a more curated approach to our general entertainment content."}, {"role": "assistant", "content": "Operator, next question please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Jessica Reif Ehrlich of BofA Securities. Please go ahead."}, {"role": "user", "content": "Thank you. Bob, you mentioned that in the upfront, you will take a bigger share. You'll lean heavily into digital or AVOD. I'm just wondering, in the face of accelerating pay TV universe decline, is that enough to offset linear losses, or when will it be enough to offset linear losses and start to drive growth? And in the sub-universe decline thought, I'm just wondering if you can give us your updated thoughts on ESPN and how it transitions or when it transitions to ESPN+."}, {"role": "assistant", "content": "I'll address the ESPN first. We haven't really changed our position regarding basically migrating ESPN's flagship service as a direct-to-consumer or streaming platform. We think there's an inevitability to that, but it's a huge decision for us to make, and we know that we've got to get it right, both in terms of pricing and timing. Obviously, that has not only a direct impact on the linear channels, but it will have an even greater impact on it if we were to do that."}, {"role": "assistant", "content": "What we see going on in linear networks, as you know, I'm not saying anything that you don't know, is we're seeing both sub declines and advertising weakness. And it's created worrisome circumstance for us because it's obviously having such a negative impact on the economics of that business. And that's forcing us to take a look at the cost structure of those channels, which ultimately comes down, probably more than anything, to spending on programming."}, {"role": "assistant", "content": "The decline in the business is, by the way, something that we predicted starting in 2015, 2016, which is why we got into the streaming business to begin with, but the declines that we're seeing put even more pressure on us to turn that streaming business into a profitable growth business for us. And that's why all of the steps that we're taking, both in terms of the organizational structure, the cost reductions, the marketing changes, the changes in how we program, the lean into advertising -- we've also, by the way, Jessica, we've invested a fair amount in the technology needed to serve advertisers digitally much more effectively with automated sales functionality and delivering in a very, very granular way exactly what advertisers want."}, {"role": "assistant", "content": "So we're very bullish about leaning into digital advertising. We're bullish about how we're positioned there. We're bullish about Disney+ and Hulu and that combination, by the way. We think that by making Hulu available as a one-app experience will increase engagement and increase our opportunity in terms of serving digital ads and growing our advertising business. So all things are kind of connected, ESPN to the long-term health of the bundle, the growth and the need to grow streaming as a reaction to the deterioration of linear businesses and, of course, all the steps that we've been taking to get to profitability."}, {"role": "assistant", "content": "Operator, next question please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Kannan Venkateshwar of Barclays. Please go ahead."}, {"role": "user", "content": "Thank you. Bob, on Hulu, the revenues of Hulu make it one of the biggest streaming businesses around, and it's also one of the oldest services around, but it doesn't seem to be profitable despite the scale. And it sounds like you've made up your mind on buying the rest of Hulu based on the announcement of the combination with Disney+. Does this combination allow you to change the cost structure of Hulu by maybe dropping content spending or the number of titles on Hulu and raising price because it's now a single service? So any color on your plans with Hulu would be much appreciated."}, {"role": "user", "content": "And, Christine, on the parks, could you help us scale -- the impact of the recent wage increases in Florida and how that might impact the year? And, historically, the business has delivered mid-single digits for better revenue growth and EBITDA grows faster than that. You now have a number of cruise ships, more attractions, higher price, but also higher costs. So could you help us think about the growth algorithm going forward more broadly? Thank you."}, {"role": "assistant", "content": "Kannan, as you know, we have a contractual arrangement with Comcast that will enable them to put their share of Hulu back to us in early 2024. Starting in early 2024, there's a, I guess, further right that we have to call their share from them. And it's not really been fully determined what will happen in that regard, except that as we look more and more at the growth -- or the future of our streaming business, and I mentioned at the first earnings call that I did after I came back that everything was on the table. And, in fact, everything was on the table."}, {"role": "assistant", "content": "But I've now had another three months to really study this carefully and figure out what is the best path for us to grow this business. And it's clear that a combination of the content that is on Disney+ with general entertainment is a very positive, is a very strong combination. From a subscriber perspective, from a subscriber acquisition, subscriber retention perspective, and also from an advertisers perspective. So where we are headed is for one experience that would have general entertainment and Disney+ content together for every reasons that I just described."}, {"role": "assistant", "content": "How that ultimately unfolds is to some extent in the hands of Comcast and in the hands of basically a conversation or a negotiation that we have with them. I don't want to be in any way predictive in terms of when or how that ends up. I can say we've had some conversations with them already. They've been cordial and they're aimed at being constructive. But I can't tell you and I can't really say where they end up, only to say that there seems to be real value in having general entertainment combined with Disney+. And if ultimately Hulu is that solution, we're bullish about that."}, {"role": "assistant", "content": "Hi, Kannan. Let me address your question on parks earnings growth and the outlook there. So I think the way I would phrase this is we do expect a really solid year overall for our domestic parks. That being said, we also expect increased costs. And we alluded to that in our first quarter earnings call."}, {"role": "assistant", "content": "And they're really coming from a few areas most predominantly. One is wages with the new union contract coupled with inflationary trends. We do have some new guest offerings. So there's some incremental operating expenses that come along with those. And we also have the operational support for adding a fifth cruise ship to our cruise line fleet. I think you all know that we launched the Wish back last fall. So we continue to look at ways to address cost management. The team down there has done a great job throughout the pandemic and then coming out of the pandemic. But they utilize a variety of tactics to mitigate potential margin pressures and downside risk across the segments."}, {"role": "assistant", "content": "And some of the levers that they can utilize to really address it are by looking at capacity. At some of our new attractions, they increase the footprint or increase capacity. so we can open up the valve a little bit more on attendance. And with some new attractions that are more -- based on newer IP, so that will get more people not only coming in, but wanting to come in and enjoy the experience while they're there. And we also are really continuing to focus on meeting our customer needs there. But we think that this is a growth business for us. We've said so in the past."}, {"role": "assistant", "content": "And I do just want to give a call out to our cruise business. That business, as you know, was the most impacted. And we had talked about that, that was going to be the last business to come back from the closures during the pandemic. But that business has come back incredibly strongly over the last year, this fiscal year. And even looking out to the balance of our fiscal year, we're very encouraged by what we're seeing there and the reception to not only our new ship, but also our legacy ships within the fleet."}, {"role": "assistant", "content": "Operator, next question please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Michael Morris of Guggenheim. Please go ahead."}, {"role": "user", "content": "Thank you. Good afternoon. I wanted to ask one on direct-to-consumer advertising. And I'd love to hear any early details you can share about the Disney+ with advertising product. It wasn't mentioned as a driver, and I realize it's early. But I would love to hear any early takes there and thoughts about how that might pace over the course of the year."}, {"role": "user", "content": "And then second, Bob, I'd love to ask about artificial intelligence, clearly a very hot topic right now, and a technology that seems like it could be pretty impactful to your business, both your ability to use it, but also just given how much intellectual property you have to protect something that could be a threat as well. So I'd love any takes that you can share on how that would impact the business over time. Thank you."}, {"role": "assistant", "content": "Not to get cheeky, Michael, I'm looking forward to a time where maybe AI does earnings calls for me. You probably -- you wouldn't know the difference, perhaps. Maybe they'd be better. I don't know."}, {"role": "user", "content": "I'd use AI to ask the questions too."}, {"role": "assistant", "content": "It's pretty clear that AI developments represent some pretty interesting opportunities for us and some substantial benefits. In fact, we're already starting to use AI to create some efficiencies and ultimately to better serve consumers. Getting closer to the customer is something that is a real goal of ours, and we think that AI will provide some great opportunities to do that. But it's also clear that AI is going to be highly disruptive, and it could be extremely difficult to manage, particularly from an IP management perspective."}, {"role": "assistant", "content": "I can tell you that our legal team is working overtime already to try to come to grips with what could be some of the challenges here, and we're certainly not the only ones. I think this is across not only our industry, but industries."}, {"role": "assistant", "content": "So I'd have to say overall I'm bullish about the prospects because I think they'll create efficiencies and ways for us to basically provide better services to customers. On the other hand, I think that there's a lot we're going to have to contend with that will be quite disruptive and quite challenging. Getting more specific is not something I really am prepared to do right now."}, {"role": "assistant", "content": "Hi, Mike. I will take the Disney+ ad tier question for you. As you know, we launched back in December, so we've just begun to scratch the surface of what we can really do on advertising on Disney+. And we look at this as an incredible opportunity for longer-term advertising positioning."}, {"role": "assistant", "content": "Just to remind everyone, we do have a lighter ad load on Disney+ versus what we have on Hulu. And also notwithstanding the very challenging macroeconomic advertising market, we're still seeing our consumers come into the not only existing, but also new sign-ups, come into that ad tier. So, we're very encouraged by that."}, {"role": "assistant", "content": "As Bob has mentioned previously, we have invested a lot in our ad tier technology and our data platforms for really providing state-of-the-art programmatic and addressable ad tools to our advertisers. So, those are also investments that we've made and we believe are going to pay off not only today, but position us well for the future as the ad market overall gets stronger."}, {"role": "assistant", "content": "The other thing I just want to mention is we will be launching the ad tier on Disney+ in Europe by the end of this calendar year, so that will be another platform that we'll have or another offering that we'll have for consumers outside of the US."}, {"role": "assistant", "content": "Operator, we have time for one more question. Operator, one last question please."}]}, {"messages": [{"role": "system", "content": "The last question comes from Doug Mitchelson of Credit Suisse. Please go ahead."}, {"role": "user", "content": "Thanks so much. [Indecipherable] good afternoon. Bob, integrating Hulu into the Disney+ app is intriguing, so I wanted to continue that conversation. When Disney+ was launched, you noted consumers should not have to buy through your entertainment content to get to Marvel and Star Wars and Disney and Pixar content, and you thought at the time having separate services to give consumers choice was the right approach. Is that still the right approach to have multiple services to give consumer choice? And if the answer is yes, but you want the efficiency and flexibility of a single app, that would suggest that Disney+ is finally turning into a platform, and I'm just curious if you see the opportunity to broaden the number of subscriptions that can live on that Disney+ platform or if you can expand the monetization of that platform in other ways while maintaining a premium experience for consumers?"}, {"role": "user", "content": "And if I could just add one for Christine. Is fiscal 3Q the peak for streaming losses? Thank you both."}, {"role": "assistant", "content": "We -- on the integrated app experience that we announced today, that's for consumers that have subscribed to both services for now. So in other words, it's taking what we call the dual bundle and putting it together in one experience, which is obviously good for consumers. Why have to close out one app and open another one? So it becomes a one app experience. We also think that it will benefit basically consumption in general, lower churn, be more attractive. It's just an all-in-one. It's a bigger platform, basically more content than it offered before."}, {"role": "assistant", "content": "Outside the United States, we created that with Star, which doesn't have all the programming of Hulu, but it has a significant amount and it's working quite well. And it's one of the reasons why we're going to launch that as an advertised supported platform, as Christine mentioned."}, {"role": "assistant", "content": "So I think to answer your question, we're bullish about an app that goes well beyond the Disney+ branded content and includes general entertainment, which maybe at one point I called undifferentiated. That was a little harsh. But that includes quality, curated, general entertainment for the purpose of growing advertising, growing subscriber fees, growing engagement, growing -- lessening churn, and to address one part of your question, reducing costs."}, {"role": "assistant", "content": "Hi, Doug. And I'll answer your question on the direct-to-consumer losses and the peak losses. Just to remind everyone, we did say, and it is the case, that we had peak losses in direct-to-consumer in the fourth quarter of 2022. That was the quarter that we reported in November. So what you've seen since then is we improved on a sequential, linked-quarter basis. You've seen a $400 million improvement in Q1, another $400 million improvement in Q2. In my comments, I did say that Q3, it would widen out by $100 million because of the timing of some releases and particularly the marketing of those releases. But that will be an aberration because it's not a linear path, but we will be improving significantly from 2022 peak losses in Q4 through the balance of fiscal 2023. So, you should assume that, what you saw back in Q4, was the peak loss and we have improved for the next two quarters. There will be that one little blip in Q3 and then we expect to be back on the path for the balance of the fiscal year."}, {"role": "user", "content": "Very helpful."}, {"role": "assistant", "content": "Thanks."}, {"role": "assistant", "content": "Okay, thanks for the question. I want to thank everyone for joining us today. Note that a reconciliation of non-GAAP measures that were referred to on this call to equivalent GAAP measures can sound on our investor relations website."}, {"role": "assistant", "content": "Let me also remind you that certain statements on this call, including financial estimates, our statements about our plans, guidance, or expectations, or other statements that are not historical in nature may constitute forward-looking statements under the securities laws. We make these statements on the basis of our views and assumptions regarding future events and business performance at the time we make them. We do not undertake any obligations to update these statements."}, {"role": "assistant", "content": "Forward-looking statements are subject to a number of risk and uncertainties and actual results may differ materially from the results expressed or implied in light of a variety of factors including economic or industry conditions and execution risks, including in connection with our organizational structure and operating changes, cost savings and DTC business plans relating to content, subscriber, and revenue growth and profitability."}, {"role": "assistant", "content": "For more information about the key risk factors, please refer to our investor relations website, the press release issue today, and the risk and uncertainties described in our Form 10-K, Form10-Q and other filings with the Securities and Exchange Commission."}, {"role": "assistant", "content": "We want to thank you for joining us today and we wish everyone a good rest of the day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Ms. Lisa Gill with JPMorgan. You may ask your question."}, {"role": "user", "content": "Thanks very much. Good morning. David, thank you for all the comments around the PBM and profitability, etc. I guess my first question is really to understand where do you think the disconnect is from a legislative standpoint versus how the PBMs actually operate? And then secondly, when we think about an employer, it feels to me that a lot of this legislation is going to take away that decision-making by the employer, what are employers saying to you around legislation? What are they saying to you around the selling season? And then also if you can just give us an update as to how you're thinking about the 2024 selling season?"}, {"role": "assistant", "content": "Lisa, you put a lot in there. Good morning and thanks for the questions. Let me try to touch on each. First, as we step back, as I noted, we're quite proud of the results that we have delivered and continue to deliver in view the PBMs using that acronym, but the pharmacy service organizations are the organizations that relentlessly work to improve affordability for the benefit of a broad constituency group. I think to your first question, if we step back, well, we could point to tremendous results in terms of clinical trends, outcome, affordability on average, less than $1 increase in out-of-pocket costs for individuals. We do recognize, and I think this is part of the legislation or the legislative energy, the program still don't work for everyone."}, {"role": "assistant", "content": "So for example, while the programs are designed to generate overall affordability if there's a high deductible plan is an illustration and in the month of January, someone has -- is deductible and has a significant out-of-pocket for our pharmaceutical experience that creates a financial dislocation for an individual, that's a failure of the system, right? We need to step up to that. We need to innovate because that's an unintended consequence of the failure of a system. So we could talk about the averages that we're proud of from an affordability, but we need to make sure we continue to innovate till it works for everyone or we could talk about the fact that we have leading breadth of network access through our pharmacy networks, coupled with our home delivery, yet when you look at the uniqueness of America in some rural locations may not have the access or accessibility in a specific case. And therefore, the market is not working for those individuals."}, {"role": "assistant", "content": "Hence, you see some of the innovations we step forward out. Our copay assurance program directly goes at the out-of-pocket predictability for individuals under a variety of circumstances. Our rural pharmacy and independent pharmacy initiatives go directly at specific actions to support individuals. So the averages when we sit and look at the data is accepted, we need to do better, and we're stepping forward as a leader to do better from that standpoint."}, {"role": "assistant", "content": "As it relates to employers, our retention rates and our new business growth rates reinforce the fact that by and large, employers see us as being successful. I would note that our ClearCareRx program that we just rolled out, that was two years in design. And we worked with about a dozen sophisticated large employers to design those programs to work for them and work for us and how we can roll those out and scale. And as we sit here today, we have hundreds of clients together with our Evernorth team and our Express Scripts team talking about future innovation. So there remains high receptivity and high receptivity to the advancements we're making in terms of further transparency in clinical programs, but they like their choice. They like having the choice of financing mechanisms, which we're aligned with."}, {"role": "assistant", "content": "And then finally, maybe just to manage time, on the '24 selling season, '24 will be another year of growth for us in the Evernorth service portfolio. We will see strong retention. As I noted, our retention has historically been in the mid-90s or better we will see strong retention, and we will see good growth as our products and programs resonate in the marketplace. Lisa, thanks for the questions."}]}, {"messages": [{"role": "system", "content": "Thank you, Ms. Gill. Our next question comes from Mr. Steven Valiquette with Barclays. You may ask your question."}, {"role": "user", "content": "Great, thanks, good morning. So regarding the Evernorth results in the first quarter, you mentioned they were in line with the expectations. Just with the script volume, though being down, just curious to get more color on that. And also, I know you're not giving script volume guidance for the full year, but just curious if the trends in the first quarter are good run rates for the full year? Thanks."}, {"role": "assistant", "content": "Good morning, Steve. It's Brian. Steve, it's Brian. Yeah. As I mentioned earlier, our Evernorth results are very much in line with expectations for the quarter. One thing that's important to keep in mind, David mentioned 40% of the revenue in Evernorth now is derived from our specialty pharmacy business. And as you can appreciate, the Specialty Pharmacy script counts end up being dwarfed by the generics and the higher-volume script counts that come through the PBM. So it's a little bit misleading to look at the aggregate script counts for those reasons."}, {"role": "assistant", "content": "And I'd note our -- the revenue in the Specialty Pharmacy grew mid-teens year-over-year. So it was a very strong grower. You saw strong script growth in specialty, but again, it was dwarfed by the big picture of the PBM generic volumes moving around a bit. And as you think about the overall script counts year-on-year, I think of the client mix changes that occurred from '22 to '23 is driving a good bit of that. and that really drove the kind of flattish all-in script counts."}, {"role": "assistant", "content": "Now as we look forward to '24, obviously, we prepare to onboard Centene, you'll see a meaningful step-up in that metric. But as I mentioned earlier, with the specialty pharmacy growing at such an attractive rate, it's a bit masked when you look purely the script count metrics. So hopefully, that helps a bit. And when you put all those pieces together, we're again confident and comfortable with the full year outlook in terms of Evernorth income."}, {"role": "user", "content": "Perfect, thanks."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Valiquette. Our next question comes from Mr. Nathan Rich with Goldman Sachs. You may ask your question."}, {"role": "user", "content": "Thanks, good morning. I wanted to go back to the PBM and the regulatory focus, David. You mentioned that not all pharmacy benefit designs work for everyone. And the target, I think, of much of the legislation is focused on lowering out-of-pocket cost for patients. You've had plan options in the past that address some of these areas. I know you said that clients like having that choice. But are there -- is there any middle ground in terms of different solutions that you couldn't maybe roll out more broadly that would address some of these pain points kind of proactively ahead of maybe being forced legislatively? And I guess kind of my follow-up to that is client preferences, I think kind of changed relatively slowly over time. I guess if we did see legislation go in place, how quickly could you kind of shift the client -- shift clients to new payment models to kind of adjust to a new regulatory backdrop?"}, {"role": "assistant", "content": "Good morning, Nate. So first, on the affordability in the out-of-pocket, choice has have been in the marketplace for some time. And important to note, by and large, as I noted before, on average, those programs are working well in terms of the balance of overall affordability. And plan sponsors make trade-offs in terms of how much is put in premiums, how much is put in the benefits, etc., from that standpoint. Two, just pointing you to specific because you said actions we could take. In 2019, we rolled out the first of its kind, the patient assurance program for insulin-dependent diabetics, cap monthly costs at $25 will stop. There's 11 million people benefiting from that program today as you see more focus relative to insulin. So we can have and will from that standpoint."}, {"role": "assistant", "content": "Second, as you click down because, in many cases, the devils in the details, as you roll out new programs, you learned that, for example, some of the copay assurance programs can work in an HRA program, but in some cases, don't work in an HSA program because of the regulatory requirement to the HSA program. They'll only work for preventative drugs, but they won't work for a broader class of drugs. So that now enables us to be more consultative with employers to make sure there's even a more pinpointed focus on benefit design and communication strategies as open enrollment happens because in some cases, an individual will enroll in an HSA, yet learn later that they have more dislocation in their out-of-pocket costs in a given month from the copay."}, {"role": "assistant", "content": "So my point is actions taken, actions being taken, more precision that is necessary from that standpoint. As it relates to the -- how quickly we could pivot, we've proven tremendous flexibility in our model. Some of the additional data we're providing, we noted even last year at our Investor Day, we would continue to push ourselves with expanded disclosures and you're seeing more and more. We can pivot, we will pivot, we will continue to offer choice and the tools exist today as exemplary with our ClearCareRx program to provide further choice that use different financing mechanisms. So we are confident that we will be able to flex rapidly, if necessary. But we want to also ensure that we are a voice for employers to still work to preserve choices for them as how they want to finance their programs, how they want to manage their overall cost and predictability from that standpoint. But to reassure you, we have ample flexibility to flex rapidly."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Rich. Our next question comes from Mr. A.J. Rice with Credit Suisse. You may ask your question."}, {"role": "user", "content": "Hi, everybody. I guess I'll try to pivot away from the PBM question. In the prepared remarks, you mentioned your ongoing discussions with VillageMD about putting in place value-based contracting. I wonder if you can give us any further update on that, When you start to think about your '24 bids commercially or and MA, will any of those arrangements be part of the package that you offer or a factor in your bids and -- so it's -- I'm asking about '24 anything on the MA final rate notice and whether that changes your view on growth or margin trajectory that you're on in MA?"}, {"role": "assistant", "content": "A.J., good morning. You tucked a lot of questions in there, but let me start from the top. Relative to value-based care, before I get to Village first, we've had a long commitment and positive track record relative to value-based care programs. our orientation, as you may recall, is oriented around partnering, using data and collaborating with additional care-extended resources to drive better, more consistent clinical outcomes and, therefore, overall value."}, {"role": "assistant", "content": "Today, think about order of magnitude approaching 75% of our MA lives are in a value-based program. And depending on what you're looking at commercial or individual exchange, 40% or 50% of lives benefiting from the value-based program. And I'd underscore we're seeing benefits from that in our continued market-leading lower medical cost trend. Specific to Village, we're pleased to advance in even further partnering more deeply with Village and collaborating with them. There are many ways in which we'll collaborate with Village to further accelerate value-based care traction off of their already successful model."}, {"role": "assistant", "content": "I would note and highlight one of the portions that we are really excited about with Village is they've proven their current value-based care approach for commercial as well as Medicare Advantage. And our model with them has the ability to design and benefit from not only commercial and Medicare Advantage, but ASO and guaranteed cost as we bring more Evernorth services and collaborate with them as we curate more specialty networks, et cetera, going forward."}, {"role": "assistant", "content": "As it relates to the part of your question, are there benefits in our current pricing as a result of our village initiative, they are starting to yield benefits already starting to contribute to pricing in specific markets where the initiatives are underway is the headline."}, {"role": "assistant", "content": "As it relates to your last question relative to big strategy, rate notice, etc., you should think about our view is our net rate for 2024 approximates the industry average. We take all the puts and takes that are framed in. Secondly, as you know, we're in the latter part of the bid cycle right now, so it would be premature and inappropriate for me to speak in any depth relative to our specific pricing strategy for 2024. We're pleased with our growth in 2023. We're pleased to see the 10% that we've yielded to-date and the traction in some of our markets that are maturing, and we will work on a market-by-market basis relative to the bid strategies and look forward to updates as we get into the second half of the year. Thanks, A.J."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Rice. Our next question comes from Mr. Justin Lake with Wolfe Research. You may ask your question."}, {"role": "user", "content": "Thanks, good morning. And I'll just echo how much we appreciate the comments on the PBM transparency there. I wanted to follow up with a couple of things on the PBM. The first is -- and so 20% of your profits come from those spread contracts and rebates. If the government did price -- did pass what they're talking about this year, how would -- how are your contracts structured such that you could pivot away? Is that something that would have to happen over time? What would the near-term impact be versus the longer term?"}, {"role": "user", "content": "And then secondly, I've gotten a lot of questions on 340B given one of your peers talked about is a pretty meaningful headwind versus their expectations this year. So curious if you can give us some color there in terms of maybe what percentage of earnings come from 340B or how your outlook has changed there within your Express Scripts guidance? Thanks."}, {"role": "assistant", "content": "Good morning, Justin. Justin, I'm going to take your questions. It's David. I'll take your questions in reverse order. Specific the 340B, we've seen some recent extrapolation of what potential exposure could be for us based upon what some others said or the size of certain other programs, I would start by saying we think those estimates are overstated. So now let me step back. By way of context, we do believe the 340B represents an important series of capabilities, in many cases, for hospitals to benefit from more affordable pharmaceuticals for underserved populations. Some pharmaceutical manufacturers have unilaterally removed or made it much more difficult for those hospitals to engender those benefits. By way of context, we saw deceleration, some deceleration in our volumes in the first half of 2022. We saw that deceleration trough mid-'22 and we saw volumes begin to increase in the second half of '22 as different data sharing and other activities move forward."}, {"role": "assistant", "content": "As it relates to our impact, we have factored into our plan for the year, and our most recent updated outlook for the year, our best estimate, which includes some dampening of the overall program as it relates to our results, but I would stress, some of these extrapolations based on the size of certain other programs, we think is overstated. This is manageable within our portfolio and not a material driver of the overall Evernorth portfolio."}, {"role": "assistant", "content": "As it relates to your first question, which I really appreciate, Justin, I can't give you a precise answer to your question. If we take a theoretical and say that legislation is passed tomorrow, that creates an immediacy, which we do believe will transpire. In fact, you could look at some of the most recent dialogue coming out of committees and otherwise for the consideration of -- consideration being implemented in the latter half of 2025, for example, we don't think that theoretical exists."}, {"role": "assistant", "content": "Having said that, you should think that we have contractual -- by and large, contractual frameworks that take into consideration unanticipated immediate legislative or regulatory movement. We don't believe that is the case. We will continue to advocate for our clients. We will continue to work to ensure that choice exist. And as we made clear, even with our ClearCareRx program, we have the tools and flexibility to deliver what a client wants from a choice standpoint, with or without sharing and being able to earn a sustained attractive margin for the value we create. Thanks, Justin."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Lake. Our next question comes from Ms. Erin Wright, Morgan Stanley. You may ask your question."}, {"role": "user", "content": "Hey, thanks. You mentioned some elevated disenrollment in the second half embedded in your guidance from a softening economy and -- can you quantify that range? Or how are you thinking about that? And what are you seeing now? And how did that change relative to what you were anticipating previously? Thanks."}, {"role": "assistant", "content": "Good morning, Eric. It's Brian. So first of all, I just would reiterate, we're really pleased with the strong growth momentum across the Cigna Healthcare portfolio. When you think of our U.S. commercial Medicare Advantage and our U.S. individual business is all showing strong year-to-date results running ahead of expectations in aggregate for enrollment levels. And that builds upon our really strong performance in '22, where we added nearly 1 million customers across the Cigna Healthcare platform."}, {"role": "assistant", "content": "As I mentioned, we are not yet seeing signs of economic pressure in our book, for example, the disenrollment levels in the most recent months are very much in line with historical norms. But as I mentioned, we have assumed some level of elevated disenrollment in the back half of the year in order to be prudent. And in addition to that, we typically see some in-year attrition within the U.S. individual book over the course of a given calendar year. And as I mentioned, we still see organic growth in net client counts in the U.S. commercial business, particularly as the Select segment continues its sales cycle through the balance of the year."}, {"role": "assistant", "content": "And finally, we have not yet incorporated any assumption of potential volume for Medicaid redetermination. So that represents pure upside for us. And so should we not see economic weakness transpire later in the year? Or should we pick up some unexpected customers from the Medicaid redeterminations we may have some upside in our Cigna Healthcare customer accounts."}, {"role": "assistant", "content": "Final comment I'll give you just in terms of sensitivities. In prior economic downturns, we've seen for every 1% change in the unemployment rate, our commercial employer levels enrollment levels will move by either 0.5% to 1% as it relates to 1% move in the unemployment rate. So it gives you a sense for the sensitivity relative to the size of the book as you think about how to model the rest of the year."}]}, {"messages": [{"role": "system", "content": "Thank you, Ms. Wright. Our next question comes from Mr. Kevin Fischbeck with Bank of America. You may ask your question."}, {"role": "user", "content": "Great, thanks. It seems like cost turn really wasn't a problem for you in the quarter, but still after earnings season is basically over, still trying to reconcile the strong numbers from the providers and the med tech companies with relatively solid numbers from the Managed Care industry. Can you help reconcile what seems to be an apparent conflict? And any color on cost trend, particularly, I guess, through the quarter and into this quarter would be helpful."}, {"role": "assistant", "content": "Good morning, Kevin. It's Brian. So just a few thoughts for you in terms of the reconciliation to the provider side, etc. I'd start by saying we're pleased to having delivered another strong quarter here of MCR performance in line or better than expected. So I'm pleased to start the year in that position. You can think of that as a function of the strong progress we've made in recent years with our affordability initiatives. So that includes items such as our provider contracting improvements, clinical program evolution, sight [Phonetic] of care optimization, along with our continued pricing discipline. So all that served us well, all while allowing us to grow 1.5 million customers year-to-date."}, {"role": "assistant", "content": "As you think about the first quarter specifically, the favorability that we saw was driven by lighter-than-expected viral or respiratory claims. So in this case, think of COVID, flu, RSV in aggregate, running a little bit lower than what we had been expecting. Now on the nonviral side, we had planned in price or normalized utilization levels to transpire in 2023 that were more consistent with pre-COVID levels. And during the first quarter, that's what we saw. We saw nonviral utilization, reflecting this more normalized pattern. But again, this was in line with our expectations that we had planned and priced for stepping into the year."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Fischbeck. Our next question comes from Mr. Gary Taylor with Cowen. You may ask your question."}, {"role": "user", "content": "Hi, good morning. Quick question. I do appreciate the PBM disclosure because obviously, if you're talking about to the company's total earnings that you expect to retain? It seems like the down 26% stock price is quite overdone this year. So I appreciate that. Are we going to see some of that financial disclosure in the 10-Q when you talk about new disclosure? Will that be around some of the economics of retained spread in rebate?"}, {"role": "user", "content": "And then my second question is we did see the Florida all pass or I believe, is going to be signed or just was signed by the governor that would prohibit spread pricing in Florida across all lines of business? And just wondered what the -- if you knew what the implementation date on that was and just how quickly you had to sort of move to address that employer?"}, {"role": "assistant", "content": "Good morning, Gary. It's Brian. I'll take your first question. I think David will comment on the situation that you referenced in Florida. As it relates to the incremental disclosures. So really, those were designed today to give all of our investors some further context on the earnings sources within Evernorth, just given the amount of misinformation in the ecosystem. And so alongside our 10-Q that we filed today, you'll find a supplemental disclosure that provides some additional qualitative information as well as some metrics that we think are important to help various stakeholders understand what the PBM does and doesn't do. And hopefully, we find that investors look at that as useful information."}, {"role": "assistant", "content": "As it relates to some of the additional data points David and I shared, for example, the 20% adjusted earnings associated with PBM retained rebates and spread. As we referenced, that percentage has declined over time. At this point, we're not necessarily intending to update that every quarter in the Q, but we will obviously give you context for how the earnings sources are evolving over time as that business continues to grow. David, do you want to comment on the..."}, {"role": "assistant", "content": "Sure. Good morning, Gary. Relative to the Florida activity, one of the two components we talked about. We talked about rebates. This is specific to your question relative to spread. We're still working through the details from a state standpoint. Interesting timing as well. We literally have our large client gathering that is taking place as we speak. This is a topic of discussion for clients in terms of digesting the ramifications. We'll have the ability to flex our capabilities as I noted in prior questions relative to this one aspect as it's implemented. I don't want to go any further in terms of quantifying or otherwise. Big picture, it's manageable."}, {"role": "assistant", "content": "Specifically, we'll work through client by client, the impacts relative to their respective Florida footprint and then considerations on a go-forward basis as to whether or not they want to flex financing mechanisms for other geographies going forward, using our capabilities. But we have the ability to flex, and we will be compliant, obviously, with the implementation timeline."}, {"role": "user", "content": "Appreciate it."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Taylor. Our next question comes from Mr. Stephen Baxter with Wells Fargo. You may ask your question."}, {"role": "user", "content": "Hi. I wanted to ask about ClearCareRx. I guess, first, how quickly do you think this model will be adopted? Is there any kind of target for this that you can share? And then obviously, your clients are sophisticating of access to pools to evaluate your economics during RFPs. But how do you think about competitive dynamics of the industry as a whole over time could be progressing to explicit fee-based pricing models? Thanks."}, {"role": "assistant", "content": "Good morning, Stephen. The ClearCareRx program, as I noted previously, we've worked for about two years with a small number, think of a dozen large sophisticated clients to design this program to work through the program to perfect aspects in a program, and we're excited to roll it out on a more extensive basis. Two, I would think about the addressable market as more the larger of the large clients working down given the immediacy of pass-through and then the potential cash flow management ramifications that it creates from that standpoint. So this will be another choice that's offered in the marketplace."}, {"role": "assistant", "content": "I think to your broader question -- inferred to your broader question, the relentless of ongoing commitment to innovation is mission-critical in any industry. In this subset of our industries, it's mission-critical. And we're proud of the fact that we had leadership relative to a variety of programs. As I mentioned, insulin programs, as we talked before about our Embark program on high-cost gene therapies, our SafeGuardRx program, that is benefiting all of our clients relative to care management programs. TRCs, as you know, more therapeutic resource groups and centers that come together and focus on specific diagnosis and have detailed expertise and then how they're coordinated with the medical professionals and how they coordinated with the behavioral professionals are mission critical. So the path of innovation and whether it is, to your point, a fee-based environment that transpires or may transpire. However, having the choice, we think, is mission credible."}, {"role": "assistant", "content": "Finally, for you and maybe the broader audience, we may see some similarities as we've seen in the medical space where as you think about our approach, I mean, the medical benefit space, our approach was broad funding mechanisms and financing mechanisms, an agnostic model, meaning we could flex in any of them, whether it's self-funded, self-funded with stop loss on risk management, a share return model or a guaranteed cost model. And we see those same trends manifesting in the pharmacy space, and we're in a position to lead there. So largest of large employers, two years in its design, it's perfected and it's ready to scale. We don't think the entire market shifts to this in 2024. We think there'll be more adoption of programs like ClearCareRx, and we're happy to be the leader in the space."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Baxter. Your next question comes from Mr. Josh Raskin with Nephron Research. You may ask your question."}, {"role": "user", "content": "Hi, thanks. Good morning. I was wondering if you could give us some more color on the individual book. It looks like it came in maybe 100,000 or so more than expected. Maybe where did those lives come from? And was that the reason for the increased total membership guidance? And then maybe any early signs on utilization and other metrics that give you comfort that you price that business correctly?"}, {"role": "assistant", "content": "Good morning, Josh. It's Brian. So overall, the strong individual customer growth in 2023, you can think of as a combination of a few things. So one, obviously, the industry had some strong growth rates from '22 into '23. We also had some new market entries and there were some competitors that exited certain geographies where we participate in. As think about the sources of that, our growth came from a combination of existing geographies and those three new states that we stepped into, which were Texas, Indiana and South Carolina here in 2023. We did see the majority of our growth come from three states in particular."}, {"role": "assistant", "content": "So Texas, Georgia and Florida drove the majority of the growth not only one specific city we're in multiple locations in those states. Fortunately, we have a long history in these geographies that goes well beyond the U.S. individual business, meaning our commercial and MA businesses has been operating in those locations for some time. So our provider engagement and clinical programs should benefit these individual customers as well."}, {"role": "assistant", "content": "Now for purposes of the claims experience and the margins, etc., for the '23 calendar year, we continue to expect the margins on this book will run below our long-term goal, which is 4% to 6% in our Cigna Healthcare income and MCR guidance reflects this. So we expect to run below that 4% to 6% long-term goal given the substantial amount of new customers we've added in 2023, we think this is a prudent assumption to make from the standpoint of the margin running below that long-term target."}, {"role": "assistant", "content": "While it's early in the year so far, the claims are largely in line with our expectations through the first quarter. And importantly, as you think about the first quarter actuals as well as our full year outlook, we've assumed that we will be in a risk adjustment payable position for the 2023 plan year despite the fact that we were in a receivable position for the 2022 plan year. So again, we think that's a prudent assumption to make at this early juncture in the year until later in 2023 when we see some industry-wide risk adjustment data that will help us to recalibrate that assumption."}, {"role": "assistant", "content": "As you think about the longer run, this is a book of business that does represent a source of future embedded earnings power that will help contribute to the segment's long-term margin expansion and income growth. So overall, a good start to the year. Still a long way to go for the full year, and we think we've taken a prudent posture as it relates to the accruals."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Raskin. Our next question comes from Mr. Scott Fidel with Stephens. You may ask your question."}, {"role": "user", "content": "Hi, thanks, good morning. Would be interested if you could maybe just drill in a bit more into your latest thinking on both the GLP-1 drugs and then the emerging Alzheimer's drugs, maybe give us just some insights from both the Cigna Healthcare and Evernorth business segment perspective? Thanks."}, {"role": "assistant", "content": "Good morning, Scott, it's David. Clearly, the GLP-1 drugs have been priced pretty significantly. And by way of headline, we think the drugs and the treatment protocols represent a positive step forward. specifically for diabetics as such. We have coverage within our formulary. I would remind you that early on when the first within the class came out, we actually stepped in with some value-based care arrangements with pharmaceutical manufacturers and have seen positive contributions for both the benefit of patients as well as our clients."}, {"role": "assistant", "content": "To date, I'd also add that employers have had a more limited appetite to expand coverage beyond clinical diagnoses such as diabetes for certain lifestyle treatments. There has been some, but we've seen more limited adoption of that thus far. And on a go-forward basis, we would expect to have our P&T committee and our internal clinical oversight continue to monitor the progress relative to ongoing testing development in this important class."}, {"role": "assistant", "content": "I would take that trend and carry it across similarly relative to the Alzheimer's space. Clearly, a lot of interest, excitement and demand for drugs within the Alzheimer's space to help a growing population confronting this challenging disease from that standpoint. We've seen more limited adoption thus far. We see some early data like you're seeing right now relative to the next-in-class drugs seeming to demonstrate some promise going through FDA, working through CMS relative to Medicare reimbursement, and we will stay tightly aligned relative to that."}, {"role": "assistant", "content": "On a final note, if you put a circle around this, I think you've heard in the latter part of your question, you can think about these drugs as, in some cases, creating cost on the benefit side of the equation with an offset of a benefit, clearly. But you should also think about the Cigna Group's portfolio because of Evernorth is having some dimension of a natural hedge given the size and sophistication and reach of our pharmacy and specialty pharmacy programs and the breadth of the clients we're able to serve within that portfolio. So we see this as a growth opportunity within the Evernorth portfolio and the clinical depth we have in there in terms of coordinating services for individuals will be helpful in terms of ensuring that the value is delivered."}, {"role": "assistant", "content": "So emerging space in both categories some promise, early adoption, some track record in value-based care. And importantly, I would underscore, we have a natural hedge relative to some cost pressure you would think about in the benefit space through our high-performing services space."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Fidel. Our last question comes from Kevin -- Mr. Kevin Caliendo with UBS. You may ask your question."}, {"role": "user", "content": "Great, thanks for getting me in. Great. Getting back to the 20% of Evernorth earnings, does that include the ESI rebates and pass-through and spread? Does that also account for the medical profit like the pharmacy profit in the Medical segment as well? Or is that separate? And since you've been in such a giving move, can you provide us, is there any transparency on that number?"}, {"role": "assistant", "content": "Good morning, Kevin. It's Brian. So the 20% that we made reference to is the PBM retained rebates and the retail spread that comprise the Evernorth segment's contribution specifically. So as with all of our clients of Evernorth, whether they be the Cigna Healthcare affiliated health plan or our unaffiliated health plan clients, they choose how they would like to use the pharmacy value that we create for them. So to your question, if there are pharmacy earnings in the Cigna Healthcare segment, that's not reflected in the 20% metric we're specifically dimensioning the Evernorth contribution. And then like I said, the Cigna Healthcare health plan decides how they choose to deploy any value that's created from over North as sister company. David, maybe you want to pile on here?"}, {"role": "assistant", "content": "And Kevin to add on that, as you think about the health plans that are served by Evernorth, if you consider the total cost of care, a health plan through their medical contracting, ancillary contracting, pharmacy contract behavioral contracting, aggregate a total cost of care to generate their price point. So in the case of a guaranteed cost offering or a risk-based offering, the cost of the pharmaceuticals are baked into that from that standpoint, whether that's commercial, individual exchange business. or Medicare Advantage business for health plan. So that's value delivered just like the value that's delivered for their medical contracting, their DME contracting, their behavioral contracting, etc., and part of their overall cost equation that they'll factor into the net pricing that they're offering to the marketplace."}, {"role": "user", "content": "Appreciate it. Thanks, guys."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Caliendo. I will turn the call-back over to David Cordani for closing remarks."}, {"role": "assistant", "content": "Thanks again for joining our call today. Let me just reinforce a couple of quick points. One, we are confident that we will deliver our increased adjusted EPS, revenue and customer growth outlook for this year. To do that, our team remains focused on everyone we serve and is executing with good focus and discipline, all while we continue to innovate. We will also continue our leadership in working to improve healthcare, including our increased transparency, choice and clinical programs to drive down further drug costs for our customers, our patients and our clients."}, {"role": "assistant", "content": "I would want to underscore that the progress we continue to make all starts with and is fueled by the dedication and commitment of our 70,000 coworkers around the world who I want to thank for their commitment and demonstration every day to working to make a very positive difference in the people's lives we are able to serve both formally through our commercial relationships as well as in the communities we serve each and every day. Finally -- and thank you for joining our call. And as always, we look forward to our continued discussions in the future."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Pragada. [Operator Instructions] We'll take our first question this morning from Jamie Cook of Credit Suisse."}, {"role": "user", "content": "Hi, good morning, and congratulations on a nice quarter. I guess my first question just sort of related to the spin. Can you just sort of help us talk through your decision to spin versus sell the asset and/or any sort of dis-synergies associated with spinning CMS business? And then I have a follow-up question after that."}, {"role": "assistant", "content": "Okay. So, maybe I'll start off and then Kevin I'll turn it over to you. With regards to the second part first Jamie. We do not see dis-synergies with the spin. Understand specifically, we were looking for the most optimal tax free benefit for our shareholders, as well as our confidence in the business that it has the credibility and the horsepower to operate successfully as an independent -- an independent entity. So those were kind of the drivers we're looking to obviously maximize shareholder value. Kevin, anything you want to add?"}, {"role": "assistant", "content": "Yeah, look. I think we've evaluated all alternatives and at the end of the day given the facts and circumstances that Bob has highlighted, we're excited about the announcement of the spin. But as circumstances change or anything comes to light, we would certainly have to consider that because we are interested in maximizing shareholder value."}, {"role": "user", "content": "And then I guess just my -- my others just sort of -- now that we're sort of splitting the businesses, is there any way you could sort of frame how you think about longer-term or medium-term organic growth or margin targets associated with the different businesses as they sit today? Thank you."}, {"role": "assistant", "content": "Yes, maybe I'll answer the first part of that and then you talk about margin targets, Kevin. So as far -- as as far as our growth expectations for the business, they're very strong and in line with what we articulated in our '22 strategy for the segment reporting. So we feel the pipeline as well as the opportunities in front of us with the platform that we have looks very-very bright for the [Indecipherable]. Kevin, you want to add anything?"}, {"role": "assistant", "content": "Yeah, look, as we -- as we've talked in the in the prepared remarks. As we look at the two businesses and we talk about 2022 kind of pro-forma, if we had done something, we had a 12% margin for the people and places business operating profit margin and about 8% for CMS. We think that our stand will ultimately allow the two incremental individual companies to focus on their respective opportunities and in a manner that allows for, if anything, an acceleration in growth. I do would like to say that in the event that the spin is able to be executed, we are -- we do realize that there will be some incremental CMS public company costs that would have to be incurred, but we will think we will be to offset NIM and then some with our opportunities to streamline our two organizations."}, {"role": "user", "content": "Okay, that's very helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. We'll go next now to Andy Kaplowitz at Citi."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Hi Andy."}, {"role": "user", "content": "Congrats on the announcement. Backlog continues to rise in P&PS, obviously there is some cross-currency given concerns around private spend, but state level governments I think continue to spend and you've talked about funding ramping from the fiscal Bill. So do you see backlog growth continuing there sequentially over-time? And can you sustain that 10% year-over-year constant-currency growth that you have in the segment?"}, {"role": "assistant", "content": "Let me answer the backlog growth. Right now the way our pipeline is linked -- is lining up, Andy, the answer is yes. We do see consistent opportunity to increase our backlog and grow the business. The 10% constant-currency growth on the topline, I think that's going to be dependent on the phasing of the jobs, how these jobs come out specifically on the infrastructure side as well as in our private sector business. Those early phases of the job tend to be more study and higher-end consulting work. And then as we move through subsequent phases kind of where the larger revenue -- the revenue opportunities are. So I wouldn't -- wouldn't want to to go and say that that's going to be a consistent quarterly topic, but definitely a target if you were to aggregate over a period of time."}, {"role": "user", "content": "Maybe a similar question with CMS. You've got -- you did get a backlog uplift from Kennedy, and I think you mentioned that the pipeline is up double-digits, but how are you thinking about backlog in CMS moving forward? What is the risk that the debt ceiling debate could slow down bookings a bit for a couple of quarters?"}, {"role": "assistant", "content": "Actually, we see we see the backlog potential in CMS being strong. The pipeline of work that we have and not just the rebid, but the new work that's coming down the pipe, they provide some real opportunity for us to continue that backlog growth. So we feel -- we feel confident about that."}, {"role": "user", "content": "Great. Thanks, Bob."}]}, {"messages": [{"role": "system", "content": "Thank you. We'll go next now to Michael Dudas at Vertical Research Partners."}, {"role": "user", "content": "Good morning, gentlemen, and Claudia."}, {"role": "user", "content": "Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "So with regard to the spin and is there any of the businesses in CMS, I guess you've highlighted 5G maybe staying with the business, the automotive side, anything from CMS that may stay with Jacobs and maybe vice-versa, given some of the demands for security and issues that have been leveraged from CMS to your customer base on the P&PS side?"}, {"role": "assistant", "content": "Yes, Michael, just to clarify one point, we didn't -- actually 5G and automotive are part of the CMS segment and that's actually what we were reporting today. So I just wanted to clarify that point. I would say as far as what stage what goes, we're early in that process and so to be direct and to provide clarity, it is the CMS segment today."}, {"role": "user", "content": "Got it, but could you still debating whether things could adjust between now and [Indecipherable] So that's what understand?"}, {"role": "assistant", "content": "No, we're not. We're not and so I just want to provide clarity on that."}, {"role": "user", "content": "Got it, terrific. Second question is, you -- it seems like again in the last couple of quarters your new projects and new contracts in the backlog have come in at better margin rates than prior. I assume you anticipate that going-forward in both in all the segments and how do you see the execution of getting that margin from the backlog to the bottom line? Is that something that we can see more acceleration as we maybe track into fiscal year 2024?"}, {"role": "assistant", "content": "Yeah, so on the on the margins themselves, I mean I think clearly it's been a part of our strategy for not just '22, but '19 as well. We are in -- we continue to going up the value chain for our clients and as we do that and we're getting more into the higher-end consultancy work, we're seeing the incremental effect on our our booked margin. As far as how that's dropping into the bottom line I thinks two parts, Michael, that you're highlighting. One is that kind of excellence in project delivery which has been a part of our DNA for decades. That continues to be high on our list on delivering only to our clients' expectation, but within our financial expectations as we're booking these jobs."}, {"role": "assistant", "content": "As far as the last part of your question on the timing of that dropping to the bottom line, we're seeing a nice pace in the marketplace and this kind of goes to all segments of our business. After a period of time I think in the beginning of Q1 and maybe in back-half of last year, that was having an effect on our topline and some of our actuals to forecast back, that is reconciled back and intends to the performance this quarter. And so all indications that we're getting from our clients is that that's going to continue."}, {"role": "user", "content": "Excellent. Thanks, Bob."}]}, {"messages": [{"role": "system", "content": "We'll go next now to Sean Eastman of KeyBanc Capital Markets."}, {"role": "user", "content": "Hi everyone. Thanks for taking my questions. First one is kind of high-level. Just rewinding to the Strategy Day from last year, we kind of got a vibe from that update that you guys were kind of embarking on a deeper integration of the business units with the Divergent Solutions segment kind of being a bridge. And today we're kind of talking about it a more exciting outlook as separate entities. So I'm just curious what changed there? I hope that's a fair question?"}, {"role": "assistant", "content": "Yeah, Sean, we're constantly looking at our portfolio and doing an evaluation on how we're executing externally with our clients and the effect that that is having on advancing our strategy. So to reflect back on what we where we were before, I don't think we're doing anything that's different from what we articulated in our strategy. And so we feel confident in the decision that we made today."}, {"role": "user", "content": "Okay, understood. And then relative to the divergent solutions dynamic between investing in growth and kind of releasing margins, any update post the review you guys did on how you're balancing those two things?"}, {"role": "assistant", "content": "Well, look I think that we are continuing to invest in what we think is a great opportunity to enable divergent, actually people in places and PA to benefit for some of the overall investments being made and digital data capabilities for the total Jacobs. And so those investments continue, because we believe there is strong rationale for a very large return relative to that. So we're not making any choices relative to those investments. We continue to make them and we're confident in the ability that the scale is growing as it did in the quarter and how we communicated a sequential growth in terms of the topline, which will translate into a growth leverage factor that translates into margin improvement as we highlighted in our prepared remarks. Nothing has changed. We feel good about that. We see visibility forward to be able to do that. So investments continue and our growth is going to allow for us to get to the margin profile that we've communicated."}, {"role": "user", "content": "Understood. Appreciate. I'll turn it over."}]}, {"messages": [{"role": "system", "content": "Thank you. We'll next now to Bert Subin at Stifel."}, {"role": "user", "content": "Hey, good morning. So your updated earnings guidance range is everything to contemplate maybe a slight above. Maybe a slightly more tempered growth path in the second-half of this fiscal year. Can you just walk us through what you see as the potential positive drivers that could get you a little closer to the high-end of $7.45 EPS? And then maybe highlight where your visibility is a little bit weaker."}, {"role": "assistant", "content": "Kevin, why don't you start-off from a market standpoint, I'll talk to that."}, {"role": "assistant", "content": "Yeah, look, clearly as we look going-forward, I think there's a couple of things to highlight. Certainly, got inflationary pressure on the medical costs. Now, ultimately we're going to be able to pass that along to our clients. But in the short-term, certainly we're seeing some some pressure in that. We saw in first-quarter. First-quarter is as you know, the last year of our medical plan. So we wanted to get a better read on our second-quarter, which now is in the next plan year. We continue to see that occurring in Q2. So we're projecting that that's going to continue through the full-year. So, assuming that that doesn't happen, that obviously would be a positive. But right now that's what our expectations are."}, {"role": "assistant", "content": "Our interest rates obviously are higher year-over-year and we think we're at hopefully the top-end of kind of what the interest rate scenarios are going to look like in that, if anything, we're going to be able to trend down. If that happens, we're not counting on it, but certainly that would allow for us to be able to have some incremental performance in our EPS figures as well."}, {"role": "assistant", "content": "I think the underlying business is actually quite strong. And so absent some of these dynamics, I think putting it into context, we don't really see a situation where our business is slowing."}, {"role": "assistant", "content": "Well said. I'm not going to add anything."}, {"role": "user", "content": "Okay, great. And maybe just a follow-up to the CMS announcement. Now that you're doing that portfolio rationalization, how should we think about capital allocation maybe over the next four quarters? Does the transaction now taking place for another year leads to maybe a more of a conservative view toward M&A and buybacks? Or you go full steam ahead here now that you have the plan underway?"}, {"role": "assistant", "content": "Go ahead, Kevin, yeah go ahead."}, {"role": "assistant", "content": "Somewhat, I think that clearly we have in front of us a lot of execution that is a really imperative for us to do well against, whether that be on our business, OSP, the actual execution of the spin of CMS. So that is clearly job number-one. Number two is because of that, certainly I think there is a elliptically a high bar right now from a financial, people, gross margin perspective as it relates to actually deploying additional capital in the M&A. Never say never, but we think the bar is pretty high at this particular moment."}, {"role": "assistant", "content": "So having said all of that, there certainly is opportunities to invest back in our shares as appropriate, and I think that you might want to think about that potentially happening over the course of the next several months."}, {"role": "assistant", "content": "Yeah I just want to add is, we really like what we got."}, {"role": "user", "content": "Awesome. Thanks so much Bob and Kevin."}]}, {"messages": [{"role": "system", "content": "Well that's now to Steven Fisher of UBS."}, {"role": "user", "content": "Thanks, good morning. How should we think about the second-half '24 timing for this spin. I think that's within the normal range for these types of transactions, but still seems like it's a bit long-dated. Is there any potential to accelerate that if it stays a spin and what are the factors there? Just curious if the debt ceiling discussions and continuing resolutions and federal budget, is that all a factor or is it more just the internal process?"}, {"role": "assistant", "content": "No, look. It is certainly a process both internal, but also external. So as you as you may be aware, the process of putting in place a structure in an organization that facilitates an ability on day-one to execute and manage a publicly-traded company is not inconsequential and so we're not going to rush that process. And I think a 12 months to 18 months is actually a fairly aggressive stance in some respects. So I don't think we're going to be able if in fact it continues to be oriented around the spin, but do much better than that. But of course, we will do whatever we can to accelerate, for sure."}, {"role": "user", "content": "Okay, thanks. And then P&PS is going to really be the biggest contributor to profits post-spin, so there's going to be a lot of focus on that and particularly the margin, so just looking at the sequential margins this quarter were down in P&PS, but up 150 basis points year-over-year. It sounds like you think we should focus on the year-over-year there, but I'm curious about how we should think about mix within P&PS and how might that affect margins on a quarter-to-quarter basis."}, {"role": "assistant", "content": "Yes, Steve, a couple of things. One is that we were pretty clear last quarter that on a quarter-to-quarter, at least Q1 that had some -- some project incentive releases that were one-time. Another way of saying, we need to really take a look at the year-over-year comparisons and then for all of us to be aware that we put margin targets out at our Strategy Day. And just to do kind of a mid term report on that, we are actually a year ahead of where we said we were going to be on our margin profile. So that's a -- look at it over a over the period of time, we're up. So I hope that clarifies that."}, {"role": "user", "content": "Okay. Thanks a lot, Bob."}, {"role": "assistant", "content": "So one thing just just to crystallize and make sure that you caught it correctly. Our margins in CMS Q1 [Speech Overlap]"}, {"role": "assistant", "content": "And as far as that continuing, Steve. I missed one part of your question. As far as that continuing, we evaluate based on our clients and trends that we're seeing in the marketplace. And as we said in the script, those have been very-very strong in P&PS world. So we continue to have confidence in our business."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. We'll do next now to Chad Dillard of Alliance Bernstein."}, {"role": "user", "content": "Hi, good morning guys. Just wanted to dig into the spin a little bit more. With the remaining Jacobs business, can you talk about like what the cash conversion profile looks like and how you think about capital allocation once the spin is done and if there is any potential gas that need to be filled on the capability side once it's complete?"}, {"role": "assistant", "content": "So we're early in our process, Chad. We do know that people and places and CMS both have good cash- low characteristics. Actually, people and places has a lower DSO level than the current CMS organization. So we're working through all of that. We'll provide incremental details relative to when we get to that space to really give greater clarity, but I think you're going to see both businesses being robust in terms of their cash flow capabilities longer-term."}, {"role": "assistant", "content": "Yeah, and Chad on the second part that you asked about the capability. We feel strong that we've got a -- we've got a strong -- we feel strongly that we've got a really solid platform today. In areas where we continue to to innovate is around our digital platforms and our digital enablement and the partnership that we have with Palantir and with others, that is a -- those are strong platforms in order to grow without making huge investments. So we're really comfortable where we sit today."}, {"role": "user", "content": "That's helpful. And then second question on PA with respect to the margin, now you guys talked about operating margins getting to like the 20% range in the second-half. But maybe thinking a little bit longer-term, like to understand what's the path to bringing it back to, I guess what your target range would be?"}, {"role": "assistant", "content": "I would say that we're thinking longer-term that there is no cap ultimately at the 20% level. So our work to continue to drive with the management team and our ability to get back to margins that are north of 20% longer-term."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "And we'll go next now to Michael Feniger of Bank of America."}, {"role": "user", "content": "Hey guys, thanks for taking my question. I'm just curious, there is obviously headline that has someone brought up the government shutdown, but there's also headlines with the House Bill potentially trying to repeal the IRA clean-energy tax incentives. Many thing that's not likely, but I'm just curious on-the-ground through the channel on fieldwork. Are any of these headlines starting to slow part of the activity as these headlines pick-up, does it maybe push something out to the right in the near-term that we should be aware of?"}, {"role": "assistant", "content": "So Michael, the short answer is no. IIJA, it's where we made specific commentary about that in the script, has really started to incrementalize in our business and we can see it, not only in our pipeline but in our bookings. And it's realizing itself in that would -- that's why we specifically called out P&PS Americas on the 30% year-over-year growth. So we're not seeing that at all. And just one other just a clarifying point on IIJA it's law, right? So as far as it being repealed, they would have to be significant -- there have to be a new law and so we feel confident about that."}, {"role": "assistant", "content": "On some of these other items, those were actually in the early stages and we have not even -- we have not seen the effects of those in our pipeline or n our work. So the fact that there is a debate about those now, it's not really having that material effect on the business."}, {"role": "user", "content": "Good to know. And just lastly, there was a comment about Europe. It seems that there's some mixed signals, some positive, some negatives. What do you kind of seeing in Europe when we think of like the PA the P&PS business?"}, {"role": "assistant", "content": "Yeah, interesting, are kind of separated between PA and P&PS. Our PA business in the UK specifically is actually growing and it's been really-really strong and it's kind of a testament to no different than Jacobs historically. Real strong capabilities in those areas of global priority and national priorities and it's around the defense sector that PA has a strong relationship with MOD, as well as in energy and utilities, which in fact is turning into a security issue in broader Europe. So that's really driving the PA business. What's driving the PA and the P&PS business is the energy security issue in the broader continental Europe, as well as in Scandinavia and I'll give you just one statistic."}, {"role": "assistant", "content": "A year-ago, two years ago of our UK platform which is really-really strong, about 90% of our folks that were based in the UK worked UK business. Today that that's about 60/ 40 is where we have globe. We have our talent from the UK working on programs and projects and engagements all throughout Europe, as well as globally. And that goes into -- Kevin and I have been really vocal about that over the course of the last three or four years about tying that global talent. So it doesn't totally dampen the effect of some of the economic headwinds in Europe, but our diversity is helping in that front."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. We'll go next now to Gautam Khanna at Cowen."}, {"role": "user", "content": "Yes, thank you, good morning, and congrats Kevin and Claudia."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}, {"role": "user", "content": "Yeah, I just wanted to go back to, I think it was the first question, in the Q&A on any sort of dis-synergies and I don't mean quantitative necessarily, but are there any linkages that the CMS and PA or CMS and P&PS were able to just be more competitive on bids because you could the broader qualifications of the entire enterprise that might be lost and I was also thinking just when PA was acquired, I felt one of thrust was to bring them outside of the UK, which you just talked about, but into the US and into some of the government customers and does that potential opportunity maybe look less optimistic if CMS was not under the same roof. Thanks."}, {"role": "assistant", "content": "Yes, so, Gautam, it's Bob. One of the things that -- we looked at this really-really hard. And as far as the dis-synergies go, we we feel pretty confident that that's not going to be of any materiality at all. Now that said, similar to what we've done in the past, our relationship post-spin with CMS is going to continue to be very strong. And so our ability to work together, collaborate and partner for the benefit of our client is going to continue to be there. So that's always going to be there. In fact, we've demonstrated that in our history with previous divestiture that we did and that relationship continues to this day to be very-very strong."}, {"role": "assistant", "content": "On the PA outside of -- outside of the UK, really that entrance into the US, which were in real-time and having success on, was around the private sector in the US, not that the government sector, and more specifically around energy and utilities and health and life sciences. And those those opportunities have continued to. In fact, today in the US we have probably 50 active pursuits with a lot of cases, bids in play with PA and we're growing referring very confident about that."}, {"role": "user", "content": "Thank you. If I might follow-up just on the decision to spin versus an outright sale, can you talk a little bit about what the tax basis of CMS would because presumably when you announce something like this that potential suitors would also be interested I would imagine. So what is the tax basis of the enterprise CMS?"}, {"role": "assistant", "content": "So we've we've evaluated all of the opportunities and depending upon if you were to do some type of other structure, will ultimately determine what the tax base basis is, but clearly if we did sometimes of other transaction there would be some tax implications that would occur. So the fact that we've centered around executing against spend is a tax-efficient way of addressing the opportunity to create two separate very strong companies. And so look, I think that's how we're executing. That's our plan at this particular point in time. It takes a little bit of time given some of the discussions that we've had in the past, but that's one of the reasons that we consider the spin to be a highly-attractive option. But as we go through the process and determine if we get any additional facts or circumstances that could change that, we'll consider that because we are ultimately interested in ensuring that we maximize shareholder value."}, {"role": "user", "content": "Thanks, guys."}]}, {"messages": [{"role": "system", "content": "Thank you. And we'll take our final question this morning from Andy Wittmann of Baird."}, {"role": "user", "content": "Yeah. Great, thanks. So I was going to ask here on some of the capitalization, I guess, of new co and some of the cash cost to spin-off. So could you Kevin comment on what do you think a realistic range for cash costs to effectuate the spin would be, as well as your thoughts on where the debt was set? I would guess that you'd keep them rotable or similar leverage based on the relative EBITDAs. But I guess from a practical standpoint, I guess new co probably gets spun out with no debt and then would borrow and then pay like a cash dividend back to RemainCo to achieve the capitalization, so kind of a lot in here. But I guess, there is another aspect to it, which is as you range in new debt in today's debt markets, what's the what's the net impact on interest expense from having to recapitalize new company."}, {"role": "assistant", "content": "So the, I'll make my first comment in response to your detailed questions is we remain committed to the Jacobs RemainCo, that it's going to be investment-grade rating, so I think that gives you a a ground post that you can certainly evaluate what the potential options may or may not look like. The second thing I would say is, we're a little bit too early in the process. We have kept this to a very small group of executives and team members up into this point in time and now we are as we publicly announced, we're going to go through a very detailed thoughtful, disciplined process -- I'll answer all of these questions."}, {"role": "assistant", "content": "I do think that, that the way we would characterize the leverage factors, they're going to be appropriate relative to the businesses in which they are. So I think I'll just leave it there and I think you can interpret what that may or may not mean, but we think ultimately that there is an ability to have a standalone organization that is now CMS, which is going to have an ability to be quite successful longer-term and people and places PA and divergent, as well as the RemainCo Jacobs."}, {"role": "user", "content": "Got it and then I guess just for my follow-up. I think I've heard on your revenue outlook for divergence that you're expecting good acceleration, maybe I missed it. But did you have a comment on the second-half revenue performance that you're expecting for CMS? I think previously this business also was expected to see an acceleration. I just wanted to make sure I heard your latest on that one."}, {"role": "assistant", "content": "Well, we didn't really comment about CMS, although I think what I would focus on in CMS is really more about the margin, sequential improvement, which we think is really important as we get the business back to that level of 8% for the full-year, which is what we characterize. And so perhaps I'll leave it there because we didn't really talk about CMS numbers."}, {"role": "user", "content": "Okay, thanks."}, {"role": "assistant", "content": "Still growing."}, {"role": "assistant", "content": "Very much growing."}]}, {"messages": [{"role": "system", "content": "Thank you. And Mr. Pragada, I'd like to turn things back to you, sir, for any closing comments this morning."}, {"role": "assistant", "content": "Yes, thank you. Its exciting -- exciting times ahead. We're really looking forward to what the future brings. Thank you everyone for joining the call and will be very pretty close to the market as things continue to develop and in progress. Thank you, everyone."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from the line of Colin Rusch with Oppenheimer. Colin your line is open."}, {"role": "user", "content": "Sorry about that man. Can you talk a little bit about what you're seeing in terms of order size in the spot market? And how that inventory is clearing at this point? Are you seeing any real meaningful change here in the last, call it, three or four weeks?"}, {"role": "assistant", "content": "Colin, this is Eric. So you're talking about -- I didn't get your first part. You said order size and stock clearing, is that what you asked?"}, {"role": "user", "content": "Yes, yes. Yes this activity in the spot market just."}, {"role": "assistant", "content": "Yes. Well, look, I mean -- yes, I think, what really transpired and what Kent referred to in his prepared remarks, we saw a significant destocking happened in China, which affected the spot market. Our contract customers around the world continue to buy at their contracted volumes, as Ken pointed out. We've seen close to 30% growth in EV sales in the first quarter across the industry, and over 50% in the U.S., a little weaker in Europe."}, {"role": "assistant", "content": "Overall, the markets are performing largely as we thought it would of a strong year, with what we think will be a tight supply as well. But specifically in the first quarter, with that destocking, we saw the spot market be practically nonexistent at times during the quarter. There's very little activity going on, as these stocks were drawn down. Stocks were drawn down the levels at the cathode level and battery level. In China, lithium stocks to -- and in some cases, below a week."}, {"role": "assistant", "content": "Clearly, not in the long run, a level that's sustainable for sustained operation. To your question, what we've seen in the past couple of weeks, we've seen spot buyers return. We've seen -- and we believe that's partially what's affecting the price that is popped -- is leveled and then started to rise within China. And we can -- and we see no change in what our projected sales for the year in EVs of about 30% growth anticipated in China, closer to 40% for the overall market. I think the spot orders, it would be premature for me to say how large they are, but they are beginning as these cathode producers now start to restock and prepare for a more stable operation for the balance of the year."}, {"role": "user", "content": "That's super helpful. And then, in terms of the competitive landscape around -- just on the refining side, as we've seen some new entrants into the space, are you seeing any real meaningful evolution in terms of the technology piece of this? And how folks get to the quality spec across the landscape? And I'm asking that question in context of looking at some of the evolving chemistries that we're seeing -- that are preparing to go into production?."}, {"role": "assistant", "content": "Yes. I don't think we have visibility to that. So what we -- we've not seen -- I mean, the specs have not changed or whether people are getting qualified, taking longer to get qualified with some of this -- the newer facilities, maybe that's some of the delays that we see, but we don't have visibility whether it's about qualification issues or just about production issues. I don't think, we have visibility of that."}, {"role": "assistant", "content": "No. In terms of the competitive landscape, I would tell you in terms of the expectations of customer of us, it is a moving ball. The expectations go up on quality, particularly in the higher energy -- higher energy density chemistries, which tend to be the nickel chemistries. We recently completed upgrades in some of our workhorse plants like Xinyu to drive even higher quality standards to remain a leader in that area in that regard. So, it is something that it is a barrier for any new entrant to be able to achieve and to get to, for sure."}, {"role": "user", "content": "Thank you so much guys."}, {"role": "assistant", "content": "Thank you for your question. Our next question comes from the line of David Begleiter with Deutsche Bank. David your line is now open."}, {"role": "user", "content": "This is David calling here for Dave. Just going back to the spodumene costs, can you talk about where the lower cost spots remains coming from in Q1 and probably, how much was the benefit to margins in Q1? And also, is that higher cost of spodumene from the resource Wodgina? Or is it from Greenbushes?"}, {"role": "assistant", "content": "Yes. So the lower cost spodumene is really from the both Kemerton as well as Wodgina. And just as -- sorry, Greenbushes. Just as a reminder, the reason it's lower cost is because of the timing lag and the rapid increase and then, now decrease in spodumene prices. It's really not the operating cost of the minds itself that's causing this issue. In Q1, the benefit was probably in the kind of 15 to 20 percentage point type of range that we were seeing in Q1. And again, we'll see that reverse, as we go through the rest of the year, and that will be a margin rate pressure on the business."}, {"role": "user", "content": "Okay. And what was the final cost for Kemerton I and II? And I guess what will Kemerton III & IV cost?"}, {"role": "assistant", "content": "So we haven't -- we haven't disclosed the total amount. So it's probably in the $1.5 billion to $1.7 billion range for Kemerton I and II. Kemerton III and IV will be in a similar type of range, partly because we've got an employment village that we're putting in place to help with the labor issues ultimately."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Our next question comes from the line of David Deckelbaum with Cowen. David your line is now open."}, {"role": "user", "content": "Good morning Eric, Scott. Thanks for taking my question today. I wanted to just ask about long-term planning, particularly for you, Scott, how you think about the move to be spending, I guess, about $4.2 billion in '27 versus $1.8 billion this year? You point out obviously, that your guidance always just illustrates pricing if you held conditions sort of flat today."}, {"role": "user", "content": "You talked about this year spending within cash flow. I guess that these conditions obviously persist that you would be outspending cash flow, if you followed that capex plan. How do we think about that planning cycle while you maintain sort of a long-term structurally bullish view on the market? You're expanding your conversion quite a bit, to get to those capex numbers."}, {"role": "user", "content": "I guess, how do we think about that capex trajectory every year? And, should we expect it to be governed by sort of the beginning of the year outlook for organic cash flows?"}, {"role": "assistant", "content": "Yes. So I think, as we've said, when we laid out our investment plans, but we look at the market and we'll adjust, as we go through this. So, what we put forward in January, those are our plans. And the market -- and our view of the market changes dramatically or significantly, we'll adjust to that. So short-term cycles, if our view is right, we'll maintain and invest through those. But, if our view of pricing changed longer term, then we would adjust our investment profile."}, {"role": "assistant", "content": "Yes. And I would just add, Kent, that given our volumetric growth at these kind of pricing levels, we'll continue to be generating significant cash flow to be able to fund that kind of capex growth. So the Albemarle story is not really about the price, it's about the volumetric growth. And the cash generation that's coming from this is significant. So."}, {"role": "user", "content": "I appreciate that. Kent, in your prepared remarks, you talked about the minimal impact for now of the Chilean governmental moves, particularly given your contracts expiring in 2043. You also, I guess, highlighted, looking at things like extraction technologies, processing technologies. I guess, did the move change any of your long-term strategy in the country and might have accelerated some of the investments? Or, I guess, exploration around direct lithium extraction and applications in Chile?"}, {"role": "assistant", "content": "Yes. So I guess we were surprised by the announcement that came out of Chile. We knew they were moving in that direction. A couple of things we learned in that. But our plans around DLE and our discussions with the government about using that in the Salar are consistent now and before. We're working to progress that as quickly as we can, and we'll do it in a number of places, but there's an opportunity to utilize that in the Salar as well."}, {"role": "assistant", "content": "So I guess our view is -- I mean, we -- our concession goes through 2043, where the government has gone out of their way to assure us that, that's valid. But expansions and getting additional concessions will probably require us to use new technology, and probably partner with the government as well around that. So we see that as an opportunity beyond our current concession."}, {"role": "user", "content": "Appreciate the answers."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Our next question comes from the line of Josh Spector with UBS. Josh your line is now open."}, {"role": "user", "content": "Yeah hi. Thanks for taking my question. I was wondering, if you could talk about your thoughts around the EBITDA margin cadence in Energy Solutions, through the year. I assume second quarter is probably going to see the biggest compression. But can you get back to that mid- to upper 40% range in fourth quarter? Or can you even get there with where spodumene prices are today, once that does roll through?"}, {"role": "assistant", "content": "Yes. So Josh, with where spodumene prices are and the projection that we've made using the mid-April prices, we'll be below that kind of mid-40% range, in the second quarter all the way through the fourth quarter. So it's really, again, the pressures coming from that price being lower as well as that spodumene price drop or cost drop that is putting the pressure on the margins."}, {"role": "assistant", "content": "If you were to stabilize that, I think, you'd end up being more at the long-term expectations of that mid-40s to low 50% range. So really, this -- just as a reminder and repeat it again, this margin pressure is really just driven by the velocity and the change in the spodumene price flowing through our P&L."}, {"role": "user", "content": "Okay. And just to make sure I'm clear, just in your pricing assumption, I mean, are you assuming that your contracts stepped down with the lag in the next couple of quarters along with that? Or are you assuming your current contract mix extends?"}, {"role": "assistant", "content": "Yes. So what we do is we're taking our current contract mix, as of today or let's just say, mid-April. We're applying the market indices that are referenced in those contracts, flowing that through and that generates what we think -- what the revenue will be. And so, as you look at that on a sequential basis, we'll see price reductions each quarter. And as you look at it on a year-over-year basis, our first half of the year, we actually see price increases. In the second half of the year, we're seeing price decreases on a year-over-year basis."}, {"role": "assistant", "content": "And again, that's just really just reflecting, how those contracts are structured and the lags that are built into them. And a couple of the contracts have caps and floors, that we'll have to take into account."}, {"role": "user", "content": "Ok, Thanks Scott."}]}, {"messages": [{"role": "system", "content": "Thank you for taking the question Our next question comes from the line of Mike Sison with Wells Fargo. Mike your line is now open."}, {"role": "user", "content": "Hey good morning guys. Nice start to the year. In terms of inventory destocking, I understand there's been some in the industry, but your volumes were up in the first quarter. So, are you not seeing destocking from customers? And is that a risk, as you get into the second, third and fourth quarter?"}, {"role": "assistant", "content": "So this is Eric. The way I would qualify that as again, that the destocking has happened specifically in one country, it's China. Now, it happens to be the largest country in the market where almost all the spot volume activity is that's 10% of our mix, as we described on an annualized basis. All of our contracts are everywhere else around the world, including even some long-term contracts that are sourced into China,"}, {"role": "assistant", "content": "Are all operating according to the projected plan prior to beginning of the year, prior to any destocking that happened in China, meaning the EV growth story is intact everywhere, all that's happening in China to destocking what's specifically there. And everywhere else, volume continues to flow. So we're not seeing destocking, as a widespread phenomenon just something in China and specific to the spot market."}, {"role": "user", "content": "Got it. And then -- so when you think about the volume growth, as you head into the second half of the year, there -- it doesn't sound like there's a lot of risk to that on your end, right? Customers want that product and it's within your contract. So what is the risk for volume in your second half, if any?"}, {"role": "assistant", "content": "This is -- everything that's happened and that we've talked about on destocking has to do with a temporal effect in China. It has nothing to do with fundamentally demand that we've seen. It is true. The year started out a little weak in China on demand. Recovered rapidly by the end of March. So we saw a weak start in Europe, but that's a hangover effect, we believe, from what has been expiring incentives largely in Germany, and the U.S. started off with a bang for the year."}, {"role": "assistant", "content": "All of that is consistent with our look, our view at the beginning of the year, our view now, that we're looking at a 40% year-on-year growth in demand, our customers need the supply. And frankly, we see the market as still being tight for the balance of the year. So this is a market that's healthy in that regard. Independent of what's going on with price now, the supply-demand fundamentals are very favorable."}, {"role": "assistant", "content": "Yes, Mike, I would just add to that, as you look at our projection, I mean, it's really an operational risk because we're ramping new plants, right? So, it's really just our ability to ramp those plants, and we think we have it dialed in, but things can go wrong. So, I think that's really the risk and also potential opportunity because if things go better, then we'll have more volume."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you for taking the question.Our next question comes from the line of Arun Viswanathan with RBC Capital Markets. Arun your line is now open."}, {"role": "user", "content": "Great thanks for taking my question. Appreciating that it's a very volatile market that's constantly evolving. Could you just kind of review some of the drivers that you think are influential on price lithium spot prices? And maybe, just give some perspective on the market? The declines that we saw were very swift and would indicate destocking and very high inventory levels, especially in China."}, {"role": "user", "content": "I know that there's been some other factors like discounting on ICE vehicles over there, but maybe you can just provide your own perspective on what you're seeing?"}, {"role": "assistant", "content": "Yes. So it's difficult to say what's really happening in the spot market, kind of the fundamentals we rely on are the supply and demand balance. We spent a lot of time working on that, making sure that we understand that. We think we understand that and it kind of works where it's a tight market for a pretty long period of time."}, {"role": "assistant", "content": "And the previous question, we're probably more concerned in this year about volume and being able to produce the volume as opposed to the demand that's there for the product. In the spot market, I mean, in China and the movement that we've seen, a lot of that is about destocking and that volume running down and shifting to different areas in the supply chain between the battery makers, the cathode makers and then the raw lithium salt providers like ourselves and converters that sit in the market as well. So it's moved around within that space."}, {"role": "assistant", "content": "And then, it's been -- there's been a lot of destocking in that that's really driven the pricing, but it's in the spot market, as we've said before. It's about 10% of our portfolio, has a big impact on the broader portfolio because we indexed -- our prices indexed to those with a lag, but it does have a bigger impact on our portfolio than just the 10% that we represent. Eric, do you have additional color?"}, {"role": "assistant", "content": "No. I mean, I think the market is changing as well at the automotive level. I mean, there's now more models, more vehicle producers, aggressive competition for share. So that's a dynamic that's going on within our customer base. But that's the industry rising up to meet the demand that's there for these vehicles. And it doesn't change the need for us to execute well in order to meet our customers' expectations. And as Kent said, the market for spot material is isolated largely to China."}, {"role": "assistant", "content": "And so, what you're seeing now is some dynamics playing out in China, which -- when you think about an inventory drawdown, it's temporal in nature with strong demand. We are going to pretty soon go to a point where many of that much of the supply chain needs to start restocking in addition to just meeting its growth, that move before it."}, {"role": "user", "content": "Great. And then, just as a quick follow-up, then you also noted that there potentially are some observations of a supply response, in that some of the newer capacity that's potentially at higher cost levels may not command or is being played. Could you just elaborate on that? What are you seeing there? Is that meant to also imply that maybe the mid-30s is the marginal cost of some of that new capacity, how should we think about that?"}, {"role": "assistant", "content": "Yes. I'm not sure we didn't -- we weren't talking about new capacity coming on that's been delayed. We were talking about converters in China that were shutting down because their math didn't work any longer between lithium prices and spodumene prices. So I'm not sure -- I'm not aware of anyone who's delayed a new project, as a result of the current market pricing, although that could be the case, I'm not aware of that.."}, {"role": "assistant", "content": "Eric W. Norris, Albemarle Corporation - President of Albemarle Energy Storage37"}, {"role": "assistant", "content": "No. I don't know that we have any intelligence that says a new project is delayed."}, {"role": "assistant", "content": "There's still a fair amount of interest in bringing supply in order to meet the demand, which we believe will be necessary, given the shortness in supply. But we know because we both compete, of course, in the China market against some of these converters who buy spodumene on the open market, but also toll with some of these individuals from the behavior that we have in that market -- we've seen that market, we know very clearly that more tolling capacity is available because they cannot make money on existing spodumene conversion, when they buy this spodumene themselves."}, {"role": "assistant", "content": "So that's part of the evidence package we have that some capacity has been leaving the market at current prices."}, {"role": "user", "content": "Okay, thanks."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Our next question comes from the line of Vincent Andrews with Morgan Stanley. Vincent your line is now open."}, {"role": "user", "content": "Thank you. Good morning. Scott, I'm wondering if you can just help us on the inventory on your balance sheet. Just looking at the end of the year, it was a little south of $2.1 billion. And then, at the end of the quarter, it's almost $3.2 billion. So what were the mechanics of that increase? I'm sure some of it is price, but how much of it is volume? And then, I think you made an accounting change at third quarter in terms of how you deal with the unrealized profits from your JVs, and I think those now reduced inventory. So, if you could just help us bridge the increase from $12.31 billion to $3.31 billion, that would be great?"}, {"role": "assistant", "content": "Yes, Vincent, I think -- so a significant amount of that increase is due to price. So, as the price has moved up, obviously, there's an impact on our -- on the value. Also, we've got increase in volume as we're ramping both the expansion at Greenbushes as well as Wodgina. So you're going to see, increases coming from that. And to your point, we did have an accounting change where we've changed, how we're recognizing the profit in inventory that now is reflected in our inventory line as opposed to our investment line. That reduces the effect. So those are kind of the muting pieces."}, {"role": "user", "content": "Okay. And then, the other follow-up I had was just on your spodumene cost. It's very easy to understand what your -- what and how you're assuming lithium prices, based on what you've said. But the spodumene cost that you're running through your guidance, are those the mid-April cost? Or do you have a sort of more of a projection on those that's baked into the guidance?"}, {"role": "assistant", "content": "No. It's the same methodology is based on that mid-April -- that mid-April cost. So, we don't take -- we're not taking a position on what that's going to do."}, {"role": "user", "content": "Okay, thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Our next question comes from the line of Christopher Parkinson with Mizuho. Christopher your line is now open."}, {"role": "user", "content": "Hi This is Harris Fein on for Chris. Thanks for taking my question. So there's been an effort over the past few years to increase the variable portion of your lithium tons. All of your expansion plans are still going forward. It seems in tracking in line with expectations, and you're still generating a lot of cash. But I guess, in light of what's going on in the market, can you speak to how comfortable you are, with having this level of volatility in your results? Thanks."}, {"role": "assistant", "content": "Yes. So, there was quite an effort from us to move toward index-based pricing. As pricing was moving, whereas historically, we've had more fixed price or at least agreed prices for a period of time. And, it does create a little volatility in our results as the price moves, but it's a volatile market and this is a space, and it's probably going to move around like that for a period of time. So, it could we, at some point, want to change that structure, but you never say never. It could be the case at some point."}, {"role": "assistant", "content": "But given, where the market is now, I think being indexed to the market, we like that. We think it's right for us and our customers. No one is really out of the market, either one, and that's kind of how we're going to operate now. It creates volatility in our results, and we just have to live with that in the near term."}, {"role": "assistant", "content": "I also think that it's reflecting -- you can see in our performance that our low-cost resources and our low-cost operations benefits us. So, we can handle this volatility better than many of our competitors, just given our cost position as well as our scale. So."}, {"role": "user", "content": "Okay. And my second question is I would think that spodumene is the more commoditized product versus the downstream lithium salts. So I guess, why do you think that spodumene prices are holding in better -- more stable on a relative basis versus the downstream chemicals?"}, {"role": "assistant", "content": "Yes. Look, that's speculation, but there's just a longer lag in the way that works its way through our P&L and through the industry. So, we kind of rely on what happens in the market where spodumene prices get set. It's not that material for us because we're integrated all the way from spodumene into lithium salt. So the real impact it's timing and the tax impact from the joint venture that hits us. That's kind of why you see that volatility."}, {"role": "assistant", "content": "So it's -- but I think it lags just because of the timing of how long it takes to adjust those prices and how long it takes to move that material through the supply chain."}, {"role": "assistant", "content": "Kent, I'd also add that, fundamentally, this is an inventory drawdown in a period of time that won't last, we believe long, and we're seeing. And, we think it's fact transpired and it's behind us, and we see strong demand. I think, the spodumene market is reacting to the strong demand and the need for the supply. So there is a time lag, but there's also just -- the supply/demand fundamentals are, again, very strong for growth going forward. So I think, we can speculate, but some of that's at play as well in. There are no more questions?"}, {"role": "user", "content": "Everyone -- sorry, it seems that the operator dropped, and we're getting our operator back. So everyone, if you just hold a moment. The next question is going to be from Joel Jackson at BMO. I don't know. It looks to me like your line is open, but we may have to wait for the operator."}, {"role": "user", "content": "Meredith, can you hear me?"}, {"role": "user", "content": "Yes, we can hear you. Go ahead, Joel. Thanks."}, {"role": "user", "content": "A couple of questions. So -- and maybe this is simple. I want to make sure that I understand. So when you talk about mid-April market pricing is what you're using for the rest of the year, are you talking about spot indices prices in the market? Or are you talking about, so where we were mid-April? Or are you talking about the realized price that was going through your book in mid-April with your lags? And then, what is that price level in mid-April that you are referring to?"}, {"role": "assistant", "content": "Yes. So Joel, we're using the indices that are referenced in our contracts. So, it's not just taking like the China spot or just one index where you're actually taking. The actual indices that are referenced in our contracts as of mid-April, holding that flat, and then calculating through the contract structures and the lags and caps and floors and all that kind of stuff to generate what that forecast is."}, {"role": "assistant", "content": "And, if you look at that as of mid-April to today, it's basically the same. So don't really move much in that time difference."}, {"role": "user", "content": "Great. But that is the unlagged mid-April market indices price?"}, {"role": "assistant", "content": "That's correct. That's correct."}, {"role": "assistant", "content": "Of course, there will be different in China versus outside China as well is a point, yes. But it's -- as you know, they're very."}, {"role": "user", "content": "It's a blank."}, {"role": "assistant", "content": "Yes. That's correct."}, {"role": "user", "content": "Understood. Okay. Another question would be conversion margins have been negative for some months. And, so like your actual business where you are buying spodumene, say, from Greenbushes -- excuse me, from Talison at the market price, that business of converting it is a negative margin business. I understand when you put the whole thing together, you're actually making money. But how do you think about that business, that is negative? How does that change how you do things? And going forward, how do you think the mix of earnings -- mix of profitability should steady state out between conversion margins and spodumene production margins?"}, {"role": "assistant", "content": "We don't look at it that way. We're in the lithium business, and we're fundamental from the resource through to the salts that we sell to the customers, and we think of that as one business. And if the margin moves from one part of the business to the other, there are both ours, it's not that relevant to us."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you Mr. Jackson. The next question is coming from John Roberts with Credit Suisse. You may proceed."}, {"role": "user", "content": "Thank you. On your contracts that have caps and floors, do you expect to hit the floor on any contracts in 2023?"}, {"role": "assistant", "content": "I don't -- we've not disclosed that, right? We've not talked about specific contracts. I don't think we want to."}, {"role": "user", "content": "Okay. And then second question. I know it's small, but can you remind us of the main limitations of sodium-ion batteries, and why the range won't improve over time for them?"}, {"role": "assistant", "content": "John, it's Eric. It's -- sodium-ion batteries are just less energy dense and heavier on weight for this comparable energy density. So, while it may fulfill maybe a city, low-range vehicle, and that could help ease some of this -- the ability of the industry to meet electric vehicle demand, given the shortness of lithium we see in our forecast, it cannot replace it in whole on any significant way. However, it could be a viable technology in grid storage. So, it just has inherent limitations given the energy density and weight to energy benefits."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you Mr Robert. The next question is from Chris Kapsch with Loop Capital. You may proceed."}, {"role": "user", "content": "Good morning. A couple of follow-ups. One is on the pricing discussion. Just trying to get a little bit more granular because it sounds like you have good visibility on volumes. And then, the variability is going to come from the pricing assumptions. But you alluded to the sort of the bifurcation in hydroxide and carbonate prices. Can you get more explicit in sharing with us like where the assumption baked into your guidance is on each of those chemistries? Is it that $15 to $20 delta that you're currently baking in your revised guidance?"}, {"role": "assistant", "content": "Yes. So I think what -- I mean, we're looking at the market as it is today or middle of April, right? And we're using those spot markets to guide us for the balance of the year by the different chemistry. So carbonate would inform -- the carbonate business and hydroxide would inform the hydroxide business. So we're holding them flat as they were in middle of April from an indices standpoint. And again, the index that are relevant for our different contracts, we talked about the main."}, {"role": "user", "content": "Okay. And just to be clear, you have different indexes for both carbonate and hydroxide inside China and outside China?"}, {"role": "assistant", "content": "That's right. Yes, we've got indices for the different products. You also have different countries, different regions, and some customers actually blend some of the indices. So it's a mix, right?"}, {"role": "user", "content": "Makes sense. Got it. And then a follow-up just on the market intelligence about the nonintegrated converters shuttering in China. Just curious to we had heard that. That's definitely the case with lepidolite. Just wondering, if your commentary where you're talking about sort of more conventional SC6 feedstock users or for lepidolite, or just across the board in terms of nonintegrated converters being uneconomic, as where recent spot carbonate prices have been?"}, {"role": "assistant", "content": "Well, generally speaking, Chris, what we view lepidolite producers is tending to be more integrated producers from mineral resource of lepidolite all the way through conversion. Our comments, on what we're seeing and who we'd be tolling with are obviously those who consume spodumene. And who have to buy spodumene in the market to run their business. That's where our comments were focused on."}, {"role": "user", "content": "Got it, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you Mr Kapsch. Our last question is from Ben Kallo with Baird. You may proceed."}, {"role": "user", "content": "Hey. Thank very much for filling me in. And, if you could give us some help on marginal cost of the industry, and you guys' point about being integrated, how you look at the margin in mining versus conversion. But how do we think about the marginal cost of the overall industry? And any way you can frame that for us? Because I think that's the biggest question when what everyone is looking at price is like how low can it go? And, if you're the cost leader, then you set that price theoretically? And then, I have a follow-up."}, {"role": "assistant", "content": "Yes. So Eric can probably add details to this. But I would say, I mean we look at it, and we think you should look at it. Our integrated producers are producers that are not integrated, and they probably set the marginal cost right, the ones that aren't integrated. So you could spodumene price, you can see, for the most part, it's pretty transparent around that. And conversion on top of that to make a margin that -- those are the marginal producers when -- I guess it moves around depending on where spodumene sits, but you can see that and probably can determine that."}, {"role": "assistant", "content": "Yes, I'd just add, Ben, that as when the spodumene -- when the battery-grade carbonate price -- spot price in China on the various indices cross from the 30s into the 20s, you started to see that pain. We started to hear more producers, who are having trouble operating. You start to see even more activity within China to try to find ways to sort that from falling further. You could tell -- we could tell from the market sentiment that, that was a point of pain from any of these producers. And it substantiates what we've said for some time, that prices need to be at least in the 20s for this industry to operate if not higher."}, {"role": "assistant", "content": "And then, you see as new resources come on, right? And new technology comes to play, those could very well move out that cost curve as well as lower quality resources come to market with different technologies, that cost curve kind of it grows."}, {"role": "user", "content": "And then just on -- I think, we see this already to some extent, but a bifurcation, if that's the right word, of pricing that comes out of China versus elsewhere? And then, if you wanted to go elsewhere to specifically in the U.S., I know there's not a lot of volume that comes out of the U.S. But in your discussions, how much of a difference is that pricing across different regions and where -- whether it's spodumene or carbonate? Or what have you -- the difference in pricing based on region?"}, {"role": "assistant", "content": "Yes. So yes, China is a big part of the market. And historically, it's kind of set that -- all of those -- that pricing historically. I think, as the other regions grow and we start shipping volume into other regions, that's going to change. And it will start bifurcating and being different around the world. But I would say now, it's kind of one market. It's kind of -- it looks like it's wanting to separate a little bit, but I would call it one still."}, {"role": "assistant", "content": "And it's particularly true then for carbonate, 70%, 80% of the world's carbonate is consumed in China. And so, if China is destocking, that's going to have a disproportionate impact on carbonate in China."}, {"role": "user", "content": "And so the IRA -- the intent of the IRA to move supply chain out of China has started impacting the market pricing yet?"}, {"role": "assistant", "content": "Yes, there's no real consumption around that, at the moment. But it's the speculation around it has started. But, there's not a lot of volume shift that's changed, since that law came into effect."}]}, {"messages": [{"role": "system", "content": "Thank you Mr Kallo. That is all the time we have for questions. I will now pass it back to Kent Masters for closing remarks."}, {"role": "assistant", "content": "Okay. Thank you, and thank you all for joining us today. So it's clear we're a growth company that continues to provide added value to our markets. As a global leader in minerals that are critical to mobile, connected, healthy and sustainable future, we remain the partner of choice with customers and key stakeholders. Thank you."}]}, {"messages": [{"role": "system", "content": "Certainly. We will now begin our question-and-answer session. [Operator Instruction] And the first question will come from Matthew Mishan from KeyBanc. Please go ahead."}, {"role": "user", "content": "Hey, good morning, and thank you for taking the questions. Hey, Dan, could you talk -- or Mike, can you talk a little bit more about the implied operating margin assumption of kind of flat kind of year-over-year? Outside of incentive comp, is there -- what else is -- what are the other major moving pieces there?"}, {"role": "user", "content": "Yeah. The next biggest piece is labor costs have gone up across the board, as the people we hired last year are more costly. So that's definitely going to hurt us a bit. We also are going to return more to somewhat pre-COVID levels in our spending, especially around travel. And that also FX is actually going to get negative to us in the operating expense, but by the time we get to the bottom line, they'll be about neutral to us."}, {"role": "user", "content": "Okay. And then I'm having a little bit of problems modeling flat based upon some of the assumptions below the line. What are -- can you more explicitly call out the assumption for share count and for interest expense in 2024?"}, {"role": "user", "content": "Yeah. Share count will just be just over 99 million. Interest expense and other will be approximately about $10 million to $15 million headwind in total. Most of that -- as Dan alluded to in his comments, most of that interest expense headwind is going to hit us in the first half, majority is going to actually hit us in the first quarter because that's when we started seeing rates significantly rise was in the second quarter and for sure in the second half."}, {"role": "user", "content": "I'll jump back in the queue. Thank you."}, {"role": "assistant", "content": "You're welcome, Matt."}]}, {"messages": [{"role": "system", "content": "And the next question is from Dave Turkaly from JMP Securities. Please go ahead."}, {"role": "user", "content": "Hey, great. Good morning, guys, and congrats on a strong wrap to the fiscal year. I was wondering maybe if we could get some thoughts given how this quarter even played out divisionally in terms of how you get into the numbers in terms of the growth for fiscal '24. So, I'm sure Healthcare is not growing 20%, but even if we are looking at sort of ranking them, it sounds like AST, maybe some tough comps, or maybe it's Healthcare, Life Science, AST. But any color around sort of secular growth rates or what you think for those businesses to start this year?"}, {"role": "user", "content": "Yeah. Dave, so if you look at our total Company, right, so we would say that on average, most of our businesses, other than AST, grow mid- to high-single digits. AST, obviously, right around double digits, 10% grower. This year, that is the case with Healthcare potentially outpacing their normal growth. But Life Sciences would be in that same range and then Dental would be single-digit growth in total."}, {"role": "user", "content": "Got it. And then, I wanted to just ask a follow-up on free cash flow. We had a bunch of companies report, and I can -- jumping back and forth, but I think you guided to $700 million this year and I think the comp was $409 million. So, I just wanted to get your thoughts, Mike, on what exactly is happening there?"}, {"role": "user", "content": "Yeah. This year, we were under significant pressure from a free cash flow standpoint. Both our receivables increased because just the timing of the revenue -- a big bulk of our revenue was in Q4, so we are unable to collect. So that will push into FY '24. Our inventory, as we've been talking about all year, has been high, so we've got to take that down. So we're anticipating to take that down in FY '24. And then also in FY '23, capital expenditures were higher than we anticipated originally. So the combination of all three really put pressure on FY '23 free cash flow."}, {"role": "user", "content": "As we look into '24, the big change where we're going to get a nice impact is going to be lower inventory, our ability to collect those receivables and then just growing net income in total will get us to about $700 million in total free cash flow."}, {"role": "user", "content": "Great, thank you."}, {"role": "assistant", "content": "You're welcome, Dave."}]}, {"messages": [{"role": "system", "content": "And the next question will be from Mike Matson from Needham & Company. Please go ahead."}, {"role": "user", "content": "Yeah, thanks. I wanted to ask one on the EPA requirements for ethylene oxide. The comments that you made were, I guess, kind of vague. I guess the way I would interpret them, and correct me if this is wrong, is that you're expecting some sort of changes in the final rule. I don't know if you're willing to comment on what areas you think maybe need to be changed. I know AdvaMed kind of called out the 18-month timing and some of the employee safety requirements in there. If the final rule ended up looking like the proposed rule, can you comment on whether or not you would meet those standards and whether or not there'd be incremental cost to get there if you don't?"}, {"role": "assistant", "content": "Yeah. I think there's still a lot that's got to get worked out in the final definition to the rule. And my speculation is it probably gets extended in terms of comment period at this point. I would tell you that from niche[Phonetic] perspective, we're really confident where we sit in terms of our ability to meet as written and what could possibly be modified. As it relates to FIFRA, I think we got a little more gas over that as we or no one in the industry right now are capable of meeting some of the stated exposure level standards. So, I think that's got to get sorted out and I think it will through the process."}, {"role": "user", "content": "Okay. Thank you. And then just on the dental business, so it was down in '24 -- most down in most quarters at least. You said 95% of pre-COVID levels, but I would assume if it stayed at the 95% in fiscal '24, then you should be able to get back to flat or even maybe some modest growth there. Is that a reasonable assumption?"}, {"role": "assistant", "content": "That's correct. Yeah, that -- assuming that is sustained at that level and some of the modest level of pricing adjustments we've been able to put through to that business, we believe that we can grow the revenue in a low-single digits range."}, {"role": "user", "content": "Okay, thanks. And then just in terms of the share repurchase, so you stepped in to buy back some stock in '23. You said going forward with the new authorization, you're not planning to do anything other than just offset dilution. But I guess what drove the decision to buy back stock in '23 rather than prepay debt? Was it just opportunistic? I know the stock fell on some of the ethylene oxide concerns and whatnot."}, {"role": "assistant", "content": "Yeah. It was just exactly that, Mike. It was just opportunistic based on where the share price moved down, largely on some of the EO litigation issues and things that the industry were facing. So we saw it as a good opportunity to invest in our STERIS stock."}, {"role": "user", "content": "Okay. Got it. Thank you."}, {"role": "assistant", "content": "Yeah."}]}, {"messages": [{"role": "system", "content": "And the next question is from Jacob Johnson from Stephens. Please go ahead."}, {"role": "user", "content": "Good morning. This is Mac on for Jacob. Just a couple of quick ones from me and a follow-up on the EPA question earlier. Can you comment on some of the initiatives that you already have put in place? And do you think these give you a competitive advantage as compared to some of your competitors who will have to install those in the future?"}, {"role": "assistant", "content": "Well, what I'll tell you is some of our practices. I mean we've had our employees in what I would categorize as hot zones wearing full PPE, SCBAs, self-contained breathing apparatus, for over 10 years in our facilities. So, I think we're already ahead of most of the industry in terms of safeguarding our employees. We've installed on all of our outbound warehouses abatement systems to scrub any fugitive emissions that's coming off product post-aeration process. Those are completely installed and operational in the U.S. facilities."}, {"role": "assistant", "content": "A number of other things in terms of just basic engineering design around our facilities where we have complete capture of everything in the chamber rooms as well as sealed drum storage rooms which are also fully abated in the event of a leak. And a number of different engineering controls that we have in place as it relates to the design of the facility."}, {"role": "assistant", "content": "In addition to that, we've been working hard with our customers and also pushing industry very hard to reduce the initial concentrations that are used in cycles. And we've been very effective in moving many of the higher concentration cycles that are touching 650 milligrams, 700 milligrams per liter down closer to 300 milligrams per liter. So much lower input in which makes handling product, especially post processing, much safer."}, {"role": "user", "content": "Thanks for the color. And then also, can you touch a little bit on your capital allocation priorities in terms of the buyback that you previously announced and also M&A for the year?"}, {"role": "assistant", "content": "Yeah. So our capital allocation priorities have been the same for more than a decade, increase dividends off the top, invest in ourselves, so continue to spend money from a capital expenditure standpoint, especially growing and investing in our AST expansions then M&A and then finally repurchases typically just to offset dilution. So, those four categories have remained. The other one that we, from time-to-time, will put it in there is focus on paying down debt, as we're almost two years into the Cantel acquisition that is being little bit less focused on as our debt levels now are in what we'll call very reasonable ranges at 2.3 times levered."}, {"role": "assistant", "content": "And as Mike -- as you heard Mike asked the question earlier about the opportunistic share repurchases, that does not happen very often as a company, but again, we felt that it was advantageous to us to do some of that opportunistically in the third and fourth quarter of this fiscal year."}, {"role": "user", "content": "Thanks for the color."}]}, {"messages": [{"role": "system", "content": "And our next question is from Michael Polark from Wolfe Research. Please go ahead."}, {"role": "user", "content": "Hey, good morning. Thank you for taking the questions. Two-parter on AST. I want to understand the margin trend there, kind of pushes and pulls as kind of a steady quite lower throughout the last fiscal. Where does it bottom? And what's a good input for segment margin in fiscal '24?"}, {"role": "user", "content": "And then related in AST, you've been very clear about destock in bioprocess. I'm wondering what your feel for potentially a similar dynamic as in kind of your core medical device customer base. The world is kind of emerging from COVID. Procedures seem to be back. A lot of the interventional medical device companies are holding way more inventory than they used to. Is there any kind of risk of a little bit of a destock cycle there for you or not? How are you thinking about that in fiscal '24?"}, {"role": "assistant", "content": "Yeah. I'll address the latter first in terms of recovery in med-tech. I don't think so. Really what we're seeing in terms of our med-tech customers is they're really rebuilding the inventories that they have and they're still in many cases hand them out in terms of being able to deliver for hospitals right now. So, it's not as if they are flushed with inventory across the system."}, {"role": "assistant", "content": "And so, I would assume we'll see some continuing build of inventory of anticipation of surgeries continuing at the rate that they're at as well as there's a lot of pent-up demand that's got to be worked off over the next coming months or a year or so. So, I don't think there's a lot of risk in terms of any type of inventory pull-back from a med-tech perspective. I think it's pretty robust."}, {"role": "assistant", "content": "In terms of the other question around the AST margins, I mean the short answer is there were inflationary pressures and particularly on energy and labor. And the labors baked in is what I would say and we can leverage that over scale as we get volume coming through. It tends to help a bit. Energy, my crystal ball doesn't work when it comes to electricity pricing in Europe anymore. So, it is what it is. It's high right now. It was high this winter. In theory, it should come down some over the coming months or year, but your guess is as good as mine on that."}, {"role": "user", "content": "Helpful. And then maybe just a request for a feel for hospital spending patterns on capital equipment, kind of, you made comments about good mix of new large projects in your new orders. What's your crystal ball say about how new spend patterns go in fiscal '24?"}, {"role": "assistant", "content": "It's interesting. And we're pleasantly surprised every month and we see the orders coming in strongly -- very strong as we did in Q4, and our backlogs sitting at $500 million in Healthcare, which is either at or near all-time record highs basically. You got to think of it this way, most of what we sell in terms of capital is necessary to facilitate volume of procedures and recovery of volume of procedures through the hospital. I mean the sterile processing department equipment we sell in terms of washers and sterilizers and sinks and everything like that, you got to think of it more like a utility and it's not a nice to have, it's something you need to have in order to accomplish the growth for patients in terms of procedure volumes."}, {"role": "assistant", "content": "So, we've been somewhat immune to the financial lows of the healthcare sector, I would say, in terms of hospital spending. And I believe that will continue in terms of the long term, I think, over time. And I don't know if that's six months or a year from now. You're probably going to see some de-escalation in terms of just infrastructure build out that we're seeing right now. And one would also think that as things tighten a bit in terms of capital, generally it has the impact of slowing down the replacement business a bit, which we tend to pick up then on the service side. But as of right now, we seem to be doing pretty well in terms of order intake."}, {"role": "user", "content": "I appreciate that. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] The next question is from Jason Bednar from Piper Sandler. Please go ahead."}, {"role": "user", "content": "Hey, good morning, guys. Thanks for taking the questions here. A bit of a related follow-up there on Polark's question asking on segment margin, but I'll focus in the place for margins have actually gone the opposite direction. Healthcare margins improved sequentially now, I think, five quarters in a row. Can you talk about your comfort level on the year-end or full-year margin levels in that segment as we look forward to fiscal '24 again in the context of your overall guide as well?"}, {"role": "user", "content": "Yeah. We should continue to do fairly well and increase margins in Healthcare. We anticipate that we will continue to get price within Healthcare. We also anticipate that some of the pressures surrounding inflation, material and labor costs ease. We should also be able to get some productivity increases in our Healthcare business just because we had to touch the products so many times last year with parts availability that should help us improve. So, I would anticipate that the margin in Healthcare gets slightly better, EBIT margins in Healthcare get slightly better in FY '24 for those reasons."}, {"role": "user", "content": "Okay. Thanks, Mike. That's helpful. And then maybe another follow-up, but bigger picture on dental. You've had that asset now for a couple of years. I know you've gotten this question in the past, but maybe just to revisit it. Can you update us on your thoughts regarding that category, mostly your commitment to that end market? On one hand, it's a good category for roll ups, it's fragmented and there are a lot of private companies out there that aren't run in a super-efficient way. So that's an opportunity, but it's also a drag on growth and margins for the overall franchise. And it's tough to forecast, I think, strong mid-single-digit growth for that market even longer term. So maybe disagree there, but again just love your updated view on as we head into year three STERIS commitment and participate in the dental market."}, {"role": "assistant", "content": "Yeah. We remain committed. We need to see it through in terms of recovery. We didn't anticipate last year the -- a sliding into an economic recession that was going to thwart the progress made in terms of procedure recovery that we're seeing in dental and now it's become an economic issue. So, I think we need to see that play out over this fiscal year and see how the business performs."}, {"role": "assistant", "content": "There's still -- I would reiterate there's still a lot of opportunity for operational improvement, delivery improvement in the business and that's something that STERIS' long history as good operators of being able to really drive improvements with the business. It would be nice to see the volume resume. It makes all those good things that we're doing much more visible in terms of bottom line performance when the volume comes back."}, {"role": "user", "content": "All right. Helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question is a follow-up from Michael Polark from Wolfe Research. Please go ahead."}, {"role": "user", "content": "Thank you for taking the follow-up. I was just looking at a lot of great data disclosed in terms of the reporting. I could explain sequentially the Healthcare consumables line, notable step-up there, clearly levered to procedure and throughput. The Healthcare services line stepped up notably sequentially and I struggle a little bit kind of tying that in end-market development. So kind of what happened there Q-over-Q, it was double-digit increase?"}, {"role": "user", "content": "Yeah. Mike, a big portion of that was we actually had parts availability. So, we're actually able to get parts into our customers' hands and fixed some of their product. So that is a main driver of that, plus we shipped some capital equipment obviously in third quarter. We were able to install that in the fourth quarter. So we generated revenue there. Those are the two main drivers of that business for Q4 improvement."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "You're welcome."}]}, {"messages": [{"role": "system", "content": "And ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Julie Winter for any closing remarks."}, {"role": "user", "content": "Thanks everybody for taking the time to join us, and we look forward to seeing many of you on the road this summer."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]"}, {"role": "assistant", "content": "Our first question this morning is from Shar at Guggenheim."}, {"role": "assistant", "content": "Good morning, Shar."}, {"role": "assistant", "content": "Morning, Joe."}, {"role": "assistant", "content": "Good morning, Leumi, good morning."}, {"role": "assistant", "content": "So, Joe, I wanted to maybe start with a little bit more color, if you could provide on the sale process and maybe just additional thoughts beyond sort of the prepared remarks. I mean, are we still looking at three buyers that you can offload all the projects? And then just maybe how you're feeling about pricing? And Joe, the reason why I asked the pricing question is some investors are pitching that you'll sell the projects at substantial discount to book value. So maybe just give us any color on how you've seen valuations evolve even if it's generally."}, {"role": "assistant", "content": "Yes. Well, thanks, Shar, for joining us this morning. We're very grateful. The process, as I have talked about in the past, when you don't own 100% of an asset, things take a little longer to transact. I will tell you that this is very -- our transaction will involve two parties. It is very far along in the process, and that's why we can tell you with a high degree of confidence that you will have an answer or you'll have an announcement in the second quarter."}, {"role": "assistant", "content": "I will tell you that certainly, the lease areas are highly coveted. Lease areas, I think we saw what has happened in the marketplace. So that I don't think has any impact, obviously. On the project side, these are very mature projects. These are not just concepts on paper. These are projects that are very mature and in the process. So for that, I think we'll recognize good value for those projects. Obviously, that's about the extent of what I can share with you. But I will tell you that we've been pleased with the process. We're pleased with what we're seeing. We're pleased with the results, and I think that at the end of the day, it will be a very good outcome for Eversource and Eversource's shareholders."}, {"role": "assistant", "content": "Okay. Perfect. And then lastly, Joe, there's obviously been a good deal of attention in the investment community on the backdrop in Connecticut and the prospects really for lawmakers to tighten sort of the regulatory guardrails around things like settlements with SB 7. I guess how do you see that process evolving as the session enters its final innings to you and other utilities? Do you even have a seat at the table in those conversations? Just some aspects of this data become somewhat very adversarial. So I'd love to maybe get some thoughts there."}, {"role": "assistant", "content": "Yes. Thank you. And a valid question. I mean, when you look at the Aquarion auto -- obviously, very disappointing. But I'll tell you, on the legislative front, we have a seat at the table. In terms of the governor, I do speak with him regularly, I spoke with them last week. We talked about a host of issues. But one of the pieces that he highlights, and I think it's important for this community to understand is, number one, he insists that we have a seat at the table, and he wants us to participate and he basically shared that with folks that who's better equipped around performance-based ratemaking than the utilities."}, {"role": "assistant", "content": "We do very well in that environment. I mean, we do incredibly well here in Massachusetts. We have a PBR model in place. We've had it in place for some time. And I think when you look at our track record, our performance, that just -- it speaks for itself how well we do. With regard to the legislative front, great relations with the legislature. We are with them. We talk with them. This happens every year. I grew up in this part of the business."}, {"role": "assistant", "content": "And it's -- unfortunately, it's like making sausage. It's a very challenging process and sometimes it's not too attractive. But at the end of the day, you can be assured that we do have a seat at the table and that we are communicating. I think the last piece that you should take away is that event that the governor spoke about around performance-based rates he highlighted by name, both myself as well as Pedro about our ability to invest dollars."}, {"role": "assistant", "content": "And we have choices where we can invest all this. And if it's not attractive, then obviously, we've got other places we can go. So I think that he was stressing that point to kind of get the message across to regulators that it's important that we have a seat at the table that they collaborate with us. And that, in fact, it's a fair and equitable place to do business. So I am confident, as I have been in the past, that we will get to a resolution that is workable and good for all, Shar."}, {"role": "assistant", "content": "Got it. Perfect. And then, Jeff, congrats on Phase 2. You're going to be really missed and drinks -- unlimited drinks on Mr. Nolan and I. I appreciate it guys."}, {"role": "assistant", "content": "Every IR professional in the country is cheering because they might have a shot at the number one slot this year. So that is what's going on there."}, {"role": "assistant", "content": "There you go. Congrats, guys."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Thank you, Shar."}, {"role": "assistant", "content": "Thanks."}, {"role": "assistant", "content": "Our next question comes from the line of Durgesh at Evercore."}]}, {"messages": [{"role": "system", "content": "I think they dropped their question."}, {"role": "assistant", "content": "Our next question comes from the line of Paul Patterson."}, {"role": "assistant", "content": "Good morning, Paul."}, {"role": "assistant", "content": "All right. Hey Paul."}, {"role": "assistant", "content": "Okay. Good. You can hear me. Okay. So just to follow up on the -- first of all, congratulations, Jeff, again. But just to follow up on a couple of things. With the -- you mentioned that you've got PVR, you've got some experience with PVR and what have you. But one of the things that I think that you guys were focusing on as well as UI was regarding this capex, opex sort of U.K. portion of the order when it was a draft order and it stayed in the order. I was just wondering how you guys see that? And also, you mentioned the press conference that happened afterwards. How should we think about -- I mean, how do you think about, I guess, this element of the performance-based ratemaking order?"}, {"role": "assistant", "content": "Paul, it's John. So first of all, I think the order that came out was really more of a framework. The details are still out. We'll be picking this up in April of next year to finalize and work on the specifics. So I think it's too early to make the determination. Clearly, the U.K. model is significant difference from how we've been operating through the traditional cost of service. And then -- and if we were to change to something that drastic, it would have significant ramifications financially and otherwise to the utilities in the country. So I think it's too early for us to indicate one way or the other as to where things ultimately will shape out."}, {"role": "assistant", "content": "Okay. So we'll stay tuned, I guess. And then with respect to the May 15th Aquarion hearing, what should we think about as being -- what do you guys expect to happen at that hearing, I guess?"}, {"role": "assistant", "content": "I mean our expectation is that the stay would be a permanent stay from where it currently stands today, we feel very we -- based on our assessment, we feel very comfortable with our position in the commentary that we've made in our filing, and we will make it on filing on Monday, briefs to do on Monday. So more to come on that front. But hopefully, that permanent, it will move from a temporary to a permanent stay until we see the appeal process work its way through."}, {"role": "assistant", "content": "Okay. Great. And then in the prepared remarks on the offshore wind, just sort of wondering with respect to the potential for retaining some ownership of the JV. How should we think about that? Is that a strong possibility or..."}, {"role": "assistant", "content": "No, it's not. It's not a strong possibility. We see a path for a clean exit from this. So that's not -- that's definitely not the case."}, {"role": "assistant", "content": "Okay. Great. And once again, congratulations, Jeff."}, {"role": "assistant", "content": "Thank you, Paul."}, {"role": "assistant", "content": "Thank you, Paul."}, {"role": "assistant", "content": "Our next question comes from the line of Steven Fleishman of Wolfe Research."}, {"role": "assistant", "content": "Good morning, Steve."}, {"role": "assistant", "content": "Yeah, hey good morning. Yes. I am really happy I picked this call of all the other ones at this time to wish Jeff congratulations, and I think I may be one of the few people that remembers IR before Jeff at Northeast Utilities, but -- yes. Congrats."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "So just -- just a follow-up on, I guess, the question on -- a couple of questions on the offshore wind sale. So in the past, you've talked about two separate transactions for the leases and for the contracts. And wanted to clarify if that's still the case? Do you expect them to be announced at different times? And do you expect each of those to be announced during the second quarter?"}, {"role": "assistant", "content": "Yes, yes. So thanks, Steve. Couple of things on this, we're talking about two announcements to buyers in the second quarter, and there might be a space of a short period of time between announcements, but both in the second quarter, yes."}, {"role": "assistant", "content": "Okay. Great. And just on -- you mentioned, Joe, the clean exit, which is great. I just wanted to ask if there's any chance there need to be any like contingencies or stuff related to the projects that you need to commit to as part of this other than just supporting them locally, just any financial contingencies?"}, {"role": "assistant", "content": "Steve, this is John. Yes, we're going through the negotiations right now. So it's a little premature for us to indicate ultimately where that will shake out."}, {"role": "assistant", "content": "Okay. And just on the -- sorry, on the Connecticut, it -- so you're basically expecting that to kind of argue this through the courts and basically address it that way? Or -- you sounded like almost you think it could be like settled at some point. So I just wanted to kind of clarify that."}, {"role": "assistant", "content": "Yes. I mean, obviously, I think you know our track record around settlement. And if there's an opportunity there, we certainly will work with any parties around settlement. We -- the Aquarian asset, we've managed very, very well. We have very low rates. We've been making significant investments, as you know, that I think is one of the best run water companies."}, {"role": "assistant", "content": "So we do see an opportunity. We think we have allies in the state down there to kind of work through that. But as you know, it takes two to tango on the settlement space, and we need to have some willing participants. So we'll always work towards settlement. We think settlement is the way to go and -- we're optimistic that we can probably have some type of an outcome that would benefit both parties."}, {"role": "assistant", "content": "Okay, great, thank you for the update."}, {"role": "assistant", "content": "Thank you, Steve."}, {"role": "assistant", "content": "Thank you, Steve."}, {"role": "assistant", "content": "Thanks, Steve."}, {"role": "assistant", "content": "Our next question comes from Jeremy Tonet at JPMorgan."}, {"role": "assistant", "content": "Good morning Jeremy."}, {"role": "user", "content": "Hi, good morning. It's actually Rich Sundelin on for Jeremy. I wanted to touch on a higher-level topic -- Thank you. I want to touch on a high-level topic around what you're seeing on the offshore wind transmission side, just in late of the latest -- in light of the latest RFP. Any new thinking there or evolution of thought around the incremental investment opportunities over the balance of the decade?"}, {"role": "assistant", "content": "Well, I mean, I think that's -- that was one of the -- one of the points that had us make the pivot because we think there's so much opportunity in both the land aspect of it and the investment around not only the projects that we were involved in, but the projects that everybody else is involved with. We are very well positioned in this region at load centers and people want to get to those."}, {"role": "assistant", "content": "So because they want to get to them, they're going to go and spend time with us. So we see a tremendous opportunity for investment in offshore wind as it relates to our regulated business. And that's really what our focus. Our focus has been around derisking and focusing on the regulated assets. So we do see, Rich, a great opportunity, not only with Orsted, but with these other wind partners, it's already playing out right now with other wind partners that we're -- that we don't have any ownership on to build wind and transmission-related assets to help them inject clean energy into the New England and New York grid."}, {"role": "user", "content": "Got it. Thanks for the color there. And then you touched on this already around customer bills, but curious now that we're coming out of winter, how do you see the overall regional backdrop into next winter? Really thinking around the supply concerns that you highlighted into this past winter."}, {"role": "assistant", "content": "Yes. I mean, just a great question, and we've been talking about that. As you know, it was front and center for me in the company last -- last late summer, fall, and it's still on my radar, and I'm concerned about it. I'm concerned about is a fuel supply for generators. We're very interested in -- you saw what happened in PJM, where folks didn't show up."}, {"role": "assistant", "content": "We had a similar situation on a smaller scale, take place in the ISO New England market where folks didn't show up when they were expecting to show up. I think it was a shocker. The number -- the penalties they were talking about in PJM. I mean, up here, they were pretty significant. So we are focused every day on what we can do to help minimize the risk to our customers. Because although we could line up significant supply for our customers, at the end of the day, if people don't perform and the lights go out, they're going to come knocking on our door."}, {"role": "assistant", "content": "And we are -- obviously it's not our fault, but you get blamed because the lights go out. So we are focused every day in our energy supply area, in our transmission area, in our engineering area as to what we can do to facilitate solutions to fully enable this grid to operate during very challenging conditions. But in doing that, what it's going to also do is it's going to drive the price of energy down in the region, which is what our goal. We want to lower the clearing price in the region so that our customers are not getting the type of shock that they're getting, which has been devastating to them, and we know that."}, {"role": "user", "content": "Got it. Very clear. And to Jeff, congrats and all the best."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Our next question comes from Paul Zimbardo at BofA."}, {"role": "assistant", "content": "Good morning, Paul."}, {"role": "assistant", "content": "Hi, good morning. Thank you. I know it's been said many times, but sad to hear the formal news, Jeff, and a big congrats, you're one of the few IRs who I have worked with my entire career, so well deserved retirement."}, {"role": "assistant", "content": "Thank you, Paul."}, {"role": "assistant", "content": "And to dive into the actual quarter for a second, I know that you had the monetization of the clean energy investment. Was that the full investment. I know that there's typically that mark-to-market in the second quarter. So I just want to confirm if you sold the full position there?"}, {"role": "assistant", "content": "Yes, Paul, we did."}, {"role": "assistant", "content": "Okay. Great. And then thanks for all the context on Connecticut. I want to check, do you have any revised expectations on timing for any Yankee Gas rate case in the future?"}, {"role": "assistant", "content": "No, at this point, we do not. We continue to assess the timing of that rate request."}, {"role": "assistant", "content": "Okay, great, thank you all. Appreciate it."}, {"role": "assistant", "content": "Thank you, Paul."}, {"role": "assistant", "content": "Thanks, Paul."}, {"role": "assistant", "content": "Our next question comes from Ryan Levine at Citi."}, {"role": "assistant", "content": "Good morning, Ryan."}, {"role": "assistant", "content": "Good morning. Hoping to follow-up on the offshore wind process. So to the extent that you do move forward with announcing two transactions this quarter, what regulatory or other closing procedures would be needed or any sense around timing of any cash received for the company?"}, {"role": "assistant", "content": "Sure, Ryan. So it's different for the two pieces, right? So it's different for the uncommitted lease area as it is for the contracted projects. Speaking of the contracted project, that's probably one that has a bit longer time frame for regulatory approval. We -- on that one there because we just -- our subsidiary or the joint venture that holds those projects are considered a public utility company. So we would now need to obtain FERC approval, and that's probably a three month process. Other than that, it's more -- it's the traditional hot Scott Rodino. And depending on who the ultimate buyer is, we could require CFIUS approval. But once again, I think that's very -- that's weeks, not months."}, {"role": "assistant", "content": "And keep in mind that this is -- there is a process in place. It took place when we acquired the deepwater assets. So it's not unchartered waters."}, {"role": "assistant", "content": "Appreciate the color. So given that time line, curious how you're thinking about your financing plan. I know you issued some parent debt at 545 basis points year-to-date. Are you considering the convert market, given that seems to be open to a lot of utilities in this environment?"}, {"role": "assistant", "content": "Very good question. And right now, looking at the converts, we feel it's not the time and it's not right for us, just given kind of the -- where we're currently trading and kind of our valuations right now, doesn't make sense for us to do that until we have a little bit more certainty and get some announcements made. So we don't see that in the near term as being the right option for us. But we -- just given the timing, we could be in the market for another holding company debt offering."}, {"role": "assistant", "content": "Okay. I mean, you mentioned in your slide deck a May one maturity. Was there any update on what happened there?"}, {"role": "assistant", "content": "Yes. So that one -- the $750 million offering that we did in March kind of took care of that."}, {"role": "assistant", "content": "Okay. I appreciate the guard. Thank you."}, {"role": "assistant", "content": "No problem. Thanks, Ryan."}, {"role": "assistant", "content": "Our next question comes from Travis Miller at Morningstar."}, {"role": "assistant", "content": "Good morning, Travis."}, {"role": "user", "content": "I'm going to public congratulations to Jeff. If you ever mistakenly find yourself in Chicago, let me know. I owe you drinks for all the help over the years, but try to avoid the winter time here. offshore wind again. Thinking about the -- you mentioned the payment shift there, the $500 million. Thinking about the timing in terms of the close of any deal, does that payment shift save you the $500 million of cash that you had previously planned to finance or allow you more capacity to invest in other places this year? Just thinking through the timing of that -- how that affects the plan?"}, {"role": "assistant", "content": "Well, that $500 million was more towards the tail end of this year, as I mentioned in my comments. So that just gets pushed out. Obviously, it's -- we avoid further construction cost commitments this year. And then, obviously, the pricing would be adjusted accordingly by the buyer."}, {"role": "user", "content": "Okay. Okay. And then I know this isn't your project, but there's another transmission line proposal out up your way from Canada. Any thoughts on differences between, say, Northern Pass or any of the other proposals that have been made over a decade that you know of?"}, {"role": "assistant", "content": "Well, I mean we are not -- with the offtake. We're taking that power. And as we've always said, any time you inject 1,100 megawatts into the ISO or into the grid. That's good for all customers. It's clean energy that will be coming down from there. So it's a lot of the same players that are involved in that opposition. We'll leave it at that. But I will tell you that any type of injection of clean resources into our marketplace is a good day for us. It's a good day for our customers."}, {"role": "user", "content": "Sure, okay. Very good. That's all. I had, thanks so much."}, {"role": "assistant", "content": "Thanks, Travis."}, {"role": "assistant", "content": "That was the last question we have this morning. So we want to thank you all for joining us. And if you have any follow-up questions, please reach out to Investor Relations. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Toshiya Hari with Goldman Sachs. Please proceed."}, {"role": "user", "content": "Hi guys, good afternoon. Thank you so much for taking the question. I guess my first question, hoping you could talk a little bit about full year '24 revenue. Grant, you gave good color on gross margin and OpEx as well. But how are you thinking about the top line in fiscal '24? And if you can kind of provide context around or color around the three segments, that would be super helpful. And then I have a follow-up."}, {"role": "assistant", "content": "Thanks, Toshiya. I appreciate the question. This is Grant. In terms of the full year fiscal '24 guidance, based on our current view and barring any macroeconomic deterioration, we're not forecasting a significant jump in handset unit sellthrough. In fact, we actually believe smartphones to be down year-over-year, but 5G phones to be up in the 5% to 10% range. So, that underpins our overall fiscal '24 view for ACG. We do expect some growth in HPA and CSG as well, especially as the year progresses. But generally speaking, not a terribly aggressive back half of the year. That said, just walking through the quarters, margin will follow mix, as I pointed out in my prepared remarks. Although there is no change to our view of returning to 50% in the gross margin line, it's unlikely in '24. If I take it quarter-by-quarter beyond the June quarter guidance, our fiscal Q2 in September, we would expect revenue to be up approximately 50% sequentially. Again, this is driven by strong content gains and to a large seasonal ramp. Gross margin will also be up in the neighborhood of approximately 400 basis points quarteron-quarter as mix begins to favor some newer products, which are less burdened by those higher unit costs associated with underutilization."}, {"role": "assistant", "content": "In the December quarter, our fiscal Q3, we expect revenue to be approximately flat and continuing off of September. Gross margin will be down 100 to 150 basis points as utilization begins to ramp down following that large seasonal ramp and mix begins to modestly shift to some of that higher cost inventory. And finally, in the March quarter, our fiscal Q4 of calendar year 2024, we expect Android to be a higher percent of our mix, but decline less than might be historic seasonality due to a clean channel and returning to shipping to end demand. However, gross margin will be down 200 to 300 basis points quarter-on-quarter as mix reflects that higher cost inventory."}, {"role": "assistant", "content": "As I mentioned in the prepared remarks, beyond June, I gave some color around opex for the year, which would exclude Bio in the $240 million to $245 million per quarter, with some of the variability there related to product development spend and other items. Generally speaking, we have a good degree of confidence in content for our September period. And then as we clean the channel in the Android ecosystem in ACG, we feel comfortable of returning to shipping to end market demand. Tax rate is probably in that 13% to 15% range, consistent with the fiscal '23. And we believe share count will be approximately 100 million shares or less."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Gary Mobley with Wells Fargo Securities. Please proceed."}, {"role": "user", "content": "Hey guys, thanks for taking my question. Grant, thanks for that very explicit fiscal year '24 revenue guide. It's quite helpful. But I wanted to ask about something one of your competitors was talking about this evening. That is some subseasonal shipments to their largest customer, I presume Apple, their modem-only customer. I'm wondering if that factors into your guidance or is factored into your guidance, what maybe some of the undercurrents going on there, how that made impact to you from a competitive standpoint or just from a customer-specific standpoint?"}, {"role": "user", "content": "Hi. This is Bob. Gary, thanks for the question. And as you know, we don't normally talk a lot about our largest customer. I think what I can say is ACG will be down quarter-over-quarter. So we are expecting from a smartphone revenue to be down. And historically, it is a lower quarter for our largest customer. So, I don't know why -- whoever said whatever you just said. But I think we have a real good handle on the market. We talk a lot about our model and how things work. So, we feel good about what we've said for sure, no doubt."}, {"role": "user", "content": "OK. Do you mind if ask a follow-up?"}, {"role": "user", "content": "Absolutely. Go ahead, Gary."}, {"role": "user", "content": "All right. So I guess the $64,000 question is what will the new normal look like with your Android customers, once they're through draining their excess inventory? What's your best feel based on design win traction? Do you think you can achieve a new revenue high at some point in the future in your Android customer base specifically?"}, {"role": "user", "content": "Gary, thanks for the question. And as you pointed out, always forecasting the future is quite difficult. Here's what I do know. If we go back and look at where we're gaining share and what we've been talking about, the great work we've done in the Android ecosystem, whether that's Samsung and Google and already what we believe we've started to win in '24. And as you know, what we've been facing are these headwinds with not shipping up the demand and reducing the inventories that Grant went through, the 20% last quarter -- or two quarters ago, 25% last quarter that. As that comes and we continue to gain share there. I believe we can get back there or better. No doubt about it. But again, you have to forecast our largest customers done quite well in gaining share in some of their markets. So, the good news is we're positioned, and I think this is what's important. We're the only strategic supplier of the top six Android manufacturers, and we've got a great business that we're growing with our largest customer. So, when we look at it from that perspective, what we're convinced is we can continue to grow."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Vivek Arya from Bank of America. Please proceed."}, {"role": "user", "content": "Thanks for taking my question. Bob, I'm curious, what do you think is the visibility of kind of retaining this new content over the next several years? Because customers in the market have a habit of making different architecture decisions every year. So, as you start ramping this new content, how do you think you are able to sustain it over the next few years?"}, {"role": "user", "content": "Yeah, I think what's interesting, Vivek, is, I mean, over time, we've done a pretty good job of holding in the areas that we're winning nice share and growing, and as they add content in those areas, we've done well. So as we look out, we feel pretty good about things. And I even commented and Grant did as well that we believe we can continue to grow content at our largest customer, whether it be BAW-based or our discrete components that we sell there. So, we feel good about the outlook there for multiple years."}, {"role": "user", "content": "Thanks, Bob. And for my follow-up, do you think this was a competitive win, or do you think this is a new technology that customers are adding in this area? So, is this expanding the pie, or do you think this is kind of a competitive win from something they might have been using from somebody else before?"}, {"role": "user", "content": "Yeah, I think I answered this question last quarter, I believe, on a similar topic, and it was both. We're gaining content through both share gains as well as, to your point, making the pie bigger. Both."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Karl Ackerman with BNP. Please proceed."}, {"role": "user", "content": "Yes, thank you. Good afternoon, gentlemen. I guess based on your comments on channel inventory realignment for Android, why wouldn't channel inventory be aligned with sell-through by the end of the June quarter, given the further improvements that you're seeing? And as you address that question, how would you characterize the inventory balances and timing of reaching normalized inventory in your infrastructure and IoT businesses?"}, {"role": "user", "content": "Yes, this is Dave, I'll take that question. So in the Android ecosystem, you've got to remember, we ship a lot of products into a lot of different customers. So, it all depends on their program ramps, how well their phones sell through relative to their expectations. So, in some cases, you're right, we're going to be in pretty good shape by the end of the June quarter. In other cases, it will probably take a little longer, depending on the customer and their business. So -- but as Grant said, by the second half of the year, we definitely see the Android ecosystem. We should be clear of all the channel inventory and back to shipping to true customer demand. Base station is going to take a little longer. I think some of those customers built up more inventory during the tight supply conditions of last year. And so it's just going to take some of those customers longer to burn that off. So, we see that probably taking through this calendar year and into the early part of next year."}, {"role": "assistant", "content": "Hey, Carl. This is Grant. Let me jump-in there. And maybe if I take it up a level. Our view on channel inventories is incorporated in our guidance, so our 50% increase in the September quarter is predicated largely on content gains. Sequentially, we would expect the channel to begin clearing and us to begin shipping to more normalized demand later in our fiscal year. Again, it doesn't incorporate anything aggressive in terms of unit growth, this would be simply a return to what could be considered somewhat normal and that would be incorporated in our guide. So you can you can make. At least the quantification of it based on that."}, {"role": "user", "content": "Clear. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Edward Snyder, Charter Equity. Please proceed."}, {"role": "user", "content": "Thanks. You guys seem very confident about gains in the fall. Bob you said both share gains and new content. Maybe we do a little bit further down to the share gains aspect. Is this areas that you've not before because you guys tend to focus on specific areas, and there have been some kind of back and forth in a couple of slots, or is it going to be something completely new? And then, you mentioned kind of an all-in-one, midhigh band, DRx, et cetera. Watching that -- the channel has been looking at that for some time, it's been attempted in the past but there's too constrained. It sounds like more Android guys are open to that. Question there is, all in one, it gives you more defensible position because you're one of the few companies that have actually built an all-in-one, but doesn't it also compress the total ASP or the total revenue available versus selling separate modules? Can you give us a feeling on how that tradeoff works? And then I had a follow-up, please."}, {"role": "user", "content": "Yeah, Thanks, Ed. And as you know, for our largest customer, we won't talk about any future architectures, but I'm sure once you turn down the phones, you'll see where we want. And as I said, we're very confident in our ability to continue to grow there. And Dave, do you want to take out of the work that we're doing there? Second part of his question."}, {"role": "user", "content": "Yeah, Ed, you referred to it as an all-in-one. And what we talked about on the bullet there was a solution that combines the mid-high-band plus the diversity receive. So that diversity receive, that's all new content for us. We don't traditionally service that part of the phone. But in general, we're supporting our customers, I think, with a very high performance, small size is what they're looking for. So that's creating a lot of value as well. So we don't see it as an ASP issue. It's a very high-performance small sized solution that's going to drive."}, {"role": "user", "content": "Great. And then, if I could, you took another charge on the silicon supply agreement. I understand things are slow here. On my calculations, you probably have what you've got maybe $60 million to $70 million left on that. Any feelings about how that will play out? I mean, you used your deposit to offset the cash cost this quarter. Will that continue if you're under-purchasing from that supplier? I'm just trying to get a feel for how that plays out the next several quarters."}, {"role": "assistant", "content": "Sure, Ed. This is Grant. I'll take the question. Quarter-on-quarter at a high level, our revenue outlook for fiscal '24 hasn't changed. If anything, it's actually improved. What has changed would be our current forecast of mix over the out years in that contract, right? As you understand, wafers aren't fungible, once they've been fabricated and our demand profile is complex. The supply agreement covers multiple products, technologies, customers across multiple years. So, there's a significant mix impact. Furthermore, we can't order wafers for products that haven't been defined yet. So there's a timing element as well. But since we have to place those well in advance, we have to make sure we manage our inventory accordingly. And we're comfortable with our current inventory based on forecasted demand. So, we're applying our prepaid deposit, as you mentioned, to the wafers that we don't believe we'd ultimately need. And we know there'd be continued variability in the mix over the remaining life of the agreement. It could be better, it could be worse. But this is something we analyze each quarter and we're continuing to work with the supplier in that case to stay aligned."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Matt Ramsay with Cowen and Company. Please proceed."}, {"role": "user", "content": "Yes, thank you very much. Good afternoon guys, thanks for taking my question. I obviously really appreciative of all the additional fiscal '24 detail and guidance color, and I know there's content things that are happening. But I guess I just want to think about philosophically right now, giving all that additional detail and guidance on a per quarter basis all the way through the fiscal year. I mean, we -- a lot of us are listening to MediaTek commentary out of Asia. Just got off the Qualcomm call listening to their comments, where, certainly, it seems like a lot more uncertainty in the handset market all the way around at your largest customer in terms of volumes and in terms of the market recovery in China. So I guess the question I have is really just about the choice to give all that granular detail right now through the next four quarters and the level of confidence sort of underpinning those estimates, just given all that's going on in the macro despite the content gains you have. Thanks."}, {"role": "assistant", "content": "Yes, sure, Matt. This is Grant. Let me take the question. First off, we usually give some color around the forward fiscal year as we start it. So it's something that we do as a matter of practice. I think it's extremely helpful, in this case, given the volatility in the market. So I hope that it's helpful for you as you're putting your models together. In terms of the quarter-by-quarter guidance, it's so specific to the margin profile given the mix of products and the inventory balances we're carrying, that I wanted to make sure that we were upfront and helping people understand the margin is going to follow that mix and to a degree the utilization associated with those customer ramps. So, it's important to understand that it will vary on a quarter-by-quarter basis. So, I wanted to make sure that we gave as much color as we could there. Underpinning our overall view, again, is nothing overly aggressive from a recovery or a step function jump in handset unit sales. So, I don't want to be overly conservative, but there's nothing aggressive there. As we've said, we're really looking to just clear the channel inventory. We've been working aggressively to do so. And I think we're making a lot of progress there. As we return to normal in the channel later in our fiscal year, we should see some incremental improvement just simply being able to shift to what would be considered end market demand."}, {"role": "user", "content": "Thank you for all the detail there. As my follow-up, it's great to see the inventory in Android coming down. I think you guys mentioned 20% reduction last quarter and then another 25% reduction now. So maybe just could you level set us on an absolute dollar terms or maybe a unit terms of where you see the inventory that needs to still be worked through in the Android community or how much of a drag is it still for another couple of quarters? If there's any kind of quantification there, that would be helpful as we think about maybe modeling beyond the inventory burn over the next couple of quarters? Thanks."}, {"role": "user", "content": "So, Matt, I'll make a couple of comments and then turn it over to Dave. But we really don't want to get into giving dollars and units and all that because it moves around based on future demand. I think what we can say is that we're going to continue to reduce the channel inventory. So, we have a ways to go. And what we said was we'll reduce it this quarter and probably continue to reduce in September. It's probably going to take till December on the overall channel inventories. And I think we were one of the first saying, hey, we were going to do this, to your point. And I can't speak for the others that you're listening to, but we started a throttle back on this a long time ago and others are just seeing it. I also think our lead times are much shorter than theirs, which is why we saw this before they did and saw now coming back differently. Coming back in a sense, not the market's coming back, that we've made significant progress on reducing the inventories in the channel. So, the headwinds are subsiding and slight tailwinds are going to be behind us as we start shipping into the end demand, even though it's significantly lower than what we saw a year ago. So, I think I captured that. Dave, if you want to add any color to that, feel free."}, {"role": "user", "content": "No, I think they're all good comments, Bob. And we did see that the Android sales, we think that bottomed in December and our sales into China bottomed in March. And so, as Bob said, we've still got some work to do to clear that inventory in the next couple of quarters, but we do see that improving already. Bookings are up. Customer demand is coming back. And so, it's only a matter time at this point."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question comes from Ambrish Srivastava with BMO Capital. Please proceed."}, {"role": "user", "content": "Hi, I actually had -- Matt asked a good question, just simply along those lines. On the gross margin side, Grant, is that largely a factor of utilization? Could you please quantify for us because -- and it's not under your watch, but gross margin performance has been pretty volatile. So, just help us understand, is utilization at its lowest ever or in the recent past? And so, is that the biggest driving factor that gives you the confidence on the gross margin side?"}, {"role": "assistant", "content": "Sure, Ambrish. This is Grant. I'll take the question. Yes, by far, in the Pareto, underutilization is the largest item. I think last quarter, we quoted over 900 basis points, and it's -- in this Q4 period just ended, it was approximately 1,000 basis points. So very consistent headwind there from an underutilization standpoint, again, the largest factor. That underutilization plays into higher unit costs that we're carrying for the products that we have in inventory. As those work their way through the P&L, be it COGS, you're going to see that continued pressure from underutilization going forward for some period of time, which was the comments we made last quarter as we began to talk to fiscal '24 and reinforced by my guidance today. So, underutilization, to your point, is by far the largest item. The next item, which I've commented again on before is the headwind associated with inflation. We're seeing in the neighborhood of 80 basis points, maybe 100 basis points there. So, a distant second to underutilization."}, {"role": "user", "content": "Okay. Super helpful. And we all appreciate the details. Just real quick on the assumptions for the plus 50% Q-over-Q growth. Is that largely inventory normalizing -- because you pointed out that demand continues to be uncertain. Is that largely driven by some sense of normalization on the Android side and then the second factor being the content gains at your large customers? Is that the right way to think about it?"}, {"role": "assistant", "content": "I will turn that around. Very little expectation of the channel clearing in time for the September quarter, very much dependent on content gains and a large seasonal ramp."}]}, {"messages": [{"role": "system", "content": "The next question comes from Ruben Roy with Stifel. Please proceed."}, {"role": "user", "content": "Thanks for taking my question. Grant, I wanted to just talk a little bit about HPA and CSG in terms of how you're seeing the rest of the year play out. You mentioned that you're not very aggressive, but you do think there's going to be some growth progressing through the year. So, I wonder if you could talk a little bit about the pricing environment in those markets. There's been a lot of discussion around pricing, when things were tight last year and how you're thinking about that as we flow through this year? And then also if you could just comment on where we are in inventory and when you think that normalizes when we get back to sort of your longer term kind of growth targets for those two businesses, that would be great. Thanks."}, {"role": "assistant", "content": "Thanks for the question. I'll take the first part. I'll let Dave comment on pricing. In terms of our HPA and CSG businesses, we would expect to see strength in defense and power devices within our HPA business that will grow over the course of the year. And then in our CSG business, we'll see growth in Wi-Fi business and then the other connectivity elements, including UWB. So a strong sense and confidence on those businesses given where they're standing today and the growth trajectory over the year. Dave, if you don't mind comment on pricing."}, {"role": "user", "content": "Yeah, I mean certainly, the pricing environment that you referred to a year or two ago is a little different now, but we don't see anything out of normal from what we see in the market. And we're pretty excited about in 5G entry. I think Bob mentioned that only 40% of Android phones last year had converted to 5G. So, we still got a long way to go there. We see that growing at double digits for the next several years. And that's all new content for us because we really haven't participated in the 4G entry space for many years. So, as customers start to migrate more and more of their portfolio to 5G, that's all new opportunity for us. So, we're pretty excited about that growth opportunity as well."}, {"role": "assistant", "content": "Ruben, maybe I'll give you just a little bit more color here on the segment revenues in Q4, and then I'll compare it to a year ago, just for reference. HPA in Q4 was $133 million in revenue, CSG was $82 million in revenue and ACG was $418 million. If you look back one year at the March quarter in our fiscal '22, HPA was $211 million, CSG was $179 million and ACG was $777 million. So as we get back to those levels of growth we would expect over time, we should see some forward progress throughout the fiscal '24 year."}, {"role": "user", "content": "That's great. Thanks for that perspective, Grant. I appreciate the breakout for Q4 before the K came out. If I could, just really quickly, Bob, on -- I guess, following up to Ed's question on ASP. With all the content kind of moving up, to kind of the BAW filter content in one of your placements, is $5 to $7 still the right way to think about kind of the ASPs in a typical 5G handset or do you think at some point we start to push that higher with the value being added?"}, {"role": "user", "content": "Yes, I think your number is probably on the low side. If we look at the average smartphone, it's much higher than that. But we see that pretty stable over time. I mean, of course, there's going to be ASP erosion, but the conversion from 4G to 5G is going to be a big driver to offset that. And there's also new content. Wi-Fi 7 is going to add new content. We talked about our BAW filters there, but also as you look backwards in time, in a lot of cases, Wi-Fi 5 and prior, there wasn't even a FEM involved. And so Wi-Fi 6 and now Wi-Fi 7, there's opportunities there for us with our FEMs and our Wi-Fi portfolio, and we're well represented across all the reference designs there. And then even in 5G, there continues to be new capabilities, new requirements coming in 5G advanced. And that's going to increase complexity, increasing the performance requirements. And in a lot of cases, there's new content opportunities there as well. So, all that's going to be easily enough to offset any ASP erosion that we see."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Srini Pajjuri with Raymond James. Please proceed."}, {"role": "user", "content": "Yeah, thank you, Bob, just a question on China. I think you're guiding for sequential growth in second quarter, June quarter. So, I'm just curious, it's slightly more optimistic than what we heard from some of your peers. Is this driven by the smartphone side, or is it more non-smartphone business that you're seeing, a little bit of a pickup there? In general, if you can talk about what you're seeing in China because there's been a lot of expectation? I think we're still kind of not seeing a whole lot of pickup since the reopening. So, any comments there, I think, would be helpful."}, {"role": "user", "content": "100% agree with your last comment. We're not seeing any pickup either. What we've been making clear now for the second quarter now, we continue to reduce the channel inventories. So, as you do that, we've reduced the inventory. Customers do need to order some parts. So, all we're saying is in our revenue, we're going to see an uptick. That has nothing to do with end demand. It means we're signaling we're heading towards the bottom of cleaning up the channel. I think Dave just mentioned that our bookings were up strong. In fact, we had the largest bookings in China for almost two years now. So all we're showing is the momentum is changing, not in the end market, not in the end market. We don't disagree with anything that you guys have heard from others. We've done a very good job over the last two quarters of significantly reducing the channel inventory. So all we're saying is we're starting to see that bottom. And as I mentioned earlier, the headwinds are subsiding and the tailwinds are starting to come. But that's not an end market comment. That's a comment about our revenue."}, {"role": "user", "content": "Got it. And thank you for that clarification. And then, Grant, on the gross margin, I know a lot of questions have been asked about utilization. If I take your, I guess, guidance, it looks like you're going to exit the year in low-40s. So I'm just trying to bridge the gap between that and your long-term model. So, is it primarily utilization, or are there any other factors that are going to, I guess, help you get to that 50% plus levels?"}, {"role": "assistant", "content": "Sure. It's really the two factors, right? There's both utilization and mix. So, as we're selling newer products that didn't run through the factories when they were underutilized, obviously, they carry better unit costs, and you see that in gross margin in the September quarter. In the December and March quarters, you start to see more sell-through of products that we have already on the shelf and that incorporates higher unit cost due to prior underutilization. So it's a bit of mix and utilization."}, {"role": "user", "content": "Okay. Is there any revenue level, Grant, that you think you need to get to before we see a 5 handle on the gross margin side?"}, {"role": "assistant", "content": "I wouldn't say that it's a revenue. Again, it goes really back to mix. It depends which products we're selling through and what kind of contents are in those products. So it's not an absolute revenue level, but again, really related to mix. Sorry, just to follow up on that. I do feel confident in the path back to 50%. As I pointed out earlier, in the Pareto of gross margin, it's dominated by underutilization. So really, in terms of the path back, it's just a question of filling up the factories in order to get there."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question comes from Atif Malik with Citi. Please proceed."}, {"role": "user", "content": "Hi, thank you for taking my question. Grant, I have two questions. How do we look at kind of the strategic exposure to your largest customer? You said fiscal '23, Apple was 37%, Samsung 12%. It sounds like based on the content gains this year, you will grow those percentages, both these customers. And historically, Apple in terms of profitability has not been kind of the best exposure name. So how are you balancing content growth with profitability?"}, {"role": "assistant", "content": "Sure. Well, as Bob pointed out, high degree of confidence in our content there. We're fully supporting all of our customers, that one of course, as well. As we look forward, we've never guided to any particular customer as a percent of revenue. So, I'd hesitate to do that now. But as we mentioned, we do feel good about our positioning there. In terms of managing profitability going forward, as I pointed out in my prepared remarks, we are heavily investing in multiyear opportunities at multiple customers. And those R&D dollars are spent today for revenue in the out years. But we feel like we're positioned to win. We have the technology in place to do so. And we're confident in our development and the investments we're making."}, {"role": "user", "content": "I understand. And then on the power devices, silicon carbide, and I understand you're growing from a small base and the multiple million dollar order on inverter side. How strategic is this business to Qorvo? How are you investing your R&D dollars towards this business? And could this be a 10% type business maybe in a couple of years?"}, {"role": "assistant", "content": "Yeah, we think it's a very strategic investment for Qorvo, right? It's similar to a lot of the other compound work we do. We have a differentiated solution with our JFET technology. We have a lot of customer demand. And in terms of the investment there, I think it's well placed. We do expect to grow significantly. And as you'll see in the 10- K, we will be paying a contingent payment to the shareholders of United Silicon Carbide, which reflects a lot of success in that business that we've seen since we've taken it over."}]}, {"messages": [{"role": "system", "content": "The next question comes from Harlan Sur with JPMorgan. Please proceed."}, {"role": "user", "content": "Hi, good afternoon, thanks for taking my question. You guys are set to ramp into new smartphone models across your customers in the second half of this year. I appreciate the new and higher content gains. How are the pricing trends on like-for-like components on these new model ramps either versus prior generation or on a year-over-year basis?"}, {"role": "user", "content": "Yeah. I don't think we can comment on a like-for-like. I mean, every generation, there's always new challenges to solve. And so, we're just excited about the content gains that we have. As Bob mentioned, in some cases, that's new content, in some cases, it's share gain. And that's probably true as you look across the customer base, similar story plays out."}, {"role": "user", "content": "Okay, perfect. I believe it's spread across both, your HPA and Connectivity segments, but wanted to get your views on the broadband access markets, cable, fiber-to-thehome. On the infrastructure side, where are we in the DOCSIS 3.1 upgrade cycle? Seeing lots of activity on DOCSIS 4.0. On the gateway side, hearing Wi-Fi 7 home gateways may be starting next year. So, the team has multiple tailwinds here. What is the team's sense on timing? And then more near term, like what's the state of the access market's demand wise? And are you guys also burning through excess inventories here?"}, {"role": "user", "content": "Yeah, I think the timing of what you said, I think that's pretty consistent with what we're seeing, and we do see a lot of new design activity in the newer standards, and we're very well positioned there with our technology. And to your point, we do see some inventory challenges there as well that we're working through. So, we think that's relatively near term, but there will be a little bit of challenge there to get through in that business."}]}, {"messages": [{"role": "system", "content": "Thank you. At this time, I would like to turn the call-back over to management for closing comments."}, {"role": "user", "content": "We want to thank everyone for joining us today. We appreciate your time. We look forward to meeting with you at upcoming investor conferences. I hope you have a good night. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you, Mr. Durian. [Operator Instructions] Your first question comes from Dariusz Lozny with Bank of America. Please go ahead."}, {"role": "assistant", "content": "Hey. Good morning and thank you for taking my question. Just wanted to maybe pick up on that last comment that Robert was making about the advanced ratemaking process in Iowa. I noticed that the Duane Arnold order included no ROE incentive, which had been included in projects in the past. Just wondering with just kind of given where you guys are in the energy transition in Iowa, Obviously, you've got the blueprint out there. Can you maybe comment on expectations for future ROE incentives on future projects that you'll be proposing?"}, {"role": "user", "content": "Yes. Certainly. Thanks for the question. John here, and Robert wants to add anything, feel free to do so, Robert. Feel very confident that certainly, the projects we put forward, we feel that they met the standard for driving generation and investment in Iowa providing economic development benefits a bit disappointed. We didn't receive that fixed ROE approval, but feel very confident in that process going forward in the RPU. And quite frankly, pleased to be at this point in the process, and we look forward to working with the IUB and the new members on this for future projects."}, {"role": "assistant", "content": "Okay. Great. Excellent. One more, if I could. And again, this is probably more a little bit high level. Can you comment at all on the opportunity set that you see for repowering any of your existing wind assets in the portfolio?"}, {"role": "user", "content": "Yes. Certainly, we have wind facilities that we placed in service, think of it as maybe a decade or so ago that we feel that those are in position now for a potential repower either partial or full. So we've been evaluating that, and we've signaled before that certainly on our look forward possible investments. So they are certainly in position for economic benefit for customers to do that repower. So that's on our ongoing study, and we think we have some great potential there."}, {"role": "assistant", "content": "And just to confirm, John, nothing in the existing plan as far as capital for repowering?"}, {"role": "user", "content": "Correct."}, {"role": "assistant", "content": "Okay. Excellent. Thank you very much. I'll pass it along here."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] There are no further questions at this time. Ms. Gille, back over to you."}, {"role": "user", "content": "This concludes Alliant Energy's first quarter earnings call. Thank you for your continued support of Alliant Energy, and feel free to contact me with any follow-up questions."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question is from Michael Goldsmith with UBS. Please proceed with your question."}, {"role": "user", "content": "Good morning, thanks a lot for taking my question. My first question is on the sustainability of the leasing demand. What have you seen -- have you seen any change in the leasing volumes post Silicon Valley Bank and some of the disruption that was experienced in March? And just has that sustained in April? And if you have seen anyone express any sort of resistance or slowdown in leasing, what are the reasons they're talking about? Just trying to get a sense of the long-term sustainability of this recent trend."}, {"role": "assistant", "content": "Yes, Michael, this is Alan. I appreciate the question. We are still seeing very strong demand across many categories in all of our regions. And as we mentioned, we've got over 1 million square feet of new activity in the pipeline. And when we look back and we think about the bumpy road of the kind of bank announcements that you had mentioned in March, our March new activity actually exceeded both January and February. And then, of course, post closing of first quarter, we actually obviously have visibility to April activity as well."}, {"role": "assistant", "content": "April new activity has exceeded January, February and March independently. So I think collectively, we would tell you that we still feel really good. Again, head is not in the sand. But it's quality retailers. It's a deep pipeline. The activities are coming across the finish line, and we've got plenty that still remains in the queue as we look forward."}, {"role": "user", "content": "Got it. Thanks for that. And my follow-up question is for Mike. It seems like half of the upside to the '23 guidance and the outperformance was driven by base rent, which we kind of talked about. But then the rest was kind of driven by percentage rent and maybe some upside or near-term upside in the lease termination fees. So I guess the question here is just the sustainability of that? Or is that sort of a one-time item that should recur through the rest of the year?"}, {"role": "assistant", "content": "Hey, Michael. It's a combination of both. I mean we won't -- clearly, we had some onetime impacts to the first quarter that beat our estimates internally, and those are flowing through to full year results. But there is a little bit of tailwind remaining in our guide. We've become slightly more conservative, I would say, on the -- with the added visibility to the ongoing Bed Bath & Beyond filing. And a lot of that's been covered up by those first quarter impacts as well as our outlook for the balance of the year."}, {"role": "assistant", "content": "So we do see ourselves floating into -- floating back into our guidance range from the first quarter. There's some headwind in the top end from base rent as we lose the Bed Bath locations. Our outlook on an ongoing basis with uncollectible lease income remains, I would call, it historically average, maybe to a little bit slightly better from what we had coming into the year. And the best story that I see is tagging on to Alan's point on our leasing pipeline, the shop demand continues to be there and our -- and we're commencing rents."}, {"role": "assistant", "content": "The $32 million of ABR that's in the pipeline, we will deliver that this year. 80% of that, in fact, will come in this year. And that's just a great driving factor of the -- of our renewed outlook on same property growth."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question."}, {"role": "user", "content": "Hey, good morning. Just to kind of touch on some of those headwinds, tailwinds thinking about where we might end up at the end of the year. I think on the last call, you talked about kind of flattish occupancy through year-end potentially. But given this kind of healthy Q1 leasing maybe a little bit of an offset from the Bed Bath & Beyond bankruptcy? How are you thinking about year-end occupancy expectations at this time?"}, {"role": "assistant", "content": "Greg, still flattish. The bank -- essentially, the bankruptcy is turning out how we envisioned it would a quarter ago. So our outlook remains the same that depending on how the auction proceedings end up, we're going to be flat to slightly down potentially by year-end. But again, from a revenue perspective, -- remember that we have all -- we have this tailwind of delivering that occupancy that we have already contracted that -- and that shop space demand that will come through, all of which is the word I would use is overwhelming what we may lose through the bankruptcy proceedings."}, {"role": "user", "content": "Great, thanks. And as a follow-up, I just wanted to touch on the tenant watch list. I think regional banks have obviously been in the news a lot based on our look. You don't have any exposure to the ones that have been called out yet. It's more like 50 basis points maybe is around there, I think. We'd love to have you confirm on other regional bank exposure curious on potential backfills for those kinds of spaces, especially on the outparcels and what level of demand you might be seeing there. And then looking at maybe like Kohl's, Rite Aid, Michaels, we see some more risk than I think limited to 1.9% of GLA. Are you in discussions on some of those spaces as well?"}, {"role": "assistant", "content": "Greg, I'll just generically answer the question in terms of overall tenant watch list we are always proactively evaluating who's on the list, both those that come off it, those get added. Our teams out in the field are constantly and aggressively looking at those spaces in terms of sales volumes, in terms of foot traffic, in terms of lease expirations, upside, downside. And so if there's an opportunity where we think we want to proactively take it back, we're getting out in front of it."}, {"role": "assistant", "content": "If we have concern they're going to vacate, we're out in front of that. And so I think that's just really an overall comment for the totality of the watch list to include some that you might have mentioned and others that you didn't."}, {"role": "assistant", "content": "So I'll just -- if Alan doesn't mind. I'll come over top for the bank branch. I think your observation is correct. Our exposure to the bank branches are -- I mean, I think on our significant tenant list, you've got JPMorgan Wealth [Phonetic] and Bank of America. And so any of the regional bank branches that we have would be really immaterial."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Craig Mailman with Citi. Please proceed with your question."}, {"role": "user", "content": "Good morning. I just wanted to circle back to the leasing environment, you guys are pushing through escalators in a lot more leases and rent spreads remain healthy. I mean what kind of pushback are you guys getting from tenants on rent increases, adding escalators to this? And kind of where are these OCRs coming in given these rent resets?"}, {"role": "assistant", "content": "So Craig, good question. Thank you. Look, I think there's -- it's widely accepted that inflation is impacting all of us to include us, and therefore, we're able to pass through a lot of these higher escalators as you saw and heard on our -- 90% of all deals had embedded rent steps and 93% of our shops had those. And so we're having success not only getting them in our deals, but we're having them success in getting them at higher values."}, {"role": "assistant", "content": "I'm not seeing a tremendous amount of pushback there. Occupancy costs frankly, are going in the inverse direction because I think sales are generally going up for most of our retailers. And so will that provide an ability to push further, I think, in some categories, it will, Craig, and in others, maybe it doesn't. But they all seem to be operating in pretty healthy, reasonable levels that give us the ability to, I think, really reasonably push those going forward."}, {"role": "user", "content": "Thanks. It's Nick Joseph here with Craig. Just maybe on capital allocation. Obviously, it was quiet in the first quarter, but you did purchase some shares. So I guess, number one, what are you seeing on the transaction market? Are things starting to show at all there? And then the second part, how are you thinking about additional share repurchases from here?"}, {"role": "assistant", "content": "Well, I'll quarter back. I'm going to have Mike answer the share repurchase, and then we'll pass it to Nick for the overall transaction market."}, {"role": "assistant", "content": "Hey, Nick, good question. So first, on the share repurchase. Let me say that, that was largely tactical this quarter, and we outlined it in my prepared remarks, tied to a great development opportunity that we have we want to be able to be as flexible as possible to be competitive in that marketplace. And I think this was a point at which we can differentiate."}, {"role": "assistant", "content": "We are obviously very keenly aware of our NAV and our perspective of value. And at the same time, when units are necessary to make a deal, we found this opportunity to hedge that transaction. And we're not big back patterns, but we will pat ourselves on the back. I think we did pretty nicely from an arbitrage perspective as well, time will tell. But that was what that transaction was designed to do simply to hedge the unit issuance of that development pursuit which we're excited about."}, {"role": "user", "content": "And thank you, Nick, in regards to the transaction market, as Lisa alluded to in our opening remarks, that is a little surprising of how few data points there were in Q1. So it has been very, very quiet out there. But as we've said in the past, we're always focused on opportunities that are accretive to earnings and that are equal or accretive to the quality and the growth of our current portfolio. And we have the capacity and the desire to act on those opportunities that meet that criteria. And so we're very focused on it and hopeful that in the near future, some more opportunities will pop up that we can take advantage of."}, {"role": "user", "content": "Thanks. And then just on the development side, has pricing changed at all there relative to where it was before?"}, {"role": "user", "content": "On the margin, I mean, look, we're eyes wide open regarding what's going on in the market. But we're, again, highly focused on making sure it's accretive to us and what is our cost of capital and how do we best use that cost of capital. And so depending on the risk profile of any transaction, we evaluate that, we decide how we're going to fund it and make sure that there's an appropriate spread there. And so we're very comfortable that the opportunities we're working on right now are accretive to the company long term."}, {"role": "assistant", "content": "It's a great opportunity for me to remind you of our significant free cash flow that we generate. And the best use of that cash flow is into what I believe the leading development program in the sector."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Samir Khanal with Evercore ISI. Please proceed with your question."}, {"role": "user", "content": "Hey, good morning, everyone. Hey, Mike. On the FFO guidance, you did the $1.08 NAREIT FFO in the quarter, and I know there were some onetime items. I mean, we were looking at some of the term fees, maybe it was a $0.02 impact but even if we use $1.06 sort of for the run rate, you're still getting to like $4.20 for the year. And I look at your guidance and I'm just thinking, are you being overly conservative here given the macro? Or is there something we need to think about? That are impacting growth? Thanks."}, {"role": "assistant", "content": "Hey, Samir, thanks. I'll go back to some earlier comments. Let's first identify what is timing related in the first quarter and what is uniquely onetime. So clearly, the pursuit income that we recognize is a onetime event kudos to the team for being very careful with our pursuit efforts there in monetizing that value. The balance -- the higher percentage rent, that's a timing-related impact. So it will recur over time and through the years, but within the year, percentage rent is largely an earlier Q1 event. So we have to factor that in."}, {"role": "assistant", "content": "Our outlook for uncollectible leasing income, if you think about the Q1 being positive this quarter, we are not anticipating that we will replicate that through the balance of the year. As I mentioned previously, we think we'll float back down to our historical averages of ULI, which is in the 50 basis point area of build rents. Term fees, again, more of a -- but we did guide on that element. We knew that we were going to have a significant term fee in 2023. It is a -- the $4 million payment was received in the first quarter clearly, we'll have to adjust for that. Some comments on term fees. We basically looking over our shoulders get $0.05 a foot year in, year out as a semi-recurring part of the business."}, {"role": "assistant", "content": "So that's about a run rate of a couple of million dollars, if you think about going forward. Those are some of the elements there, Samir. I think it's -- and then we have the bankruptcy and the impact that losing our Bed Bath & Beyond will have on our forward growth. So that's going back to us floating from Q1 through same property NOI as well as core earnings back down into the guided levels that we offered."}, {"role": "user", "content": "Thanks for that. And then my second question is around leasing spreads. When you provided the commentary, certainly very positive around leasing. But when I look at the spreads, and again, it's still pretty good mid-single digits growth. But if you look at the last few quarters, they've sort of decelerated, right? And I know -- look, I know it's volatile month to month. I get that, but maybe just provide a bit of color on kind of those sort of leasing spreads we're seeing."}, {"role": "assistant", "content": "Yes, Samir. I appreciate the question, and thanks for acknowledging the lumpiness that can happen certainly quarter-to-quarter with that. As we look at the last quarter, we did not have any significant new anchor transaction that was in the quarter. We did over 100,000 square feet of anchor activity in Q1, but only one deal that represented 11,000 square feet was a comparable anchor deal that's included in that. So when you look at our cash rent spreads for Q1, it's predominantly all shop leasing, which is generally lower than anchor leasing that gets the big pop."}, {"role": "assistant", "content": "But I'd bring you back to the 12-month trailing cash spreads of 11% on new activity. And importantly, our keen focus and success with the embedded rent steps and prudent capital spend. And so on that new disclosure page, net effective rent as a percent of base rent has been in the mid to high 80% range over the past five quarters, and we're pretty proud of this metric as it's a testament to our team's efforts of achieving those contractual rent steps while prudently managing our capital spend."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Juan Sanabria with BMO Capital Markets. Please proceed with your question."}, {"role": "user", "content": "Hi. So maybe just circling up a little bit from a different perspective or asking any differently than Samir, for the guidance, should you assume that occupancy is kind of maybe flat to slightly down by year-end, but does it dip between now and then as a result of Bed Bath before you capture the S&O pipeline? How should we think about the quantum of that decline to maybe piece together these various pieces we've talked about on the call?"}, {"role": "assistant", "content": "I mean simply -- I'll give into some details on, but simply, I'd say, use our guide on same-property growth. And I think -- and if you think about it, if you're trying to sequence it from quarter-over-quarter, we know when we're losing Bed Bath. They've rejected half of our locations. And coming into the year, our exposure was in the $5 million range to that tenant."}, {"role": "assistant", "content": "So half of that is losing it at the beginning of Q2. And then as you think about delivering the $32 million of contracted S&O that will come on, as I said, about 80% of it by year-end. I would sequence that pretty ratably through the year. And we're going to float down from a 6.3% Q1 post on same-property growth to a midpoint of 3% by year-end. There is a unique Q4 item that we all talked about last quarter from a recovery standpoint in our numbers. So the fourth quarter comp is a little more difficult. But I hope that helps you. And if you need anything else, we'd be happy to connect offline."}, {"role": "user", "content": "No, thank you. That's helpful. Super helpful. And then just a quick question on the reversal of cash to GAAP had a bit of a benefit in the first quarter. How is that captured in the guidance if I look at kind of Page 6. And what bucket does that fall under? And is there anything else assumed in terms of reversals back to GAAP for the balance of the year?"}, {"role": "assistant", "content": "Yes. So the majority of those reversals will come through in our noncash guide, and we have -- so I would -- as you can see, we didn't change that guide. So our outlook hasn't -- it's $2.5 million rough weighted impact embedded within there. This is a good opportunity to indicate that we are at 7% on a cash basis, and that has not changed from fourth quarter."}, {"role": "assistant", "content": "I would offer that given the first quarter results and the good collection rate that we're seeing out of our cash-based tenancy. Our outlook remains the same that we will continue to convert tenants to accrual through the year. As we said last quarter, we anticipate that we should be in the plus or minus 5% area by year-end. And so we're -- we haven't come off of that expectation either. There is a little bit of AR that could -- as you convert tenants that could come through as well, but it's de minimis, Juan. So I would just focus on that noncash guidance that we provided."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Anthony Powell with Barclays. Please proceed with your question."}, {"role": "user", "content": "Hi, good morning. There are some press recently on some of the traditional anchors in malls like Macy's and Nordstrom expanding their smaller format shops. Are you seeing some of that activity in your leasing pipeline?"}, {"role": "assistant", "content": "Anthony, thank you for the question. The short answer is yes. Macy's is doing Market by Macy's. They've got their sister company, Bloomingdale Outlet, Nordstrom, you referenced is really expanding their Nordstrom Rack concept, one that we just signed down here in Jacksonville. So they're out there. They're aggressively doing it. And I think that entire really off-price category is rocking and rolling right now."}, {"role": "user", "content": "Thanks. And maybe one more on percentage rents. I get that it will be lower this year, but there was a big kind of year-over-year increase. How should we be modeling percentage rents just going forward, say, next year, either on a -- as a percent of base rent or year-over growth?"}, {"role": "assistant", "content": "I'll give you some big-picture items that will help you. Number one, it's up year-over-year. We've actually increased our percentage rent in two consecutive first quarter by over 40%. However, it's a small number. So we only -- we get about 1% of our total revenues out of percentage rent. And I would think about that in your longer-term modeling that we should keep that level pretty consistent. It is front-end loaded. So the majority of what we recognize in percentage rent income will occur in the first quarter. We will have more percentage rent through the balance of the year, but the majority is in the first quarter."}, {"role": "user", "content": "All right. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Lizzy Doykan with Bank of America. Please proceed with your question."}, {"role": "user", "content": "Good morning. I just was curious about the G&A line item that was revised up by $1 million for full year. And not too meaningful, but just wanted to see what drove the increase in expectations there and if anything could be noted as recurring or if we should expect more variability to that as we get through the year?"}, {"role": "assistant", "content": "Thanks, Lizzy. Really, just a lot of odds and ends in the non-salary line items as we look out for the balance of the year and kind of tightened up our reforecast is what it is. And we just kind of refining that estimate for everybody looking forward. There's -- I wouldn't identify any trends any way or the other. It's really just a refined outlook."}, {"role": "user", "content": "Got it, thank you. And I would hoping to get more details on a couple of the projects you had discussed at the opening just on the development in the New York metro area and the master-planned community in Metro Houston understand if you are waiting to share more details once you're able to add it to the pipeline, but just seeing if there's anything unique to each of those projects that you think you could find in other opportunities in the near future? And what particularly drew you in about the markets for these specific projects?"}, {"role": "user", "content": "Absolutely. Thank you for the question, Lizzy, and good morning. Yes, as it relates to the New York asset at this point, we can't disclose more. We have not yet closed. But as I mentioned in my opening remarks, we're excited about the opportunity and looking forward to in the not-too-distant future, being able to give more details. As it relates to the Houston opportunity, we did close on that earlier this week and are very excited about that project, although again, relatively small, approximately $10 million."}, {"role": "user", "content": "It is located within a very thriving master-planned community. So to be one of the only retail component servicing that community is really a blessing. And those are the type of opportunities we're looking for, where we know we have a very captive audience. And as I referenced, we do plan on expanding that opportunity in the future. And so we do think there'll be future phases to grow that opportunity as demand continues to increase in that submarket. And so excited to bring that on board and again share even more details next quarter when it comes to our end process."}, {"role": "user", "content": "And then just generally speaking, as I said, development is never easy, and we're well aware of some of the headwinds that are out there facing development and how challenging it is. But as I said, we have the three cornerstones that are critical, especially in this environment to execute, which is the right expertise, the right capital and the right relationships. And grocers are continuing to expand. They've had very good years. We have great relationships with the groceries across the country, and we continue to evaluate really coast-to-coast those opportunities one by one. And the team is doing a great job of figuring out which ones we think we can help with, which ones we think we want to own long-term and therefore, deploy our human and financial capital."}, {"role": "assistant", "content": "And Lucy, our overall development strategy just follows our investment strategy. And we want to invest in shopping centers that have a long-term sustainable competitive advantage where we're going to be able to grow NOI over the long-term. And these two developments, New York and in Houston, fit that criteria."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Wes Golladay with Baird. Please proceed with your question."}, {"role": "user", "content": "Yeah, good morning, everyone. I just want to stick with Bed Bath & Beyond. I think you said you have five of the 10 rejected and you're not going to get any rent from those assets at the beginning of this quarter. But once you get rent during a liquidation, why they liquidate the inventory? Or have they been doing that, I guess, behind the scenes?"}, {"role": "assistant", "content": "Yes, so pre petition rent, you obviously would lose, and we plan and we estimate that to be about $0.5 million less given what they were paid current through first quarter and what we will lose into the filing date. And then post-petition for the five that have not yet been rejected, we would continue to collect rent through their -- through the event that may or may not happen, which could be an assumption of the lease in the bankruptcy itself or a future rejection. As we indicated, we've -- at the midpoint of our guidance, we've accommodated for the worst-case scenario, which would be a full liquidation of the chain. We think we have some pretty -- we know we have some pretty good locations the ones that have not yet been rejected, we like all of our opportunities."}, {"role": "assistant", "content": "We really like those and there's -- which also tells us there's a chance that they could be picked up in option. So we'll be paying very close attention to the proceedings there. But that's -- hopefully, that helps you think about the financial impact of Bed Bath."}, {"role": "user", "content": "Yes, it does. And then sometimes, I remember at Sears at kind of lock some bigger projects for you, some larger scale redevelopments. Anything -- any of that potential here with Bed Bath? And what is your hurdle now with today's capital markets for some bigger projects?"}, {"role": "assistant", "content": "I'll start with Bed Bath and let Lisa or Mike answer the capital question, but the short answer, Wes, I appreciate you asking that. There's one Bed Bath that we are evaluating the merits of whether or not we want to entertain redevelopment, but generally speaking, this really is just a re-leasing exercise for us as all it is."}, {"role": "assistant", "content": "And with regards to redevelopments, I mean, that follows and flows directly with our development strategy. We look at those in the same manner. If we can use our and invest our cash accretively and if we are improving and enhancing an existing center and fortifying that future NOI growth while getting a really attractive investment return, we'll do as much of that as we can."}, {"role": "user", "content": "Got it, thanks for the time, everyone."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Floris Van Dijk with Compass Point. Please proceed with your question."}, {"role": "user", "content": "Hey, good morning. Thanks for taking my question. Your shop space is the most valuable portion of your portfolio was, I think, Lisa, you've alluded to in the past as well. And the beauty is you have over 50% of your ABR comes from the shop space and a big trend, two-third of your SNO pipeline is shop space. Could you remind us again what your peak shop occupancy was? And where do you think that could go over the next two, two and a half years or so?"}, {"role": "assistant", "content": "Peak -- I'll do the reminder, and I'll let Alan color up his -- what he thinks about our guide -- our glide path to achieving it. We peaked over 93% from a shop occupancy perspective. That was at a point in time when I think we would all look at each other and agree that our portfolio is better today than it was then. I think even the demand -- supply and demand characteristics of today are better. I'm not promising you that we will significantly outside those peaks because those are pretty high levels of occupancy but 93.3%, I think, was in that area was our peak."}, {"role": "assistant", "content": "Yes. And as you know, we're at 92.1% right now. And I would just go back to the pipeline of really great deals that are falling up. And I'd put on top of that our upcoming Vegas ICSC show that's here at the end of May, the amount of meetings the teams already have scheduled and the attendance that we anticipate from the retail community is really strong. So we have the runway, and we're planning to continue to send our sights high."}, {"role": "assistant", "content": "And I appreciate you remembering that we say that. And I think what's really important when you think about where we sit today versus that peak occupancy. And you've heard us say this really coming out of COVID we feel really good about the health of our in-place shop tenants. We believe that there -- it's as strong as ever. And what makes shop space so valuable is the fact that there's change as it happens in our business. We say that all the time. There's always going to be some tenant failures. But what makes that so valuable is that we're able to replace it relatively quickly versus an anchor box with a lot less capital and the rents are higher."}, {"role": "assistant", "content": "And so that's what makes that space so much more valuable. And we're able to continue to get really good annual contractual rent steps in the shop space in addition to leasing spreads upon new leasing. And that's what makes that space so valuable to us. We are not afraid to shop space. That's what you've heard me say over and over again."}, {"role": "user", "content": "No, I appreciate that. Maybe if you can -- you've talked about the rent bumps. And to me, that's one of the most underrated aspects of the business and sort of the cruising speed that, that produces. You mentioned that almost all of your shop space has fixed rent bumps, are you getting 3% rent bumps? And how do you see that your cruising speed evolve as you sign new leases?"}, {"role": "assistant", "content": "Yes, Floris, I appreciate that question. Yes. We are having more success at higher rent bumps. And I would tell you, historically, if you were to rewind the clock would say our teams are probably asking for anywhere between 2.5% and 3% in the shop leasing sector. And now we're starting at 3% to 4%, depending on the circumstances or even in some cases, higher. And so it has evolved. I do think it's become a bit more of a commonplace of where we are. And for the foreseeable future, I certainly expect us to continue down that path."}, {"role": "user", "content": "Thanks. Maybe last but not least, just I hear Wegmans might be coming to Connecticut. Any chance that you guys might be involved in that?"}, {"role": "assistant", "content": "I'm looking at Alan."}, {"role": "assistant", "content": "We are not involved in that, Floris. Sorry, I didn't know who is going to answer that, whether it was Nick or myself. But we're hearing the same rumors. So they'll be great for the Connecticut community if they end up making that happen."}, {"role": "user", "content": "Thanks, that's it from me."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Mike Mueller with JPMorgan. Please proceed with your question."}, {"role": "user", "content": "Thanks. So for the two questions. The first one, what are the characteristics of the 7% to 10% of leases where you're not getting the rent escalators? I think you talked about 90% or 93% before. So the ones where you're not getting it. And then as we look at your development and redevelopment pipeline, I think it's like $50 million new, $250 million redevelopment. We're thinking about the shadow pipeline, what's the mix going forward in the shadow pipeline? Is it -- does it have a healthy component about new development opportunities as well?"}, {"role": "assistant", "content": "Hey Mike, this is Alan. I'll answer the first part. It's pretty simple. It's simply options that are getting exercised that don't have embedded rent steps. That's the 7% to 10% you mentioned. I'll take it to Nick."}, {"role": "user", "content": "Mike, as it relates to the second part of your question, I appreciate it. And you're absolutely right. I mean as we continue to push forward, we're always pruning our portfolio and looking for opportunities to reinvest in it. And we've given you some visibility on some of the opportunities in our investor deck as it relates to those future redevelopments. But clearly, I can't disclose sort of the same level of detail on potential ground-up developments that we don't yet own. And so I'll tell you, our shadow pipeline is very focused on that mix, including ground-up developments."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question is from Ronald Camden with Morgan Stanley. Please proceed with your question."}, {"role": "user", "content": "Great. Just a couple of quick ones. Just trying to understand over the sort of the recent events with the banking system, if there's been sort of any ripple effects of the business? And I'm thinking of it in two or three different ways. One is as you guys are thinking about this future redevelopment pipeline opportunities of $115 million to $150 million, I see in the presentation, does anything change about your timing or conviction to getting those done?"}, {"role": "user", "content": "And the other piece of it is, obviously, on the acquisition front, have you seen sort of more activity, you guys are in a great liquidity position. Does that create opportunity? And then I'd love to hear from a tenant perspective, clearly, the bad debt is feeling pretty good. It went down in the guidance, but are tenants sort of talking about it, feeling it? Just trying to understand if there's any ripple effects we should be thinking about? Thanks."}, {"role": "assistant", "content": "Ron, I'll start and Alan can hit the tenant piece, and Nick may add some color. But generally speaking, we have not seen any impact yet from whichever word you want to use to describe what's happening in the banking market right now, crisis, turmoil, certainly some challenges. I'll remind you from our own personal perspective, we're using free cash flow to fund that and we knock on wood, do not have any challenges or issues with access to capital beyond that."}, {"role": "assistant", "content": "So then it becomes, how are we thinking about an underwriting the new leasing that's associated with our developments. And I think, as you know, we are very disciplined with our development program. We don't do speculative development, and we're not going to start a new development until we have real visibility to signed leases. And we're -- as we talked about, we continue to try to look around the corner and see if there are signs of softening or impacts to the business, and we have not seen it yet. And development is not something you just flip the switch on or off."}, {"role": "assistant", "content": "They take -- it's a cycle. It takes some time. and it's an important part of our growth profile. And we have developed through cycles in the past successfully, and we expect that we will continue to do the same. We're just a little bit more cautious as we think about our underwriting, and I think that that's appropriate and prudent."}, {"role": "assistant", "content": "And Ron, from a tenant perspective, the short answer is no. We're just simply not hearing that at the property and portfolio level. That said, our team is utilizing currently on a proactive basis and enhancing programs that we started during COVID to support our tenants. And so we've got a tenant mentorship program. We do webinars for them. We've got this proprietary merchant success toolkit. And so we're prepared to not only proactively deal with that, but should that tide turn have the resources there for our retailers to partner with them and help them through that process."}, {"role": "assistant", "content": "I'll jump back and I apologize, I missed your acquisition question. We've been saying it, we are on our front feet. We believe that we are really well positioned to take advantage of any dislocation in the market and compelling opportunities. As we've discussed, we haven't seen a lot come to market, but we're ready if they do. We have the capital. And as Nick said when he answered the earlier question, as long as we are able to invest that and acquire accretively and it's equal or accretive to our quality and our growth rate, we're poised to act."}, {"role": "user", "content": "Great. And then just my last one. Just any quick updated thoughts on the Kroger Albertsons situation and views for the company. Thanks."}, {"role": "assistant", "content": "I think if you were to go back and probably read my answer from the last quarter, I would say the exact same thing I'm going to say right now. And that is we don't have any information that you don't have -- we have really good relationships with both of them, and it just continues to unfold. Either way it goes, I think, is something that will be good for us. And for some reason, the merger doesn't go through, we have two really good grocers in really good locations, and it will be business as usual. If the merger does go through, you'll have a larger operator with greater scale, greater ability to invest back into their business, and we feel really good about our locations and our real estate for those that may be part of their divestiture plan."}, {"role": "user", "content": "Sorry, one more, so I had in my notes, I missed it. But -- so we've been hearing about sort of the insurance costs and premiums on property in Florida, other markets and so forth. Clearly, you guys you charge some of that back to the tenant. But are you guys -- how are you guys thinking about that at all? Has that come up? What's the thinking there?"}, {"role": "assistant", "content": "Hey, Ron. It's Mike. Yes, absolutely thinking about it with the recent renewal behind us, the team did an extraordinary job renewing our policy, but not without a little bit of pain. The markets are very difficult. They're challenging. We have -- from a results perspective, we're planning -- we're expecting about a 15% to 20% increase in that line item. More on that in a second. But our access to insurance, I think, is better than most, given our scale our quality, our moss track record, the way we maintain and think about our properties. So that is a kudos to the team because access at a small scale level is challenging today, not just about price but about access."}, {"role": "assistant", "content": "With respect to that 15% to 20% increase in the line item, it is a relatively small component of the tenant's rent. So when you think about the bleed or the pass-through, we can pass it through. It is through our lease contracts we will pass that through. It's in the neighborhood of $0.10 a foot to a tenant. So again, it's a pretty small component. So we feel like we've mitigated that risk or challenge to our forward growth and again, I think time will tell when and if the insurance markets soften. But today, it's challenging."}, {"role": "user", "content": "Thanks so much."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question is from Greg McGinnis with Scotiabank. Please proceed with your question."}, {"role": "user", "content": "Sorry, I was muted. Just wanted to talk about the transactions and potential development pipeline again, just for a couple of points of clarification. Is the $90 million cited from the New York Metro area development, inclusive of acquisition and development costs, similar question for Houston and whether you need additional land acquisitions for future development phases there, if you're securing that with that first investment?"}, {"role": "user", "content": "Sure. So it's speaking to New York, yes, that's all-encompassing all costs. So that would be the acquisition cost of the property as well as future investment to build it out in its entirety. So that's all-encompassing the future investment for that opportunity. And then the second part is I want to make sure I understand it. I believe you were asking about the Houston opportunity. Are we comfortable with the current phase if the future phases don't happen? We are. And so we would never purchase an opportunity if we weren't comfortable ultimately just owning it as is where is. But that being said, given its small scale, we are hopeful and we do have an expectation that future phases will be added. But if they don't, we're very comfortable owning what we purchased and building it and have tremendous demand already for the retail space we anticipate building."}, {"role": "user", "content": "Yes. Sorry, I was also saying for the Houston weather you'll need to acquire additional land for future phases or if you're still carrying that with the $10 million."}, {"role": "user", "content": "Great question. Yes, we have control over adjacent property. And so as part of this acquisition, it also gave us extended control over adjoining property that we're focused on for future phases. So this acquisition is just for the portion of property, we're going to build Phase I on, but we do have definitive control over the adjacent property for future phases."}, {"role": "user", "content": "Okay. Great. And then what are the targeted returns on these development projects that make the additional risk worthwhile maybe versus something like redevelopment? I mean, I know you've -- Lisa, you said that you're not taking risky investments here, but inherently with development, there's got to be a little bit more than where you already have the cash flow. So just curious what expected returns might be."}, {"role": "user", "content": "Yes. No, great question. As I said before, we really look at opportunity by opportunity. And so each one of these developments, we're analyzing, we are definitely looking at what we believe the future value of that asset is to make sure we're comfortable with the ongoing yield. And so to give you an example, that Houston asset will be developed at approximately an 8% return. So that gives you one data point of where our eyesight was as it relates to that transaction."}, {"role": "user", "content": "Okay. Great. And just final one for me. Are these investments the type that Lisa was previously referring to? I think it was the Q3 call, at least initially on the Q3 call regarding smaller developers about access to capital. And does that feel like a growing opportunity as bank lending becomes potentially even more scarce going forward?"}, {"role": "user", "content": "Great question. I mean I would say exactly that, the inverse of the banking challenges out there are it is creating opportunities for us, continued opportunities. Lisa has mentioned multiple times, we have available capital, and we have a desire to play offense. And so there's some quality developers out there that are very capable. They have great relationships and contacts, especially locally. But right now, capital is their issue, no question, if there's any place that capital is most restricted, as we all know right now, it's construction lending."}, {"role": "user", "content": "And so we have the ability to step in and not only bring capital but bring relationships and expertise to help some of these deals figure out a way to go over the goal line. And many times, it takes more than just capital. It does take expertise to dig in with them, figure out where we can be cost-effective regarding budgeting, pricing, etc., as well as deal with the retailers as it relates to relationship potentially restructuring transactions. And so we are very engaged with local developers to help fill in wherever the hold may be on these projects that have challenges at the moment."}, {"role": "assistant", "content": "And I just -- I want to reiterate that because I think that's a really important point that Nick just said. Our relationships with the retailers are especially the grocery anchors that are driving a lot of our developments shouldn't be underestimated because they know we can perform. And in times like this, that is extremely important, and that is also helping us to drive that development pipeline and build it further."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. There are no further questions at this time. I'd like to hand the floor back over to Lisa Palmer for any closing comments."}, {"role": "assistant", "content": "Thank you all. Appreciate your interest in being with us today. And everyone, have a nice weekend."}]}, {"messages": [{"role": "system", "content": "First question is from Samik Chatterjee with J.P. Morgan. Please proceed with your question."}, {"role": "user", "content": "Hi. Thanks for taking my questions and thanks for the details in the prepared remarks. I had one on smartphone and one on autos. If I can start on the smartphone one, I think, I know you're sort of taking down your guidance for the overall market outlook today for 2023. But if I look at your QTL guide, it does sort of imply that you're looking at more of a stabilization in the sell through on an absolute level. So when I look at your QCT guide -- QCT guide relative to that [Phonetic], it does suggest that most of the headwinds you're seeing or expecting there are inventory and timing of the purchases. Maybe just sort of confirm if that's the way sort of -- if I'm interpreting that right, and what's the -- maybe magnitude of the timing and the inventory headwinds to the QCT revenue guide for fiscal third quarter? And I have a follow-up. Thank you."}, {"role": "assistant", "content": "Yes. Samik, you're thinking about it the right way. It's the right thing to connect the market forecast to QTL. And then QCT really has this additional factor that is related to the inventory drawdown. Our view of inventory drawdown is really -- the macro headwinds increased -- have increased meaningfully since the beginning of the fiscal year. And so what we've seen is, the impact on market is driving a scenario where it takes longer to run through the existing inventory. We don't have a fundamental change at how much inventory we think the channel had going into the year that was access. It's just how long it takes to run through it as a result of the market forecast."}, {"role": "user", "content": "Yes. Okay. Good. And on the auto side, Cristiano you talked about the 12 design wins, but you mentioned them being in Cockpit and Connectivity. So if -- I wanted to check if you have an update on ADAS and the engagement from your customers on that front, and your product roadmap. And relative to autos, I think there has been some concern about exposure to China volumes in terms of your pipeline, if you can sort of maybe give us some ballpark estimate about how much of your pipeline is reliant on China electric vehicle volumes and how should we -- how are you thinking about sort of the risk around those production numbers? Thank you."}, {"role": "assistant", "content": "Very good. Thank you for your question. The 12 designs is what happened in the quarter. So we just highlight in the quarter, we had designs on the digital cockpit, as well as 5G for telematics. We do -- we are working on some new designs on ADAS that is going to take us throughout the second half of the year, but we're not announcing at that time -- at this time."}, {"role": "assistant", "content": "The second comment is on China market. We have seen, I think, consistent with the overall theme of China, some weakness in China auto, I think consistent with the rest of the market. But our design and presence with the China EV, with the local OEMs is very, very high and I think we continue to gain share."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Matt Ramsay with TD Cowen. Please proceed with your question."}, {"role": "user", "content": "Yes, thank you very much, guys. Good afternoon. I have two questions. I guess, I'll just ask them at the same time to make this quicker. The first one, Cristiano, in China, you were pretty clear in your script, and I think you were -- you guys were earlier than most bellwether companies in flagging this, but that -- the recovery in China in the second half of the year might be a bit more muted. And I think during the peak, obviously, things were being over shipped into China during the peak. I think we were 500 million units, give or take, on an annualized basis in China, and I think we're running closer to $300 million now on a sell through basis. Maybe you could update us, are those numbers roughly right? And what are you guys seeing in terms of a recovery? And maybe how much are you under-shipping that today that could still help your numbers in the back half of the year as you come back to shipping with parity of sell through? And, I guess, I do have a follow-up, but maybe we'll just do that one first. Thanks."}, {"role": "user", "content": "Matt, it's Akash. In terms of China sell through, I think if you are looking at any of the analyst resources that's sizing the scale of the market, we're seeing pretty much the same number. So if you're -- that's what you're quoting, I don't have the exact numbers in front of me, but that's what you're quoting, it'd be consistent. The way we are thinking about the inventory drawdown is, of course, it's a near-term phenomenon. We're going to get past it. The strength of our design win pipeline is very strong. So if you -- if one way to measure it in our minds is we look at our share of sell through, and we've seen that share grow from '22 to '23. So that should give you a sense of our position going into the next year."}, {"role": "assistant", "content": "I think just -- Matt, this is Cristiano. I just want to add one thing. You know, common sense, and I think the overall expectation is following the reopening that China market was going to bounce back. It has been very suppressed, I think, during the lockdown and during the pandemic. I think what we're basically saying is we have not seen those signs yet, so therefore, we thought that prudent not to put in our planning assumptions, but you're going to be monitoring the situation. But the dynamic we see right now is exactly what Akash outlined. It's an inventory drawdown, and that's why I think the difference between the QCT and the QTL business."}, {"role": "user", "content": "Thank you, guys. As my follow-up, mid single-digits up, I think, in the guidance you mentioned for IoT. There are sort of three different segments of the business there. If you could -- there's been an inventory correction across the IoT business, and I think many of us have less visibility on a granular basis there than in your handset business. So if you could just talk through the dynamics of that business recovering a bit in June, that'd be helpful? Thank you."}, {"role": "user", "content": "Sure. So, it's Akash. When the initial weakness that we saw in IoT was in consumer, and then we've kind of seen that expanded into industrial and edge networking, and specifically China playing a significant role in that weakness. So, it's a combination of all three areas. Now as we look forward, a lot of the growth that we're expecting within the quarter is actually going to be across -- recovery across all three, so there isn't one that stands out that I would point to. And then maybe the last point on IoT is really when you step back and think about the broader digital transformation process and where we are at, our technologies continue to become more relevant. Cristiano talked about Edge AI, and that's going to be another technology that's going to be extremely important in Industrial, PC, XR and other areas. So still very optimistic about how things look longer term, and we'll kind of work through everything in the short-term."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Mike Walkley with Canaccord Genuity. Please proceed with your question."}, {"role": "user", "content": "Great. Thanks. Cristiano, just a follow-on question for you just on the market dynamics. You made some comments about how well the Snapdragon 7 is performing relative to premium tier from your competitor. Can you talk about design win traction and share gains you're seeing maybe further downstream from the premium tier? And once inventory clears, do you think that you'll start to see some sharper share gains coming back maybe in the Chinese New Year and calendar Q4? Is that too early to call on the inventory side?"}, {"role": "assistant", "content": "Hey, Mike, thanks for your question. I will say we are no longer in -- and that's probably an understatement, right. We're no longer into a supply constrained environment. So as the supply constrained environment got resolved, we have the ability to gain share. And I think as Akash outlined, if you look at our share of activations and sell through compared to '22, you'll see a very positive picture for us in China. We've been gaining share on what we call the high tier. The 7 -- the new 7-Series, we made a lot of investment including leveraging the Snapdragon brand and the position of the 7, very well received in the market. Our 7+ outperform, I think, the competition premium tier, and we like because it sets the floor. And then you have Snapdragon very uniquely positioned in the 8-Series. And I think as outlined from a share perspective, we're gaining share. Just the whole markets to go into the dynamic that we just outlined on inventory, but we like our position in the marketplace."}, {"role": "user", "content": "Great. Thanks. And maybe a quick follow-up for Akash. Just on QCT margins, just given the inventory work there, is there any mix or anything else we should think about on QCT margins as you go through this inventory clearing and less modem-only shipments over the next couple of quarters?"}, {"role": "user", "content": "Yes. So from a gross margin perspective, as we've consistently said, and I said this in the last call, last earnings call as well, once we get past supply constraint, we expected some pressure on gross margins. So you're seeing that come through. But if you step back from that and just look at mix of devices and how that drives margin one way or the other, there isn't anything that's significant enough to discuss. It's really the current environment playing through. And then as we look forward, as remaining disciplined with pricing as we grow in a mature market."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Stacy Rasgon with Bernstein Research. Please proceed with your question."}, {"role": "user", "content": "Hi, guys. Thanks for taking my question. For the first one, I was wondering if you could define what you mean by muted seasonality for September quarter. I think you're usually up. I mean, it's not uncommon for you to be up double digits. What are you thinking now? And, I guess, maybe if you could talk a little bit about the different drivers, handset, IoT, auto into Q4?"}, {"role": "user", "content": "Sure, Stacy. It's Akash. If you look at our typical seasonality from third quarter to fourth quarter, it's really driven primarily by the launch of a new flagship device and the build that happens for that device. Outside of that, there are some other puts and takes, but that's the primary driver of the growth. What we're suggesting is, as I outlined in the prepared remarks, we expect that to be muted because the lower demand from the modem-only handset customer extends from June into the September quarter as well. And the reason for this is we saw them buy a little more earlier in the year, and so this is just kind of balancing purchases of chips from us. To be clear, this is not a comment -- to be clear, this is not a comment on their sell through and it's not a comment on our share within the OEM either. This was just the timing of purchases from chips from us."}, {"role": "user", "content": "Thank you. For my follow-up, like I know you said you expect the inventory drawdown in the last -- next couple of quarters. But I guess, into June, given the magnitude of the drawdown is better or worse or about the same as what you saw in March? I'm just trying to gauge directionally, is it getting at least better or worse even though we know it's still there?"}, {"role": "user", "content": "Yes. So, honestly, Stacy, there's a different story with every OEM. There are certain OEMs who are much further ahead in reducing the inventory profile and there are others, including the ones we just discussed, happening over the next couple of quarters. So, I haven't specifically sized it in terms of scale, but I would say each of the quarters has an impact from that phenomenon."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Ross Seymore with Deutsche Bank. Please proceed with your question."}, {"role": "user", "content": "Hi, guys. Thanks. Let me ask the question. Cristiano, I just wanted to focus on the diversification side of things. I know organically what you're doing in IoT and automotive. Are there inorganic opportunities to accelerate that? Or is the diversification effort going to just simply take time because automotive and IoT are great markets, but they take a reasonable amount of time to penetrate, especially given their relatively smaller size versus your handset-oriented businesses?"}, {"role": "assistant", "content": "Thank you. Thank you, Ross. Look, there are inorganic opportunities that we continue to look into the market. We've been clear. We have been focused in identifying M&A opportunity to help us to accelerate diversification. We've been very careful just because in the current environment, we wanted to do something that is actionable and we'll continue down this process of identifying. But we are looking at inorganic options as well to accelerate diversification."}, {"role": "assistant", "content": "And we're also very excited about what -- I mentioned into the prepared remarks, I think this incredible opportunity that we now have. We're very uniquely positioned to do AI in a very high performance and low power and all the devices at the edge. And I think that's going to accelerate our diversification strategy across all the new segments, even though it could create a new upgrade cycle in phones, but it's going to be relevant to all of the other segments of diversification as well."}, {"role": "user", "content": "Thanks for that, Cristiano. I guess, one for Akash, as my follow-up on the handset segment. It looks like you're guiding that down kind of low teens, sequentially. I know you said Android is flat and the modem-only customer would be the headwind. How is Android flat if you still are saying macro is a problem, inventory burn is a problem, etc. Is that just evidence of the share gain or what's going on there?"}, {"role": "assistant", "content": "Yes. I assume your question, Ross, was related to QCT?"}, {"role": "user", "content": "Yes, QCT there, what you're guys calling. That's not aggregate."}, {"role": "assistant", "content": "Yes. So if you think about our historical kind of trend between these two quarters in the Android business, we're staying very consistent with that this quarter. I mean, if you look at last year's second quarter and third quarter, our Android business was roughly flat, and we're guiding the same this year. So it's just following the same trend and the factors, the market and inventory drawdown exist in both quarters."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Joe Moore with Morgan Stanley. Please proceed with your question."}, {"role": "user", "content": "Great. Thank you. I guess as you look at the year-on-year decline in handsets, how much of that would you attribute to inventory build in a year ago, inventory depletion now or any kind of change in kind of like-for-like pricing? Can you just kind of separate out those three factors? Yes. Joe, we haven't talked about it or given specific numbers on it. But one of the frameworks to look at it would be to look at the two years combined. One year had the bill, the second year has the bleed. And if you look at that combined, it will give you a framework of what the run rate strength of the business is. The other thing, I would say, is just the one thing to calibrate in that framework is also to look at the market size as the overall market has continued to come down. But that's, I think, a good way to at least start figuring out the run rate of the business. Okay. Thank you. And then you mentioned you always sort of felt like as you came out of an allocation mode that there'll be a little bit of a gross margin headwind. What causes that? Is it just that -- other expedite fees you were getting before? Is it more promotional now? And has there been any change in kind of like-for-like pricing as you've kind of moved out of that type of supply environment?"}, {"role": "user", "content": "Yes. So, it's a combination of them. I mean given supply constraints, we were able to exercise some pricing leverage that gets neutralized in the current excess inventory environment. And so that's just playing out through the numbers. The other two factors to keep in mind is we had a price increase from foundry that ran through starting first of January as well. And some underutilization in our RF front-end fabs that over time will get filled back in as demand comes back, and so that should be a tailwind for us going forward."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Blayne Curtis of Barclays. Please proceed with your question."}, {"role": "user", "content": "Thanks for taking my questions. I had two, but maybe just following up on that last one on gross margin. I mean, I guess if I'm looking at the numbers, it seems like your ASP is still going up. So is it really just the higher cost? And I guess, second part of it is, I think there's a lot of concern about more competitive environment, MediaTek moving up to the high end. So just can you go back and just talk about that environment? I think you said there's not more like-for-like, but I mean, I think there's a lot of concern about maybe people buying older products and not taking Gen 2 and MediaTek moving up. Just kind of touch on those points."}, {"role": "user", "content": "Yes. Blayne, so I'll address the first part and then Cristiano will address the second part. On gross margin percentage, I think, it's a reasonable way of thinking about it. Our gross margin dollars per device continues to grow, and that's the strength and it kind of adds scale and profitability to the business. But we have seen gross margin percent get impacted by the couple of factors I just outlined. But again, those are, to me, kind of ins and outs of the business. It's better to kind of step back and look at the broader -- longer-term opportunity for us to continue to add content to our chips, which we have done very successfully over the last three years. And we have an opportunity to do that, especially with our new custom CPU course coming into play into all of our product lines, including handsets. And then with the AI that Cristiano just outlined, that will create an opportunity for us as well."}, {"role": "user", "content": "Excellent. And then -- go ahead. Thank you."}, {"role": "assistant", "content": "No, I'm sorry, I'm just going to add a couple of comments to your specific questions. Look, the way we see this, we have done, I think, the right choices of investment. We feel pretty good about the road map. And we took this very, very focused strategy and make sure that our 7 tier outperforms the competition premium tier. And that changes the landscape, which means we are very well positioned above that in the 8, as I outlined. Our design traction is very good especially within all of the OEMs, no exception."}, {"role": "assistant", "content": "I remind you that we are globally with Samsung. Our agreement with them, we have the launch of GS 23, that just happened, then we have the Fold and Flip, and then we have the GS24. It's going to be a number of years as association of Samsung with Snapdragon brand globally. And the size of the market is not good, but our position is very strong. And as I outlined before, we're gaining share."}, {"role": "user", "content": "And then if I could just follow up with the modem-only. In terms of the timing, there's -- I guess you guys have been waiting if there's any decision of that customer to move away. I'm just curious if that timing you would be notified at this point or if you thought that the timing of shipments had anything to do with their transition?"}, {"role": "assistant", "content": "No, it has nothing to do with the transition. Through this transition, I think we said a number of earnings calls ago that we're expecting to be in the product that they launched in '23. And in '24, we have no change to our planning assumptions."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Brett Simpson, Arete Research. Please proceed with your question."}, {"role": "user", "content": "Yes. Thanks very much. Cristiano, I wanted to ask about the state of the Android market. There seems to be a sort of consistent structural share loss here. And I guess, even going back pre-COVID, Apple has been growing their business since COVID and Android just seems to keep losing share. So what do you think is going on? And how much of the structural decline in Android do you think is the secondhand iPhone market? And then I don't know whether you can size this, how big do you think the secondhand market is and how it's affecting Android? And what do you think the Android value chain is going to do to reboot their business? Thank you."}, {"role": "assistant", "content": "Yes. No, it's a great question. And there are a number of things to unpack. So, first, I just want to go back a little bit in recent history. I think there was an addressable market for premium devices, and to some extent, premium and high-tier devices that became available as Huawei declined in share. In the reality, Apple pick a significant amount of their share. We did as well, I think so our competition, I think everyone grew as the expense of the market. And I think that is resulting to a much larger -- you look at that Huawei Android as a net loss of Android. That's for the areas that Apple gained share."}, {"role": "assistant", "content": "The market is smaller and those -- even the component of hand-me-down phones, it's accounted in our planning of a smaller market. I think that's a -- that's where we are until we go to the next upgrade cycle, cyclical business. But our position in Android has improved. And I think if you look of our trajectory actually [Phonetic] on the smaller Android market, we've been gaining share and focus on the value share of the market with concentration in the high and the middle tier."}, {"role": "user", "content": "Do you think the secondhand market is growing structurally, I mean, just to understand the dynamics because some of the data we've seen, it would suggest that this is starting to have an impact on the Android volumes?"}, {"role": "user", "content": "Yes, Brett, it's Akash. So I'd divide this into two parts. I think there's a secondhand market that has been around for a long period of time in emerging markets as a hand-me-down device. And so that obviously still exists. There has been a little bit of a change at the top with the refurbished phone market, and so that's something that we're definitely closely watching and contemplated in our numbers at this point."}]}, {"messages": [{"role": "system", "content": "Thank you. Our last question is from the line of Tal Liani with Bank of America. Please proceed with your question."}, {"role": "user", "content": "Hey, thanks. Akash, sometimes you give us more indications of future quarters and I wanted to ask about QTL, QCT for the September quarter. Can you provide us some comments on your expectations?"}, {"role": "user", "content": "Sure, Tal. For the -- for QTL, typically the market size is relatively flat between the June and the September quarter. There is a slight change in the market and our revenue is relatively flat as well, so you should think of that as a proxy based on historical trend. There isn't something specific going on this year that I'd say is different than last year, pending a recovery in the market."}, {"role": "user", "content": "From a QCT perspective, on the fourth quarter, we typically have seasonality, seasonal growth. And what I said in my prepared remarks is that we expect muted seasonality this year because of all the factors that we've been discussing on this call and have been outlined in the prepared remarks as well. So that would be a framework to come up with a number for September. And then obviously, as we go from there, you go into holiday season, that's typically a strong quarter for us and we would realize benefits as we go there."}, {"role": "user", "content": "Got it. And what's normal seasonality for Q4 for QCT? When you say muted, what's your benchmark?"}, {"role": "user", "content": "Well, I would say, if you look at last year, you would probably come up with a number that would be normal, and we don't expect to be close to that. We'll see a lot of different factors. We don't have, to be honest, that clear insight into quarters at this point to give a forecast. So if you can wait for the next call, we'll definitely be updating you on that."}]}, {"messages": [{"role": "system", "content": "Thank you. That concludes today's question-and-answer session. Mr. Amon, do you have anything further to add before adjourning the call?"}, {"role": "assistant", "content": "Yes. Thank you so much for listening to our call. Here's the summary. Like from our perspective, while the market conditions remain challenging, we're very confident to reach our Q3 estimates at this point. We're taking action where we can control as we navigate the near-term headwinds, but it's -- most important, we'll continue to execute on our strategy, we like our strategy. I think we're investing in the right technologies for growth and diversification, especially in the IoT and Auto."}, {"role": "assistant", "content": "I feel we have a very competitive road map, so we're well positioned to benefit when the market returns to growth. And I think the last comment is we are going to become very relevant in AI. As you look at the speed of new models appearing, new companies investing, new use cases, the ability to run those things locally. I talk about having ability to run 10 billion parameter models on the phone without compromising battery life and be able to demonstrate that very shortly in this year. And you can see how that creates an even larger opportunity for us in automotive as well the entering of next generation personal computing. So excited about that, we'll continue to invest in this area."}, {"role": "assistant", "content": "In summary, we're very focused on our long-term success and we're steadfast in our commitment to drive maximum value for our stakeholders. And I want to thank all the employees for their dedication and contribution to Qualcomm and also our many partners and suppliers. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first questions come from the line of Michael Leithead with Barclays. Please proceed with your questions."}, {"role": "user", "content": "Great, thanks, good morning guys. First question, Lori, just high level on the full year EPS guide. You're doing about 450 of EPS in the first half, which implies about $7 in the second half. I assume synergies, Clear Lake, a few other things are helping in that back half. So I guess, is there a way to broadly characterize what you're assuming for market demand recovery in the second half versus, say, controllable actions?"}, {"role": "assistant", "content": "Yes. Thanks for the question, Mike. I mean you're right. We need about on average $1 lift in Q3 and Q4 from where we were in the first half. And so our focus really is on controllable actions to the extent we can. I mean, M&M volume recovery we saw about a 10% lift from Q4 to Q1, a similar lift from Q1 to Q2. We continue to expect volume recovery in the M&M business as well. Productivity, which is coming in at the top of our range for all of our businesses, M&M price optimization, synergies, which we'll see building across the quarter. We also do expect some improving demand again for in its entirety. We were up about 10% in the first quarter. We'll have some increase again in Q2, but we do expect things to get better still in the back half of the year. As we see kind of the EU and Asia competitive dynamic improving and see the -- in destocking in the U.S. And then we should have some tailwinds from raw materials and energy cost moderation, which should help with margins in all of our businesses and especially in EM as we see those costs flow through to inventory. And start to hit the P&L. So I think that's kind of what we're in control of. In terms of where we see the markets going, if we take it first by region, in China, we do expect modest demand improvement in Q2 and into the second half. We do see markets recovering in China, especially auto."}, {"role": "assistant", "content": "And we continue to see some improvement in utilization in acetyls and hopefully get acetyls coming off the cost curve. Especially now as we're going into some turnarounds in Asia, we do see some upward price movement and some margin expansion in acetyls. In Europe, we do expect continued modest demand improvement as well. We saw that through Q2. We expect that to continue at a slow pace into the second half. And then as I said, we would expect, as Asia proves we see less imports from Asia into Europe which should help margins in Europe get back to a better level. And in the U.S., again, we know a lot of people are calling out recession. We're not seeing that in our order book. I mean however you want to define recession. What we're continuing to see is general recovery across a lot of markets. We still had some destocking in Q2, but we expect that destocking to be mostly over as we go into the second half of the year. And so if you look at end markets, auto has continued to be quite resilient in the EM portfolio that's helping both our legacy businesses as well as our M&M businesses. 2023 auto builds, we still expect to be up 3% to 4% of 2022, and we're at a run rate right now that already achieved that. And we are seeing our own auto volume recovery at a pace significantly better than that. And really building on the project pipeline and all the work that's been done in the last several years to build that pipeline, both for the transition to EV as well as increasing our content per vehicle we see auto being a fairly robust end market for us this year even with just a moderate growth in the actual build themselves."}, {"role": "assistant", "content": "I would say the most sluggish sector we still see and is baked into our forward look is construction. Although we see some modest improvements in Europe and Asia and Europe, mostly on the renovation market as energy efficiency regulations come into effect. We still see it could be quite slow in the U.S. and in China, where we've not seen any recovery in really commercial construction yet at this time. And then non-auto -- the other non-auto durables, I would say, electronics, electrification is improving. There's a lot of need for more electrification around the world, and so we see that as a growing market this year. But in consumer electronics and consumer -- other consumer appliances, we still see that lagging 2022, especially in the U.S. And then finally, packaging, we do see resilient growth in packaging, especially in the U.S. I think about Amazon and everything that's getting shipped from online shopping. And also the push for sustainable packaging solutions, but paints and coatings is a bit slow tied to construction. So that's probably a bit more than you will before, Mike, but that's a little bit of a summary of kind of where we see things going in the second half and the underlying trends that support our confidence in that $11 to $12 range that we put out for the year."}, {"role": "user", "content": "Great. That's super helpful. And then maybe second, you talked in the prepared commentary, Lori, a bit about some of the integration actions you're taking in nylon 66 I was just hoping you could expand a bit about how you're currently thinking about your approach to the 66 value chain and just maybe how Celanese going forward might be operating differently than, say, M&M stand-alone nylon polymerization business or just even the legacy Celanese compounding business there?"}, {"role": "assistant", "content": "Yes. So let me talk a little bit about 66 in general, starting with what we're doing immediately around 66. So in the past, Celanese has not been backward integrated in 66. So we were just a purchaser of nylon Polymer, which was great when prices are low, not so great when prices are high. With DuPont, we've been able to add the backward integration. What we're doing differently is we've been able to secure a different raw material contract and instead of being forced to produce PA66 polymer we have options. We have flexibility. We have optionality. We can choose to produce backward integrated nylon polymer when it makes sense, we can make less and buy nylon polymers, from others, if that makes more sense, we can make less of it if we see the demand profile not supporting higher production rates, and we can make more of it if we see a sudden resurgence of demand. And so that flexibility, which is much more like we run our other businesses like GUR and Palm and even acetyl, gives us a degree of flexibility and ability to make value across a wide range of market conditions that DuPont really didn't have or really didn't exercise. And so we've already done that. We've gotten most of the Celanese nylon grade already certified to start with the DuPont polymer."}, {"role": "assistant", "content": "We've been using DuPont polymer out of inventory, raw home, compounding it to make the Celanese branded products and we've been flexing that to really start managing some of the inventories that had been built last year for both raw and for finished polymers in the DuPont product line. And so that's a degree of flexibility and a way of running the business, which is different. We've also talked about how we're pricing differently pushing price on more differentiated grade lowering prices in some case and more standard grades to really get our inventory in line with the demand profile. And therefore, the cost profile of our inventory in line with the demand profile. So that's kind of the immediate things we're doing. As we think about PA66 longer term, of course, we spent a lot of time studying this before we went into this deal. We know a lot of people are like, well, PA66 is under hood, that's going to decline. We don't see it that way. I mean if we look at electric vehicles as they're coming on the market, we find that the addressable content per vehicle is almost double compared to what we've traditionally have in IPE. And we think a lot of those new opportunities in electric vehicles also extends to PA66 as we see performance requirements increasing for electric vehicles. So longer battery life, higher heat management required."}, {"role": "assistant", "content": "These things are very suited to PA66. So if you think about parts, the PA66 is suited for an EV, things where you replace metal for lightweighting when you need the strength of a PA66, things like battery cell frames are in place. The brackets and the mounts for the electric motors and then things in the electrical system like high-voltage connectors, and it's the PA66, standard grades, but also the high temperature nylon grades, which are particularly applicable here and which we didn't have in our portfolio prior to the acquisition of M&M. And I would say for our legacy EM business, we're about halfway to capturing the addressable content for EVs. Obviously, the M&M business was not as focused there. And so not as far as long, but we are using our project pipeline to also drive these applications of PA66 into EVs now that we have those molecules available to us. And I think if you think about PA66 beyond electric vehicles, there are huge applications there in electrical and electronics which was an area that M&M was really underrepresented in historically."}, {"role": "assistant", "content": "So think about electrification and the need for not just electrification per vehicle, but for everything you think about people wanting to get out of natural gas for homes, but basically, the electrification of everything. All the outlets would say electrification, electricity demand is going to more than double in the next five years. So with that comes data management centers, power distribution centers. All of these things require polymer and specifically, all of them can benefit from the availability of PA66. And so we think there's going to be a strong pull-through for PA66 as the demand grows for building out our electrical infrastructure. And again, this is an area Celanese has been in for some years, and now we're able to apply that market knowledge and that end use knowledge to the PA66 profile and pull those volumes through using the project pipeline model."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question has come from the line of Jeff Zekauskas with JPMorgan. Please proceed with your questions."}, {"role": "user", "content": "Thanks very much. I think you reduced your earnings per share goal by $1. What was the source of decrease?"}, {"role": "assistant", "content": "Yes. If we look at the first half, our first half came in about where we -- in total, where we expected the first half to come in. With 1Q being up because of some unanticipated commercial opportunities for spot market volumes as well as some pull forward from the second quarter, especially in auto, a few parts for auto and a few for medical implants. And so since we don't expect those -- we're not counting on those unexpected opportunities reoccurring in the second quarter. Second quarter has been a little bit lower. And we are seeing the demand in the second quarter not build as quickly as we had thought at this time last quarter. And so that reduction to $11 to $12 really reflects that slower demand growth that we're seeing across second quarter going into third quarter and just accounting for that in our outlook for the second half."}, {"role": "user", "content": "Is it fair to say that as a base case, second quarter volumes and prices are flat sequentially?"}, {"role": "assistant", "content": "I expect for volume for Engineered Materials. We should see the volumes increasing moderately across the second half, especially in M&M as we have market share recovery and just base business demand increasing in automotive and some of the other end applications. I think for acetyls, we also expect moderate growth into the second quarter as we start to see more recovery in the end markets. Right now for acetyl, pricing is a little -- is challenged, although we are seeing some early green shoots on China asset pricing and margin expansion, it's very new, though. So although we've baked what we've seen so far into our projections, we think there's still some more room there, possible upside there. And I think for Engineered Materials, we do expect some margin expansion as we go to the second half particularly as we see the lower raws and energy costs from the first half pulling through the volume and inventory, which will help with margin expansion in the second half."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Ghansham Panjabi with Baird. Please proceed with your questions."}, {"role": "user", "content": "Thank you. Good morning, everyone. Lori, maybe you could just give us a bit more color on the demand spike that you saw in March, maybe stepping back. Is there any -- was there any sort of theme in particular that you can hone in on any region in particular that saw that increase? And as you kind of step back, was it more so of a pull-forward from 2Q that benefited March, do you think?"}, {"role": "assistant", "content": "Yes Gansham. Let me talk about that a little bit. So as we saw in March, what we saw in March is we saw our books starting to really -- at the time of the call, we were really seeing good volume showing up on our books for in our base businesses, and that gave us some confidence about second quarter. I think the unanticipated commercial opportunities that we saw, though, at the end of March, which really got us above our guidance was a number of things. One, there were some unusually high spot demand at the end of the quarter. So things like Palm and nylon, also [Indecipherable] an RDP, so it was across both of our businesses. And I think because of our flexibility we have in our supply chain and our operations, we were able to capture a significant share of that unexpected volume that arose at the end of the quarter. I would say that was the majority of that. I think though we also did see accelerated by in a few products in auto and in medical implants, which is a little unusual because we had expected quite a big headwind from medical implants and in fact, had some orders come in. In the case of medical, I think that probably pulled forward from Q2. In auto, we think it's also some pull forward from Q2 in anticipation of better demand in Q2. So I think on that one, is it pull forward? Or is it just quicker demand recovery? Not sure yet. That's not clear. But we're kind of characterizing it as pull forward until we see if that's a sustainable trend."}, {"role": "user", "content": "Got it. And then as it relates to the U.S. and your comments on destocking, just a bit more color there in terms of which particular end markets I assume construction is part of that. But just to hear your thoughts. And then just judging by destocking that's occurred in other geographies, including in Europe, what do you think is a reasonable timeline in terms of the destocking event? Is it two quarters, three quarters? How are you thinking about it now?"}, {"role": "assistant", "content": "Yes. What I would say, is we really saw the end of destocking in Europe and Asia for the most part as we moved into the second quarter. What we've really seen destocking continue is in the U.S. And there, auto is pretty robust, I would say, across all of the areas. But I think there, we see destocking continuing in consumer goods and industrial for the most part. And right now, our projection is we think that's going to continue through second quarter, but be pretty much over as we move into the third quarter, and that's some of the uplift we expect to see in the second half."}]}, {"messages": [{"role": "system", "content": "Our next question has come from the line of Michael Sison with Wells Fargo. Please proceed with your questions."}, {"role": "user", "content": "Hey, good morning. Lori or maybe Scott, you started the first quarter with negative free cash flow. Can you help us walk into the 1.4? You maintain free cash of 1.4. How does that sort of unfold, do we turn positive in 2Q? Or is it more second half loaded?"}, {"role": "user", "content": "Yes. I mean we expect it to be negative just kind of coming off of where Q4 was from a sales perspective and then kind of when we had the interest payment. So as we walk into the second quarter, you've got higher levels of earnings coming through. We also had really abnormally high capex from a cash perspective in the quarter as well as cash taxes being higher. That goes away at a higher level. We're at more normalized levels in the balance of the year. With the higher earnings levels coming through now in the balance part of the year, we would expect to be able to kind of get up and average much higher levels as we go forward. That sequential walk from Q1 into Q2 is about a $700 million lift from where we were in the first quarter when you kind of put all those things together."}, {"role": "user", "content": "Got it. Okay. And then I think in your prepared remarks, you said that 50% of the first quarter EPS came in March. So April is at a buck -I'm sorry, March is at a buck then if you think about April, May, June, it typically is better than March, I think. So what happened, do you think in terms of decelerate -- the deceleration into April, May and June, and I thought maybe that dollar could have sustained throughout the quarter."}, {"role": "assistant", "content": "Yes. Again, Mike, I would say a significant portion -- or a portion, I should say, of that dollar in March really was related to the unanticipated and spot like opportunities we were able to capture in March. And so we've not seen those repeat in April, and we haven't baked them in as repeating later in the quarter. Whereas, the base level of earnings has continued to grow -- will continue to grow moderately across the months. So I think we're just trying to be realistic in terms of what we think is repeatable and what was fortunate. Again, we're positioned to take advantage of those spot opportunities if they were to arise again, but we don't want to bake that into our forecast."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Matthew DeYeo with Bank of America. Please proceed with your questions."}, {"role": "user", "content": "Good morning. So it looks like you beat your 1Q M&M EBITDA guidance and 2Q is expected to accelerate. But the prepared comments no longer mentioned that lift to like $700 million to $750 million in EBITDA. Are you walking away from that level? What do you kind of expect M&M can deliver this year for EBITDA?"}, {"role": "assistant", "content": "Thanks, Matt. We're really happy with how the integration is going and the value uplift we're starting to see in the M&M assets. Our concern at this point is the fact that second quarter is not accelerating at the pace that we thought across all of our businesses. And so we're going into the second half. At a little lower demand rate than we had originally called out last quarter. So that applies to M&M as well. And so what we're really focused on now, so what I would say is, if that plays out the way we see now, I would say we're kind of at the lower end of that $700 million to $750 million that we called out. And so what we're really trying to get our teams to focus on is making sure we're delivering growth. So that as we get towards the end of the year, we are basically on track for EPS neutral quarter going into 2023, either sometime in the second half or going into 2023, which would be at that kind of $200 million EBITDA range, including synergy."}, {"role": "user", "content": "And can you talk a little bit more about the product flow out of China and PLM into Europe? PLM is not really a product, I have a ton of line of sight into. So maybe kind of give me an idea of where margins are in Europe now versus China or what the theoretical kind of compression risk looks like to the European business, how far along we are and maybe some of that are closing from European product or a Chinese product?"}, {"role": "assistant", "content": "Sure. It really started back in the fourth quarter and when we really started seeing -- or really even through the third quarter last year when we really started seeing the very high energy prices in Europe. That raise the price of palm in Europe and provided an arbitrage opportunity for Palm coming out of Asia, both China and Korea out of Asia into Europe because demand was very low in Europe. And so that -- those molecules found a home in Europe, where it could be highly competitive even with the shipping cost to do the -- to be there. Now obviously, with the COVID resurgence in December, and going into the first quarter, we saw those volumes still flowing in the first quarter, even as we started to see energy prices coming down, in Europe, but because of the lack of demand in Asia, there was still an opportunity to move projects into Europe. And while we still see volumes moving in the second quarter, we really expect that now demand is coming back up in Asia that those molecules will find a home again in Asia, prices are down and competitive in Europe. With that on a landed basis. And so we should see those prices stabilizing again in Europe, I think as we move through this quarter and into the third quarter."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Josh Spector with UBS. Please proceed with your questions."}, {"role": "user", "content": "Yeah, hi, thanks. Two questions, maybe I'll roll into. One here is you seem to pull a lot of levers to basically keep free cash flow in the range that you provided, despite the cut to earnings. Just curious, one, what levers are left if things will play out as you see it and two, as you look at your guidance, I mean, you're talking about demand improving. I guess does the lower end of your range reflect the scenario where demand doesn't really improve from 2Q levels? Or would that be another cut that we need to consider? Thanks."}, {"role": "assistant", "content": "Yes. Let me start with your kind of last question first. I think the lower end is a range that we feel is achievable even with only really moderate growth. And there are some areas we know like auto, we feel quite comfortable we'll continue to grow this year at a very moderate pace because of the pent-up demand for auto. So I would say the -- we feel very confident in the $11, short of a global recession, on the $11 end of our outlook and our cash flow reflects that. But I mean, if we were to say, go into a global recession, we have a really unexpected downturn here well beyond anything that any of us are imagining right now. There are still levers within cash flow, and we saw that in 2020 with COVID. So if we really see that kind of scenario develop our demand goes down. One, we'll have more working capital release because the value of inventory goes down, we'll be able to go down to even more minimum inventories. But we would also have cost savings as we would take steps similar to what we did during COVID to slow production rates, possibly even shut down plants for a period of time, and you have cost saving benefits that come from that. So I mean, I think we feel very comfortable in our ability to deliver the level of cash flow that we've indicated given the steps that we've already called out."}, {"role": "user", "content": "Okay. And just a quick follow-up just on the inventory adjustment in 2Q, kind of thinking along against similar scenarios here, is that something contained within 2Q? Or is that something that drags into the second half is what's baked into the outlook there?"}, {"role": "assistant", "content": "Yes. So we're assuming any working capital release from inventory of $300 million or more. So if you think about 2Q, that's a $100 million reduction in working capital and that comes with 30 to 35 impact on EBITDA -- EBIT. So as we go forward, you would expect to see that same impact continue through the second half as we take other inventory adjustments. Obviously, different inventory adjustments come at a different EBIT and depending on what pricing is doing, but I would expect to see some impact from inventory as we move through the year."}, {"role": "user", "content": "Yes. And Josh and that's all baked into the guide that we gave."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Kevin McCarthy with Vertical Research Partners. Please proceed with your questions."}, {"role": "user", "content": "Good morning. Lori, would you elaborate on your acetyl outlook in China? If we look at some of the consultant assessments of acetic acid prices they really haven't done a whole lot over the last two months or so. But in listening to your commentary, it sounds like maybe there's some upward tension building there. If that's correct, would you attribute that to some of your competitors' outages over the next month or 2? Or do you foresee a more sustained cyclical uplift as the year plays out."}, {"role": "assistant", "content": "Yes. Thanks for the question, Kevin. So acetyl in fourth quarter was definitely sub-foundational, and I think we talked about that. I mean we're really essentially at the cost curve and in some periods of time during the quarter and fourth quarter and even into first quarter, even below the cost curve from time to time. So what's happened is if you look at coal pricing in China, coal pricing, why asset pricing has remained at about the same level for the last several months. We've actually seen coal pricing come down from Q4 to Q1, coal pricing came down about 20%. And so you see some uplift in the actual margin. So now we're still very close to the cost curve in terms of margins, but it stabilized a little bit through first quarter. And then some of the turnarounds, which we expected to happen in the first quarter got pushed to second quarter. We're starting to see those turnarounds start. And as that takes capacity out of the system, that further tightens the [Indecipherable] demand situation, we see margins slowly creeping up. And just really in the last five days, we've started to see a slow increase in acetic acid pricing which we baked that into our guidance, that small increase that we've seen. But I'd say it's still early. We need to see if that's sustained. But we think there is a chance that is sustained with now the more normal level of outages we expect going forward. I mean the last six months have been remarkably stable in the acetic acid world. I mean not a lot of unplanned downtime, not a lot of increases in demand, not a lot of planned downtime. And I think we're going into a more typical period now where we will have occasional outages, both planned and unplanned, which will give us periods of market tightness that we'll be able to take advantage of."}, {"role": "user", "content": "And then secondly, for Scott, can you speak to your debt reduction target for this year? You affirmed your free cash flow or at least endorsed free cash flow $1.4 billion. I think that number excludes the proceeds that you expect from your Mitsui deal which I understand to be $400 million or more. And so can you put that into context in terms of how you can attack the balance sheet over the next eight or nine months here?"}, {"role": "user", "content": "Yes. Thanks. Kevin. If you go back, we had stated a goal of reducing net debt by $1 billion in 2023. With the cash flow that we expect, we'll certainly do that. And when you layer in the Mitsui proceeds on top of that, certainly, will well exceed that net debt reduction target that we had when we first announced the deal a year ago, of $1 billion. So we feel good about where we finished the year from a net debt perspective. And then given what Lori talked about earlier on where we would expect from an earnings trajectory to exit the year as we drive cleanup of the inventory on the balance sheet and we start expensing much lower cost inventory as we go into the second half and then exit the year, we feel good about the earnings trajectory to get to that three times target that we had initially stated by the end of 2020."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of John McNulty with BMO Capital Markets. Please proceed with your questions."}, {"role": "user", "content": "Hi, good morning. This is Bhavesh Lodaya for John. I would like to hear your thoughts on the competitive landscape in Europe between your businesses. In your prepared remarks, you mentioned some price concessions you offer there in Yen. Any changes to your competitors or perhaps a change in the product mix that is happening there? And then on asset deals, all your competitors have the level of flexibility you mentioned of moving products from Asia. So assuming things are not as easy as you for your competitors, any changes in market share or capacity there."}, {"role": "assistant", "content": "Yes. In terms of the competitive landscape in Europe, I think the real challenge there has been imports from Asia, again, reflecting the low demand in Asia and the improved cost position Asia had compared to Europe when they had much higher energy prices. And I should say Europe energy prices have come down significantly, but they are still high relative to the rest of the world. And so again, we see that situation improving, especially now with increased demand developing in Europe. We really see that having improved now at the end of the first quarter going into the second quarter and then further improving in the second half of the year. On acetyl's competitiveness, it has been a very stable market. So it's been very competitive as there's -- and it's also been a period of seasonably low demand for acetyls as well as some of the impacts of China holidays and just lower China demand and the slowdown in the construction industry globally and the impact that has on acetyls."}, {"role": "assistant", "content": "Again, as we start to see recovery, even slight recovery in Europe and Asia in construction, as we start the normal levels of shutdown, we do see an opportunity there to capture additional margin in the acetyl space. the ability to capture additional market share is really based upon our commercial model and the optionality and flexibility we have to take advantage of when there are spot opportunities by moving molecules around the globe by flexing up and down our product chain. In first quarter, we took advantage of the stronger markets for emulsions and RDP further down the chain, which helped boost our profitability in the first quarter. As we start to see some movement in the asset price in China, there will be an opportunity to take advantage of it there. So it really is all around more so than market share, it's more around the flexibility and optionality and the ability to capture in any given market at any given time, any upside potential that exists."}, {"role": "user", "content": "Got it. And secondly, on [Indecipherable], congrats on the commissioning there. You mentioned $100 million worth earnings contribution next year. Is this all incremental to your overall global earnings level -- or will some of it be offset by, say, reduced operating rates somewhere products in China where you're running close to your cost curve?"}, {"role": "assistant", "content": "Yes. So the $100 million is on top of our already kind of $1.3 billion level of foundational earnings for Acetyl so that's raising the total global acetyl Foundational earnings from 1.3 to 1.4. And think about it, it's really about 50% based on what I call ratable productivity, so things like reduce catalyst costs, reduce energy costs, reduce maintenance costs, etc. And then about 50% of it is based on having kind of built-in turnaround and outage coverage in the network by having two units at Clear Lake. And then obviously, there's additional upside to that if we were to get in a period of higher demand and higher pricing to basically raise our output from -- in totality of our acetyl chain."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Frank Mitsch with Birmingham Research. Please proceed with your questions."}, {"role": "user", "content": "Yes, good morning, congratulations on the mechanical completion for the Clear Lake acetic acid facility. I know you gave some earnings projections for the balance of the year and for next year. I was just curious as to how this is going to impact your operating rates at some of your other facilities. How should we think about the industry overall and the impact that this may have."}, {"role": "assistant", "content": "Yes. So thanks, Frank. We are happy to have the mechanical completion behind us, and we're moving now into the commissioning phase and anticipate production in Q3. Look, at the lower natural gas prices we're seeing, which greatly advantages our location there in Clear Lake. I would anticipate you would see that facility running at higher rates, which could reduce rates because of global demand. Reduce our operating rates in China and Singapore as we continue to supply Europe from the U.S., and we'll be able to supply Europe even at higher volumes entirely now coming out of the U.S., and it's cost effective to do so. I don't know that you really see opportunistic shipments to Asia. Although that's possible in the second half, the volume of that, though, is limited. I mean, there are other supply constraints around availability of vessels and availability of receiving tankage, etc. But that arbitrage could open up as well. I think what we need to realize is Clear Lake is not only the lowest cost producer of acetic acid now in the world. And we'll be able to produce a significant volume of it, but it is also the lowest carbon footprint producer of acetic acid in the world. And so we think that is going to bring -- open up a lot of opportunities for Clear Lake and from the impact on the industry, clearly, I think it will make some impact in terms of volumes you see moving from Asia to Europe as we'll be able to service volumes in Europe much more cheaply from the U.S."}, {"role": "user", "content": "So the intent would be to run that flat out and ramp back some of the operating -- ramp up some of your other facilities. Where do you think operating rates are in acetic acid as we look at the second quarter. And then, of course, you guys recently restarted your non-Zing VAM facility. If you could talk about operating rates in the VAM area as well, that would be helpful."}, {"role": "assistant", "content": "Yes. Look, industry operating rates for both globally for both aceic acid and VAM are still kind of in that 90% range. Maybe from time to time a bit lower, but are still kind of trending towards that 90% range. It just has been so stable, which is a little bit unusual in this business. For the last six months that people have gotten comfortable at those operating levels and demand has been down, again, normal seasonality. And so it feels quite comfortable. But at 90%, I mean, we are now positioned to take advantage of really any -- either planned or unplanned downtime that occur globally in either asset or BAM or any of the downstream derivatives. And that's really where we've seen the opportunity in the past is when we start getting some either regional or short-term misallocation between supply and demand."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Vincent Andrews with Morgan Stanley. Please proceed with your questions."}, {"role": "user", "content": "Thank you. I wanted to follow up on that a little bit on the demand side of the equation because one of the issues I've been having in our own S&D models here is trying to sort of reconcile what I think the underlying demand number is versus what shipments have been to try to account for. Obviously, we had a lot of issues with unplanned outages over the last few years, but we also had very strong building and construction demand in the acetyl chain. So how do you reconcile that when you sit here today and think about what the actual underlying instant demand is versus shipments and maybe how much shipments might have overstated demand in the past and maybe understating demand now in terms of thinking through what operating rates can look like over the next couple of years."}, {"role": "assistant", "content": "Yes. Look, it's been a bit of a confusing time and [Indecipherable], I would say. If we look at fourth quarter last year, when prices were very low, we started seeing demand really coming off, particularly in Asia, although operations were fairly stable, we certainly still saw some molecules moving as people anticipated different things. And as we go forward, we also saw a lot of shipment and people carrying higher inventories before that because of all of the supply chain issues that existed around the world, and you call like in the first half of 2022. VAM and emulsions, I mean, there just wasn't even enough molecules out there to meet the customer demand. And so people were carrying a lot higher inventories when we saw the reduction in demand through the fourth quarter, we saw people really destocking in the fourth quarter. We called that out at the last earnings call. I would say now as we've moved through the first quarter and especially March and beyond, we do see demand recovery coming back for fibers for other end users. Construction is still, I'd say, the weak spot, although even in -- like in Asia, we're seeing a little bit of recovery in construction. And in Europe, we're seeing recovery in construction, not so much in new builds, but in renovation for energy efficiency, where a lot of our downstream derivatives products go. So we are seeing the demand coming back again with a few exceptions. And so that is starting to bring the volumes up. But we're not really seeing restocking occurring yet as people feel fairly comfortable because we've been in such a stable period and haven't had the supply chain issues. I think customers feel fairly confident they can get the materials they want. As we see demand continue to increase, I expect we'll see some level of restocking. And with that higher demand, we should see some tightening of pricing and seeing some pricing uplift across all the regions."}, {"role": "user", "content": "Thanks very much. I'll leave it there."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Arun Viswanathan with RBC Capital Markets. Please proceed with your questions."}, {"role": "user", "content": "Great, thanks for taking my question. I guess the first thing was you noted about $1 of uplift from 2Q into 3Q and 4Q. Would that be split kind of evenly between the two -- I mean, the $2 be split evenly, so you're looking at 3Q, 4Q about equivalently? Or is 3Q typically seasonally higher and then relatedly, how much of that dollar uplift, I guess, is under your control? I know you feel very comfortable with the $11 level for the full year. But maybe if you could just walk through maybe the walk from 250 to 350, say how much would be coming from M&M synergies and how much will be coming from volume and how much would be coming from internal cost reductions or something like that, that would be helpful. Thank you."}, {"role": "assistant", "content": "Sure. So I would say -- let me again start with the end probably of that dollar uplift, the $0.75 is the bottom end of the range, which would get us kind of to the $11. We feel very much that's in our control. That's within our ability to see. I mean, again, assuming markets develop moderately in the way that we're calling out now. Combined with the controllable actions, combined with what we've seen with raw materials and energy, those things all continue as we've called out, then we clearly have a line of sight to that $11. To get to the upper end of the range, which would be more like 375 a quarter would require some further demand improvement across the end markets. And so you're right. Usually, in terms of timing, usually Q3 is a bit higher than Q4. I think we don't really have a lot of visibility on that yet. But I would say, I actually wouldn't expect them to be that much different this year. Although we typically get seasonality in Q4. That seasonality is in the Western Hemisphere. Now with the acquisition, we have much more exposure in Asia, which tends to be very strong in Q4. So I would expect for Engineered Materials, for example, that those would be similar levels in Q3 and Q4. And in fact, if we're in recovery, we've had some very healthy Q4 before when we've been in recovery as well as we have synergies building throughout the years so that our highest number for synergy will be in Q4. So I -- right now, I would say I would expect Q3 and Q4 to be similar, although typically, Q3 has been a higher quarter than Q4."}, {"role": "user", "content": "Great. And then just as a follow-up, you're going to be exiting the year theoretically at around $7 a second half level of earnings. So next year, and still, that would be maybe reflective of just a modest demand environment. So would you expect kind of continued growth as you look into '24 and similar to that second half and growing from there, is that a fair starting point?"}, {"role": "assistant", "content": "Yes. Look, I think that's a fair starting point. I mean, obviously, we'll have some quarter-to-quarter variation because of seasonality and other things. But assuming a steady demand environment, will continue to get additional benefits from M&M. We've historically grown our own Engineered Materials business in kind of a double-digit range year-on-year. And we will get the further benefits from having Clear Lake online as well as some of the other expansions, including the integration of tow into acetyls which will continue to grow on a year-on-year basis as we move forward. So I think that's not an unreasonable place to start when you're thinking about 2024."}]}, {"messages": [{"role": "system", "content": "Come from the line of Hassan Ahmed with Analytics Global. Please proceed with your questions."}, {"role": "user", "content": "Good morning, Lori, and Scott. A question around some of the guided to sort of self-help sort of measures to boost EBITDA. I mean earlier, you were talking about being able to attain around $130 million in 2023 worth of M&M synergies as well as slightly north of $140 million from the tow business overall. So how is that tracking? Are those numbers still sort of attainable, beatable? Where do we stand with that?"}, {"role": "assistant", "content": "Yes. So we had called out before 100 to 135 of M&M synergies. We fully expect to be at the top end of that range. So we are on track for that. In the second quarter, we had about $10 million of synergies from M&M. There's another $10 million or $20 million that will be added to that in the second quarter and continue to build through the year. So we feel very comfortable in achieving that $135 million of M&M synergies this year. We feel very comfortable that we have achieved the uplift from tow. That was very obvious in the first quarter, and we also got an additional 10 million to 20 million of uplift in the first quarter from [Indecipherable] spot sales, which was part of our model going forward that we wanted to be able. Those will be there every quarter, but I think it shows the value of having integrated it into acetyls and running it in a different way. It gives us more options to capture upside than we've had in the past. So I feel very comfortable with that number on tow. I think the other thing is productivity. So we've historically achieved $100 million to $150 million a year of gross productivity. Through the first quarter, we are on track to achieve at or above that top end of that range on productivity. And these are business productivity separate from M&M synergies. So I think when we talk about self-help, we feel like we're really delivering on all of these areas as well as delivering on the volume recovery in M&M, the pricing recovery and all those things that we've laid out relative to the deal."}, {"role": "user", "content": "Fair enough. Very helpful. And as a follow-up, you had a nice sort of bump up in EM businesses EBITDA margins Q4 to Q1, around 20% EBITDA margins you guys reported for Q1. And obviously, you gave some near-term sort of guidance showing the uplift in EBITDA in that business. But from a margin perspective, longer term, as we look at sort of 2024 and beyond, where do you see EM business sort of EBITDA margins going? Because historically, pre M&M you guys were sort of reporting sort of EBITDA margins well into the sort of low to mid-30% range. I mean, should we eventually expect sort of move towards those sort of levels of margins?"}, {"role": "assistant", "content": "Yes. Look, in Q1, the combined Engineered Materials was about 20%. We expect that to move up across the year really as we lift the EBITDA margins on the M&M business. So by the end of the year, I think we should be more around that 23% range for the year. And I fully expect as we continue to grow M&M as we continue to grow our base business as we continue to high grade the portfolio and realize the value of the synergies that we will move into that more historical level of 25% to 30% EBITDA margins, which is actually about where we've been in the last few years."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next questions come from the line of Jaideep Pandya with On Field Research. Please proceed with your questions."}, {"role": "user", "content": "Thanks. Just want to say, it's very commendable that you guys have loaded the balance sheet with debt and not gone for the rights issue. But since the deal, the world has changed quite significantly and you're doing everything you can to sort of rightsize the business. But I just want to understand the legacy EM business, how are you making sure you're not starving this of capital because there's a lot of focus on M&M. That's my first question. The second question is on the competitive landscape in China. As a lot of Nylon six and 66 polymerization capacity coming in China. So just putting in context of the value chain, do you actually benefit because the chain is going long in polymerization in China? Or is this going to create headaches on the pricing for you?"}, {"role": "assistant", "content": "Look, on the question around legacy EM, I think the thing to realize is we've really focused in the last six months in forming one Celanese team. So we have put an organization in place that brings all of our businesses, including Santoprene together, under new business line groups under the best set of leaders that we could pick out of the combined organization. And we've really focused on developing a culture of one Celanese. So we're not looking -- although for the benefits of this call, we do talk about how we're doing in each part of the business, we're not running it as two separate businesses. We're running it as one business. We have everybody on the same sales platform. We have everybody in the project model. We look at our capital processes have been combined. So we look at it in the same way. So I don't think we're at any risk of ignoring one part of the business to benefit the other, because we really are running it as one business now, even though -- because we currently still have two financial systems until we can integrate the IT systems, we are able to track it separately. But in terms of how we're running it, their combined sales team, we're approaching customers as one Celanese with a full slate of products."}, {"role": "assistant", "content": "And if you look at -- you may be concerned because of some of the callouts we've done in the reduction of capex. But really, if you look at that reduction in capex, it's really just about reassessing the timing of our projects to really align with the revised demand outlook we have now and also integrating the M&M capacity we have into the project views to say, we may now have capacity on the ground. We don't use to go build it. So really optimizing the combined capacity we have, which has led us delay or eliminate some of the projects that we had thought we would need to do to gain capacity. So we haven't really canceled any material projects. We haven't made any significant cuts to our reliability and maintenance and those things that make us a reliable supplier for our customers. This is really about optimizing the new footprint and adjusting our capex to go with the new demand forecast we have going forward. And then on the question on polymerization of PA66, I mean there is a lot of PA66 capacity coming on in Asia."}, {"role": "assistant", "content": "I think one thing to remember is a very small portion of PA66 production actually goes into Engineered Materials, a vast majority of it goes into fibers. And so it doesn't all dumb into engineered materials. I mean that is really a function of compounding and others. It is, though, one of the reasons we have been so focused on building optionality into our supply chain raw material polymer, so that we can have a choice in terms of make versus buy whichever is the most economically attractive. It's why do we have a contract that allows us more flexibility. That's why we're trying to get our inventories back to a level of control and that's why we're really looking at the totality of our footprint to really be able to take advantage of low PA66 raw material prices, if that's available. Or to make it if we see an advantage to continue to produce ourselves."}, {"role": "user", "content": "Darryl, we'll take one more question, please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Please proceed with your questions."}, {"role": "user", "content": "Great, thank you. You Converted M&M over to the Celanese project pipeline and backlog model. How would you characterize their number of new projects versus the legacy Celanese and backlog?"}, {"role": "assistant", "content": "That's a good question. I'm not sure I have a number in front of me. What I'd say is we've been pleased with their willingness to use the model, if you will, and their understanding of how this adds value to the new Celanese. And I'd say the projects that are being tendered are growing as we move through this transition and people really understand what we're looking for. Again, it helps that we have combined everybody into one organization. We have one sales team. And so our growth in the project pipeline is good. We are a little bit separate from that, but we also are finding a lot of interesting things in the M&M T&I portfolio we hope to be able to bring to market. And so I think I would just expect to see it accelerate over time as we get everybody fully on board and adjusted to the Celanese way of working."}, {"role": "user", "content": "And then you've restarted the VAM unit in Germany. If there's a cold winter or some sort of energy supply disruption. Have you made enough changes to keep that plant up in that scenario? Or will you just shut it down again if we get an end new spike?"}, {"role": "assistant", "content": "So John, I would say it was still economically attractive to run it last year when we shut it down on its own, it would have been economically attractive, but the situation there was the global demand was so low, it was more economically attractive to shut it down and supply material out of the U.S. So it really is a question of total demand profile across the globe. It is an attractive unit. It is it is cost efficient. It really was related to the high energy prices we saw there. So our intent would be to run it. We hope demand would keep up with that, but we will always look at our entirety of our portfolio and make decisions about what to run and what not to run based on what's most economically attractive."}]}, {"messages": [{"role": "system", "content": "Thank you. There are no further questions at this time. I'd like to hand the call back over to Brandon and I ask for any closing remarks."}, {"role": "user", "content": "Thank you. We'd like to thank everyone for listening in today. As always, we're available after the call for any follow-up questions you may have. Darryl, please go ahead and close up the call."}]}, {"messages": [{"role": "system", "content": "Thank you, sir. [Operator Instructions] Justin Lake with Wolfe Research. You may go ahead, sir."}, {"role": "user", "content": "Thanks. Appreciate all the color. Joel, maybe you could talk a little bit about what you're seeing? You talked about higher turnover and lower temp labor costs. What's going on with turnover there? What are you expecting for the rest of the year? And how are labor costs tracking versus kind of the headwind that you had laid out for us? And then maybe given the upside in the quarter, what are you projecting for the rest of the year relative to Q1? And if you do hit these numbers, when do you think you get back to kind of your target leverage ratio and therefore, the potential to buy back shares? Thanks."}, {"role": "assistant", "content": "Okay. Well, there's a lot in there. So let me just pull up for a second and then Joel can answer some of your follow-up questions, Justin, this is Javier. First, on labor, we started to give a little more color when we had more volatility in some of the underlying metrics. But I think it's a good time right now to pull up, as you asked, which is a bigger number. But just so we're clear on all of the metrics. When you talk about SWBs, you take into account wages, productivity, benefits, training and contract labor. Within wages, there's -- obviously, you can double-click on that, you've got over time, shift differential and other things. But let's stay with those five. In the third quarter of 2022, we had a spike in training in contract labor that we called out because they were outliers to our historical numbers. But then as we fast forward to today, we worry that people aren't fast enough with the math to calculate the interplay between the five. So let me see if I get to your number, and if not, you can follow up a question. So from 2018 to 2022, we had a CAGR of roughly 2% in SWB. In 2022, which, of course, had that outlier that we were just talking about, that number went to roughly 8% growth. And in 2023, over 2022, we expect that number that incorporates all those variables to be more in the 4% to 5% growth. So does that answer the question on labor? Or do you want to ask a follow-up on that?"}, {"role": "user", "content": "Yes, just mostly on labor, what I'm trying to figure out is versus that 4% to 5%. If you continue at this pace, where do you think you end up?"}, {"role": "assistant", "content": "I'd say, Justin, we're thinking -- we're about $25 million ahead of where we thought we would be on the total labor cost. So if you think of our guide increase at the middle of the range of $50 million, I'd say half of that is labor and half of that is volume, and that's how I get to $25 million."}, {"role": "user", "content": "And is that just for the first quarter, Joel? And I'm kind of trying to think about like if this continues, does that mean you're $100 million better?"}, {"role": "assistant", "content": "Well, in the labor line itself, there were some items that we don't think will recur. They were good guys in lines like benefits and workers' comp that I'd strip out as you think about annualizing things. So the $25 million would be a full year number in terms of where we need to go from here, we're expecting continued wage pressure as the year presses on. There will be a little bit of improvement in contract labor, but we've seen most of the improvement in contract labor that we're likely to see because it just happened faster than we thought. And -- on the productivity side, we haven't seen much. We're off the peak that we saw in the middle of last year, but we're still well above pre-COVID levels. And what we're currently building in is some progress in the back half of the year, but ending the year still above pre-COVID levels, and that's really driven largely by the turnover that we're seeing."}, {"role": "user", "content": "That's helpful. I'll take the rest of my questions offline, Joel. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Kevin Fischbeck with Bank of America. You may go ahead, sir."}, {"role": "user", "content": "Hi. This is actually Nabiya Guterres on for Kevin. I had just another quick question on labor. You said you expect continued wage pressure in the year. What are you assuming for wage inflation this year? And how does it compare to last year and pre-COVID levels? Thanks."}, {"role": "assistant", "content": "Yes. I think it was really answered a little bit with Justin, so let me make sure we're asking the same thing. So we just basically said that if you take all of the variables into account, that we think that SWB will be 4% to 5% higher, '23 over '22. Does that answer your question?"}, {"role": "user", "content": "Yes. Thank you. And that's all. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Andrew Mok with UBS. You may go ahead, sir."}, {"role": "user", "content": "Hi. This is Thomas [Phonetic] on for Andrew. Start, could you walk us through the underlying drivers of the treatment growth beat in the quarter as well as provide an update on how mistreatment rates are tracking sequentially?"}, {"role": "assistant", "content": "Thanks. Sure. Thanks for the question. So I'd like to use the treatment per day number, and you'll see that, that number is up about 90 bps quarter-over-quarter. That is largely driven by census increases, and that's the result of admissions increases in Q1, offset by continued excess mortality, which is way down relative to prior years, but remains higher than it was pre-COVID. In terms of mistreatment rates, it continues to trend well above the pre-COVID number. It can move around from one quarter to the next. There's a lot of seasonality and other impacts in it but we are still seeing it running roughly 100 basis points higher than what we saw pre-COVID."}, {"role": "user", "content": "Got it. That's helpful. And a quick follow-up. I wanted to ask about the ESA switch to MIRCERA. Specifically, are there any KPIs you can share to track the transition? And do you have any update on the cadence of the rollout?"}, {"role": "assistant", "content": "We do not have any disclosures on it. All I can tell you is that the rollout is going as well as we expected and that from a clinical perspective, we are seeing the results that we wanted. So it's going as planned."}, {"role": "user", "content": "Great. Thanks again."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our next caller is Pito Chickering from Deutsche Bank. You may go ahead."}, {"role": "assistant", "content": "Good afternoon guys. So follow-up here on Justin's question, on the $50 million operating income raise, you said half is labor and half was better volumes. You added almost 60% new lives into IKC. I guess any changes on how that is tracking versus your previous guidance? And then on the guidance raise, can you walk us through what $50 million of operating income is transitioning into $100 million of free cash flow, is that just working capital or anything else in there?"}, {"role": "assistant", "content": "Let me take the first part of that, and Joel can take the second part of that. On IKC, as you can imagine, it is a growing business and while we're making really good progress, it is clearly in the investment phase of the business. And so there is no change in what we see the full year. We had a bit of timing in there. So the number looks a little better on a quarter-to-date than it will on an annualized basis. We're still on target to what we've said."}, {"role": "assistant", "content": "Yes. Pito, on the free cash flow, as you pointed out, obviously, an increase in OI helps that. The other two things are: one, cash taxes are trending better than we expected. And the second is working capital. You see the DSOs were down considerably. So we think we'll get a bit of a tailwind to that as well for the year."}, {"role": "assistant", "content": "Okay. And then just Cigna IKC for a second, realizing that when you add on 50%, almost 60% new lives, that's going to be sort of a drag as you guys think about those coming online. But any sort of color on sort of how the medical trends are tracking for your people that you had coming into the year? I mean we've seen spikes of utilization in other areas of healthcare. Just curious on how that class of 2022 was tracking during the first quarter?"}, {"role": "assistant", "content": "Yes. It's -- as you said, we agree. It's a little hard to say because we have so much noise and volatility because of COVID. And so there's not a lot to report, what we're seeing is that the savings are coming in line to where we expect the model of care is a little less efficient than we want. We need to build more scale, and we need to standardize a whole bunch of these things that right now are manual. So we're still work in progress. We're growing a lot of things that we want to be, and we're still expecting to be breakeven in 2026."}, {"role": "assistant", "content": "Okay. And then so one last question here, which won't shock you, looking at the NAG growth, sort of flat year-over-year, definitely a lot better sort of trending that we've seen for the last several quarters, Baxter was talking about sort of similar normalization utilization. I guess any color you can give us on how many patients you guys added this quarter, how did that sort of track versus, say, 2022 versus pre-COVID? And then any more color you can give us on where mortality is tracking on the current patient base today?"}, {"role": "assistant", "content": "Yes. So let me walk you through some numbers, Pito here. So the net census growth in Q1 was about 1,350 patients. If you compare that to what it was in Q1 of '22, that was negative almost 500 patients. So an almost 2,000 patients swing -- most of that is explained by the change in excess mortality, although some of it is also the result of a better admit quarter this quarter than we saw last year. So on both the mortality side and the admit side, we saw progress."}, {"role": "assistant", "content": "So on the admit side, I guess, can you give us a color of sort of the 1Q '23 new adds and how there was 1Q '19? Just to some comparison on pre-COVID."}, {"role": "assistant", "content": "If you were to look at this, excluding excess mortality, I don't have the numbers in front of me, but I can tell you it was definitely higher this quarter than it was Q1 of 2019. That said, I would be cautious before we start extrapolating this out. This is one quarter of data, this metric historically has been variable quarter-to-quarter. And I'd want to wait to see what happens for a few more months before we're ready to really declare a trend here."}, {"role": "assistant", "content": "So I mean just a last question on that one. Sorry to sort of keep going there. But you're looking at the USRDS data, we go back for many years, the incidence rate of [Indecipherable] disease has been fairly consistent for I mean, nearly a decade, all signs you're seeing that we are returning to normalization of incidence rates and for you it's just too soon, some lead to call it at this point?"}, {"role": "assistant", "content": "It's a little too early to call it. We've been studying and evaluating all different data sources, and we're not ready to draw any conclusions but there's a lot of movement upstream on the CKD population, in particular, with COVID. And so we will look because, as you know, there's some things that are making progression slower. On the other hand, there are things that are expanding life expectancy. And so our math is not leading to any conclusion at this point."}, {"role": "assistant", "content": "And then last piece there, I promise I'll stop here, at least for now, is on mortality, I guess, any color on sort of where the normal mortality was in excess mortality? And sort of how we should think about both of those continuing in the back half of the year? And I'll stop there."}, {"role": "assistant", "content": "Yes. So excess mortality was about 900 patients in the quarter. We have brought down slightly our expectations of excess mortality for the balance of the year but we're still looking at a number somewhere between 2,500 and 3,000 patients in terms of what's built into the middle of our guidance range."}, {"role": "assistant", "content": "Great. I'll stop there."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Gary Taylor with Cowen. You may go ahead, sir."}, {"role": "user", "content": "Hi, good evening. I think just two quick number ones for me. Joel, you had mentioned or at least in the release, some favorable items in G&A, including an advocacy refund. Just wondering if you could size that for us. And then on IKC, I know there's a ton of moving parts there, but I'm just trying to sort of foot how the revenue was down $4 million sequentially from 4Q, but you said you had better than -- or some early revenue there and some delayed expects. So I'm just trying to sort of foot down, but still including some early revenue recognition."}, {"role": "assistant", "content": "Sure. So $6 million is the ballot number you're looking for. In terms of IKC we saw about $20 million, roughly half in the revenue line, half in the expense line that we were expecting. We were just expecting it later in the year. In terms of the timing of the revenue we generally view IKC revenue to be back half of the year loaded. As you think about the claim's lags filling up or maturing and then ultimately, the calculations on shared savings being done -- that usually happens in the back half of the year, and that's when we'll recognize the shared savings dollars. That's why you see the decline from Q4 with still a call it, a positive timing surprise."}, {"role": "user", "content": "Got it. Perfect. Thank you."}, {"role": "assistant", "content": "Thank you, Gary."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Pito Chickering with Deutsche Bank. You may go ahead, sir."}, {"role": "assistant", "content": "Alright, sorry, guys. I just had a couple of ones I wanted to come back to you on. So revenue per treatment sort of flatter sequentially, primarily due to sort of the seasonal co-pays. Just curious sort of two questions, I guess. What are you seeing from managed care on cost-of-living updates? And then how should we think about revenue per treatment sort of going through the rest of the year?"}, {"role": "assistant", "content": "Yes. Thanks, Pito. A couple of things. We're not seeing anything to report on from the managed care negotiations and just to refresh you, we've talked about our contractor multiyear. In any given year, we negotiate roughly about 20% or so of our portfolio and we're not seeing anything different in this year. What we've talked about in Q4 last year is that we said that we would get a revenue per treatment increase year-over-year from 2% to 2.5%, '23 and over '22."}, {"role": "assistant", "content": "Okay. Great. And then sort of on the efficiencies from closing centers, you sort of closed 20 this quarter, you talked about consolidating another 40 to 50 centers. I guess how much of savings do you think you're going to realize in '23 from those center consolidations just solely on that line? And how much of that then should trend through for 2024?"}, {"role": "assistant", "content": "Yes. So we haven't quantified the number. We've always said it will be part of the $125 million to $175 million, but not the biggest piece. The biggest piece of that is MIRCERA we'll get -- so that will be in '23, There'll still be some amount that will roll over into '24, but we'll get most of it in 2023."}, {"role": "assistant", "content": "Okay. And then sort of last one here for me. What -- maybe I missed it, but what was the contract labor dollars this quarter? What are you seeing for the rest of the year? And then any color on what your hiring was and net hiring was in the first quarter?"}, {"role": "assistant", "content": "Yes. So I think what we said was that in the year -- last year, remember, contract labor was running around $100 million. And we said for the year, this year, we'd be half of that. And now today, we moved that -- that we are moving better -- at a better pace so that number will be more like $35 million. But again, I would point you to the beginning of the conversation where we said the most important part is the interplay between all the variability of all those metrics because, of course, training productivity wages benefits and contract labor are all intertwined. But that's the number."}, {"role": "assistant", "content": "And I guess the second part is just can you quantify for us the number of hires you had in the quarter and what the net hires was after turnover and how that should trend throughout the year? Because you mentioned about lower training costs as this bachelor comes online, just a helpful I think you can quantify them for us."}, {"role": "assistant", "content": "Yes. So here's the way I'd think about the training cost. They were -- they peaked last year as a result really of two things: higher turnover, combined with the need for us to net add staff. And those combined to a high training level. As we sit here today, the turnover remains elevated. It's gotten better on with some class of late bird and others, but it still remains elevated. So we're expecting continued high training levels until that comes down, we're modeling the back half of the year but we are much closer or at fully staffed. So some of the training associated with getting the staffing levels back up is now done, and that will mitigate some of the training costs relative to the peak we saw in Q3 last year."}, {"role": "assistant", "content": "So then when you talk about sort 4% to 5% increase in SMB, I guess how much of that is sort of more of a once it comes from the training costs that are embedded within the guidance that should sort of roll off as you think about '24?"}, {"role": "assistant", "content": "Not a lot. The change in contract labor is a much bigger tailwind relative to '22 in the training productivity. And that's -- it's partly because we're not going to see the training productivity improve until the back half of the year. It's also partly because in the beginning of 2022, training productivity was still low. So we saw the spike in Q3, but that was only one quarter."}, {"role": "assistant", "content": "Okay, great. Thanks so much, guys. I appreciate it."}, {"role": "assistant", "content": "Thank you, Pito."}]}, {"messages": [{"role": "system", "content": "And at this time, I am showing no further questions."}, {"role": "assistant", "content": "Thank you, Michelle, and thank you all for the questions. As I hope you've heard today, we have some positive momentum to start the year with the results of Q1 proved to be a sustainable trend. We're excited about the implications for our patients, our teammates and our financial performance in 2023 and beyond. Thank you all for joining the call, and be well."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] We'll take our first question from David Begleiter with Deutsche Bank."}, {"role": "user", "content": "Hi, this is David Huang here for Dave. First, can you talk about the merchant volume trends you're seeing in April and May, maybe by region?"}, {"role": "assistant", "content": "Well, we usually don't comment about the quarter in the middle of the quarter. But in general, I would like to say that we are pleased with the improvement in the economy that we see in China after the Lunar New Year, the Chinese economy gained strength. And we are seeing the benefit of that as you have seen in the last quarter and we should continue to see that in the next quarter."}, {"role": "assistant", "content": "In Europe, the volumes remain flat and maybe a little bit down. But obviously, we are compensating that with the pricing action related to energy costs. And in the U.S., you know very well, David, it's just flat. They are not gaining significant amount of volumes, the economy is not growing that much, but at the same time, we are not going into a recession, at least we don't see that yet. Is that good enough?"}, {"role": "user", "content": "Yes. And I guess, second, the projects. Just going back to the Indonesia project cancellation, can you give us the background related to that decision? Is that related to the higher coal prices? Was that a factor in your decision? And then I guess the Jiutai project has been delayed for another two quarters. Can you discuss what's driving that delay? Thanks."}, {"role": "assistant", "content": "Sure. With respect to Indonesia, I mean, coal prices have nothing to do with these things. Coal price is going up and increase the price of the final product. The main reason that we withdraw from Indonesia was that we had started the project about, almost five years ago. The project had condition precedents that had to be met and we just were not getting those conditions approved at the different levels. And therefore, at some point in time, you kind of just can't continue waiting for approvals. And we decided that we have opportunities to deploy our cash at other places, and that was the basis of the decision to be drawn. I hope the investors give us the benefit of the fact that we are flexible. We are not -- we react to the circumstances. And we can't keep millions, billions of dollars of Air Products' money sitting somewhere for a long time without getting an income for it. And therefore, we decided to deploy the capital at other places around the world, and you will hear about where we are deploying it in the future."}, {"role": "assistant", "content": "The second comment with respect to Jiutai, Juitai, we have completed the facility on time. But like any on-site business that you're very familiar with, the customer has to give us utilities and provide this raw material for us to get it started. The customer is having some issues with doing that, and that is why we are delaying two quarters."}, {"role": "user", "content": "Okay, thank you."}, {"role": "assistant", "content": "Yeah, thank you."}]}, {"messages": [{"role": "system", "content": "We'll move to our next question from Steve Byrne with Bank of America. Please go ahead."}, {"role": "user", "content": "Yes. Regarding the higher hydrogen volumes in the U.S., is that presumably driven by renewable diesel? And just wondering whether those customers would be willing to pay a premium for blue hydrogen to get a lower CI score? And if so, are you reconsidering whether to add carbon capture on your existing methane reformers?"}, {"role": "assistant", "content": "Good morning, Steve. Yes, you're absolutely right about the fact that if we can provide the customers that are making renewable diesel hydrogen with a lower carbon intensity, that increases the LCFS credits that they get for selling that renewable diesel in California. Therefore, our customers are asking for two hydrogen, and we are considering converting some of our existing methane reformers, put carbon capture on them and provide blue hydrogen to our customers."}, {"role": "assistant", "content": "In addition to that, as you know, our project -- our big project in Louisiana is all about producing blue hydrogen. So you're absolutely right. Those things will drive demand. We are very excited about that, and it will create a significant opportunity for anybody who can come up with blue hydrogen first. And that would be Air Products."}, {"role": "user", "content": "Thank you for that. And can you provide more granularity on what drove the $0.44 drag in other costs? It seems as if this was primarily in the Americas, it looks to be more than $100 million year-over-year. What is in that? And what is your outlook for it?"}, {"role": "assistant", "content": "First of all, it is really twice what it usually should be. And the main reason for it is that we had some onetime items in the quarter, which drove that. It has to do with incentive compensation. Obviously, if the businesses are doing better, the incentive comp that people will receive will go higher, we have to accrue for that. And there were some other onetime items, that drove that cost."}, {"role": "assistant", "content": "We expect that to come down to something more like $0.20, $0.22 that it has been in the past. And that is driven by the fact that we are investing in the future projects and a lot of the cost -- those development costs, we cannot capitalize and therefore, that number will be with us. We have to compensate a bit productivity and other measures."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "We'll move to our next question from John McNulty with BMO Capital Markets. Please go ahead."}, {"role": "user", "content": "Yeah, good morning. Thanks for taking my questions. So Seifi, you guys had put out some really cheap green bonds. It looked like it was like 4% to 4.8%, so almost in line with treasuries. I guess when we think about the cost to borrow for green and blue hydrogen projects, is this kind of a reasonable baseline to be thinking about? And does it make you think about potentially putting some of these projects into more of a project finance mode in North America? How should we be thinking about that?"}, {"role": "assistant", "content": "Well, first of all, good morning, John. Hope all is well. John, you are absolutely making very, very appropriate and correct statements. We were very pleased with the interest rate that we got for the green bonds. It took us only one day to raise the $1.1 billion, which means that there is a lot of demand for that. And it does encourage us to look for project finance on a lot of our projects. And that will increase the firing power that Air Products in terms of doing more and more of these big projects. So we are very happy about that. And obviously, at the end of the day, the interest rate that we pay, that would depend on what the federal reserve does. But right now, as you said, we borrowed almost -- closest to treasuries, which is very good news for us, and we are very happy about that. And you are very right, it will help us significantly in financing the projects in the future and doing more of this."}, {"role": "user", "content": "Got it. Okay. Thanks, for the color on that. And then the first kind of big blue hydrogen project you have coming up is -- or at least net zero hydrogen project is the Alberta project. I guess can you give us an update on that as to how it's progressing? And also, I know you've got one customer that's taking more than half of the product or projects of product. Can you speak to the demand for the rest of the -- of that blue or net zero hydrogen demand or production and if you've largely allocated the bulk of that?"}, {"role": "assistant", "content": "John, that's a very good question. First of all, that project is moving well. We are seeing a significant amount of demand there. We clearly see that [we will be sold out of that facility. And we are actually looking at the possibility of expanding that operation to include more."}, {"role": "assistant", "content": "When we announced it, we did say that this is the first phase of a three--phase operation and we expect to do more there. Considering all of the oil industry in that part of the world and the demand for -- obviously, in Canada, it's a little bit different than in the United States. Canada is moving towards the actual carbon tax. A lot of these refineries actually had to do something. And hydrogen is -- blue hydrogen is the solution. We are in a very good position with our pipeline there, with the land we have there. So we are very optimistic about that, John. Very optimistic."}, {"role": "user", "content": "Great. Thanks very much for the color, Seifi."}]}, {"messages": [{"role": "system", "content": "We'll move to our next question from Christopher Parkinson with Mizuho. Please go ahead."}, {"role": "user", "content": "Great. Thank you Seifi. So obviously, everyone's focusing on some of the aspects of the Indonesia project. But how much of your considerations for the next few years has to do with your increasing ability to bid on blue hydrogen projects and everything that's kind of being brought to the forefront from the U.S. IRA? I mean, from a relative basis, how are you thinking about that capital being used elsewhere for your backlog growth on a go-forward basis, once again, specifically geared towards the U.S.? Thank you."}, {"role": "assistant", "content": "Chris, thank you for your question because that gives me an opportunity to address it. When we look at projects, I've always said, we look at the specific project, the viability of the project and the profitability of the project. If there is a very, very profitable project that makes sense for us to do in another part of the world, we will look at it and we will do some of those things. But there is no question that the IRA has created a significant opportunity for hydrogen in the United States, especially blue and green hydrogen."}, {"role": "assistant", "content": "Air Products is the leader on that. And therefore, I expect a significant part, a significant part of our investments in the future will be in the U.S., because definitely. we are building a green hydrogen facility in Northern Texas that we've announced. We definitely need to be -- there's another giga green hydrogen project in the United States because of the demand. There are significant opportunities for blue hydrogen in the United States that can be realized, because there is possibility of sequestration of the Gulf Coast of the United States. So the -- and natural gas prices are cheap because for blue hydrogen production, that we can easily make it and then export it."}, {"role": "assistant", "content": "Therefore, we are very bullish about that. We are very excited about that. And IRA is designed to promote investment in the United States. That is going to happen, and we will be a big participant on that. So I mean, I can't give you exactly the book in the next five years, 80% of our investment will be in the U.S., but it will be a substantial part of it."}, {"role": "assistant", "content": "But at the same time, if there are other interesting projects, as I was telling John McNulty a few minutes ago, with the increased ability to project finance some of these, we will do projects in other parts of the world if they are interesting and lead us to further growth in other parts of the world."}, {"role": "user", "content": "That's very helpful. And just as a quick follow-up, just on Asia in particular, it seems like things were a little bit more flattish on volume when, I'd say, a lot of us were suspecting that things would improve on a sequential basis. Can you just give your latest and greatest update on how you're thinking about the macro specifically in Asia versus the rest of the world? Thank you."}, {"role": "assistant", "content": "Sure. Chris, we have seen significant growth in Asia because of our smaller projects. We did say we have executed about 30 smaller projects. They are not -- they used to be big projects by the old standards, but now we call them smaller projects, $100 million, $200 million, $300 million project."}, {"role": "assistant", "content": "In semiconductors, we have significant additions, in glass, we have significant additions and in other traditional nitrogen generators and all of that. So we are doing very well. We are gaining more than our fair market share in that part of the world, and we continue to be optimistic about that part of the world in terms of economic growth."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "We'll move to our next question from Vincent Andrews with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Thank you. And good morning, Seifi. Just wanted to follow up on your intentions to allocate more capital in the U.S. going forward post the IRA. Just curious if you have a thought or a preference towards the structure of those investments, whether they'll be akin to the big Louisiana mega projects or if they will be more sort of on-site at customer projects or perhaps a mix of both? Or if you have any thoughts or preference between those two."}, {"role": "assistant", "content": "Good morning, Vincent. It's always good to talk to you. It will be a mixture of those things, As you have seen from our announcements, Vincent, the announcement that we put out last night, those are on-site projects at customer sites. The Eastman project is on the side of Eastman and the other one is on the side of LyondellBasell. So we will do a mixture of both, stand-alone ones where we can feed our pipeline or dedicated ones or a combination of the two of them, which has been our model and we will continue doing that."}, {"role": "assistant", "content": "The interesting thing is that this increase in demand for green and blue hydrogen is across the board. It is not that one customer has decided they want to do that. Everybody has to do that. Every refinery in the United States has to decarbonize. Every steel plant has to decarbonize. Every cement plant has to decarbonize. Every glass plant has to decarbonize. Therefore -- every heavy transportation has to decarbonize. And the only way to do that is using hydrogen. So that demand will be there, and it will be a mixture of on-site, standalones and all of that. So we will be doing all of the above, as they say."}, {"role": "user", "content": "Okay. And as a follow-up, with all of this activity post the IRA, there's obviously more competition for capital to invest in gas projects of all types. So in sort of the more traditional gas projects, sort of non-IRA-driven, are you seeing better project returns available because of the competition for capital? Or has that not happened yet?"}, {"role": "assistant", "content": "I think it will happen in time. Your assessment on that is very correct. It will happen in time, yes."}, {"role": "user", "content": "Thank you very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "We'll move to our next question from Mike Leithead with Barclays. Please go ahead."}, {"role": "user", "content": "Great, thank you. Good morning."}, {"role": "assistant", "content": "Good morning, Mike."}, {"role": "user", "content": "Good morning, Seifi. First question on Europe. Can you just speak to the improvement in earnings sequentially? It looks like versus last quarter, volume was up 3%, price was down 1%, and EBITDA was up 21%. So can you just talk to the big margin improvement there?"}, {"role": "assistant", "content": "Yeah. The big margin improvement is driven by the fact that when energy prices were going up significantly, at the beginning we lagged it. As you recall, year and half ago, we had a lot of issues with the investors about erosion of our margin because we couldn't keep up -- increase prices fast enough to keep up with energy prices. So now we have caught up with that. So now at the other end of the cycle, energy prices are decreasing and therefore, it gives us an opportunity to increase our margins and make more profit to the bottom line. It's kind of making up for what we lost before."}, {"role": "user", "content": "Great. That's helpful. And then second, John asked earlier about your next upcoming net zero hydrogen project. If I could maybe take that one step further and ask about the following project. Could you just update us on the current status of the World Energy SAS facility for 2025?"}, {"role": "assistant", "content": "We are working on that project. We have gotten almost -- most of the permits that they need, and we are waiting for one or two of them to start actual construction. Engineering is going on. So that project is moving forward as planned, as of right now."}, {"role": "assistant", "content": "Now we have to look at other opportunities and how we can enhance that project. But the project is moving forward, and the demand for sustainable airline fuel seems to be improving. And other people seem to be very interested in the product so that they can decarbonize."}, {"role": "user", "content": "Great, thanks."}, {"role": "assistant", "content": "Yeah, sure. Okay, next question?"}]}, {"messages": [{"role": "system", "content": "We'll move the next question comes from Josh Spector with UBS. Please go ahead."}, {"role": "user", "content": "Hi, good morning. It's Chris Perrella on for Josh. I just wanted to follow up on the volume impact from all the customer maintenance in the quarter and potentially how that boosts volumes sequentially as those customers begin to operate again."}, {"role": "assistant", "content": "Good morning, Chris. Well, we are hoping to see that. And that is why when you look at sequentially in terms of the earnings per share guidance that we have given you, you'll notice that if you do the math, you need to have a pretty decent and robust fourth quarter to meet our guidance of $11.30 to $11.50. So we do expect that exactly what you said."}, {"role": "user", "content": "Right. And then just a follow-up with the European volume. I know that the on-site had picked up in Europe. Just could you give some more color on what you're seeing both in the merchant and the on-site business in Europe?"}, {"role": "assistant", "content": "Our on-site business compared to last year is doing better, and our midstream volumes are kind of flat. Nothing significant to report."}, {"role": "user", "content": "All right. Thank you very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from John Roberts with Credit Suisse. Please go ahead."}, {"role": "user", "content": "Thank you. And good morning. I'll ask just one question here. Where is Air Products on its disassociation technology? And when do you think we'll see the first one of those major projects?"}, {"role": "assistant", "content": "Good morning, John. Excellent question. We have developed the technology in terms of how to crack the ammonia back to hydrogen. And we are going to -- we are in the process of designing and building one of these. And I expect that in about two years or two and half years, you will have one of these things at commercial scale operating even before we actually have blue or green ammonia to put into it. We are going to build it and test it with ordinary ammonia."}, {"role": "assistant", "content": "I'm very optimistic about that. We have the technology, it works. So that's competitive advantage that we have over people, John, as we have talked about before."}, {"role": "user", "content": "Very good. Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Mike Harrison with Seaport Research Partners. Please go ahead."}, {"role": "user", "content": "Hi, good morning. Maybe a follow-up on the question that John just asked about the dissociation technology. Is that something that you could potentially sell as a sale of equipment for others who are interested in cracking ammonia to get to the hydrogen?"}, {"role": "assistant", "content": "Mike, good morning. On that one, I think what we will probably do is that if anybody is interested in cracking ammonia, we will suggest to them that we build the plant for them and crack the ammonia back to hydrogen and sell it to them a sale of gas, even if they have the molecules, the original nitrogen -- the ammonia comes from somebody else. I don't think we will be licensing that at this stage. But I don't want to predict the future. And if there is a specific customer who wants huge quantities, we take a look at it. But it is a proprietary technology the same way that we don't license our LNG technology. I don't see us doing that."}, {"role": "user", "content": "All right. And then in terms of energy and power costs in Europe, obviously, they've come down quite a bit from where they were over the winter. But what are your expectations as you start to look at the fall and winter for this year? Are you expecting that we could see another increase or spike in energy and power costs there?"}, {"role": "assistant", "content": "If I make any comment on that, it would not be that credible because nobody knows how that will move, right? I don't know. I really cannot answer that question because it will be a very difficult thing to pretend to project what is going to happen to energy prices in the future in Europe, right? It depends on the world. It depends on what else will happen. So I just don't want to pretend as if I know something that I don't. I have no idea, Mike."}, {"role": "user", "content": "All right. Thanks very much."}, {"role": "assistant", "content": "Sure, thank you."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Kevin McCarthy with Vertical Research Partners. Please go ahead."}, {"role": "user", "content": "Yes, good morning. Seifi, would you comment on the recent and future trajectory of your backlog? If I look at Slide 12, you show $11.3 billion as the amount remaining to be spent on the backlog. I think that's down about $4 billion sequentially. Presumably, some of that's Indonesia. But as you redeploy that capital, can you comment on how you would expect that number to trend maybe over the next year or so?"}, {"role": "assistant", "content": "Go up. It will continue to go up, because we are working on a lot of projects, Kevin. And I fully expect that, that backlog will grow. One of the things that is -- one of the things which is not in that backlog is that we have put zero amount for the green hydrogen project that we are doing in Northern Texas. And obviously, we will not put it in our backlog until we get cleared -- get the permits and so on. But that by itself is a significant amount."}, {"role": "user", "content": "I see. Thank you for that. And then secondly, if I may, with regard to your carbon monoxide projects and new contracts that you announced yesterday, I normally think of CO as a co-product of hydrogen. And so will you get additional hydrogen from the new plant in Texas City? And if so, maybe you can speak to what process and what color hydrogen and the state of those molecules?"}, {"role": "assistant", "content": "Well, that is a very good question. We did put out the announcement because we are obviously transparent and we want you to know what we're doing. But the other end, there's a lot of constraint from the customers about the price and the volumes and all of that. They don't want us to disclose that."}, {"role": "assistant", "content": "But here is actually a very good example of the competitive advantage that Air Products has, is -- you're absolutely right. It can make CO and then by-product is hydrogen. But we do have our pipeline. Our pipeline is sold out. We do need additional hydrogen, and therefore, we will put the hydrogen in our pipeline and sell it. The demand is there. So that was one of the main reasons that we were able to get those projects. And basically on one of them, we displaced an incumbent who has been there for a long time because they didn't have the competitive advantage that we have."}, {"role": "user", "content": "Perfect. Thank you, Seifi."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Marc Bianchi with CD Cowen. Please go ahead."}, {"role": "user", "content": "Hi, thank you. Could you comment on the status of the NEOM project finance? I believe there was supposed to be a dry close shortly after the last earnings call."}, {"role": "assistant", "content": "The dry close has happened. And now we are basing on what is called the wet close. The dry close is kind of the banks make their commitments. And then the wet close, where we actually receive the money and the commitment, happens usually two-three months after that, after all of the condition, precedents has happened and the lawyers have spent enough time to make a lot of money."}, {"role": "assistant", "content": "So that is -- that process is underway. So we have had the dry close, and the process is underway in order to get the wet close done. It's going to take some time until we get there. And when we get there, we'll obviously put out a press release immediately and let you know."}, {"role": "user", "content": "Okay. But still on track versus what your prior expectations were?"}, {"role": "assistant", "content": "That is correct."}, {"role": "user", "content": "Yeah, thank you. The other question I had is, first, a specific question, but also more broad around IRA, with the specific part relates to how the IRS is looking to handle tracking the carbon intensity of electricity that's going into making electrolysis hydrogen. I think there's some uncertainty as to how that's going to happen. And I'm wondering how that might apply to any of the projects you've got either in backlog or under consideration. I think perhaps, New York might have some exposure to that issue."}, {"role": "user", "content": "And then more broadly, I think there's some question as to -- are there areas of IRA where there's uncertainty with how IRS will handle things. And then Republicans seem to be trying to dismantle IRA, and I'm wondering if that gives any pause to the project opportunities that you're looking at."}, {"role": "assistant", "content": "Well, first of all, with IRA, you're absolutely right. It's a law. Now it has to be translated into rules in terms of how you apply it. I would just like to make comments. From what I see -- we think that IRA is a good legislation for the world because it promotes decarbonization and addresses global warming. It is focused on hydrogen, which is obviously our business. That was the right thing for them to do."}, {"role": "assistant", "content": "Now in terms of what will happen to it and all of that, I cannot comment on the political situation. But specifically, I would like to say that Air Products' position is very clear. First of all, with our project in New York, we are getting power from the Niagara Falls. It is continuous power, 24 hours a day, green. Therefore, we don't see any issue with that."}, {"role": "assistant", "content": "But we have been very public that we believe that you can only make green hydrogen and call it green and not faking it, is when you can prove that you are doing that every hour, not average over a year and so on because that doesn't make sense. That is the rule that Europe has adopted. And besides that, anything that you make in the United States has to be a product, which is tradable. So we need to follow the lead that Europe has had in terms of the hourly production and measuring it on an hourly basis, prove that you are making green rather than saying, well, the sun is shining. I'm making green. But during the night, I'm using the dirty grid to make hydrogen, but we call it green because I made more -- I sold some power during the day to be green."}, {"role": "assistant", "content": "So we have a position on that. We have expressed that position to the government, to the Department of Energy and all of that. So that, we are very public about where we stand on that."}, {"role": "assistant", "content": "But you are very right. All of these things do need to get translated into law. But I would like to stress that the projects that we announced, they were -- our project in Louisiana and so on, they're all pre-IRA. So IRA will help. But that wasn't the primary reason we did that. The primary reason that we did that is because we think there will be demand for these projects. If IRA doesn't exist, then the price of hydrogen will be higher. If there's -- IRA exists, the price of hydrogen will be lower because you have the incentive and the customer will benefit from someone."}, {"role": "user", "content": "Thank you, Seifi. Very helpful."}, {"role": "assistant", "content": "Thank you. Thank you very much."}]}, {"messages": [{"role": "system", "content": "That concludes today's question-and-answer session. Mr. Ghasemi, I'd like to turn the floor back over to you for any additional or closing remarks."}, {"role": "assistant", "content": "Thank you very much, I really do appreciate that. I would like to thank everyone for joining our call today. I know how busy everybody is. We appreciate your interest in Air Products, and we look forward to discussing our results with you again next quarter sometime in early August. Please stay safe and healthy, and all the best to everyone. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question today comes from Arun Jayaram from JP Morgan. Please go ahead with your question. Yeah, good morning. Lee. I wanted to get maybe a few more insights on the dividend expectations for 2Q out of EG, I wanted to run some math by you. In the first half of the year, including 1Q actuals, you would expect it generally about $115 million of equity income and based on that $200 million dividend that would suggest maybe an $85 million tailwind to cash flow relative to your equity income guide. So, I wanted to run that math by to see if that made sense to you?"}, {"role": "assistant", "content": "Yeah, Arun, thanks for bringing a little bit of clarity to this point, but your math is relatively spot on. The reality is that we do have a little bit of dislocation location from time to time between equity income and receipt of the cash dividends and we're in that space in first quarter, but as you accurately stated, we're going to more than make up for that in second quarter with a greater than $200 million cash dividend payment coming from EG LNG, but your math is spot on."}, {"role": "user", "content": "Great. And just my follow-up, Lee. I wanted to go back to EG again, looking at the 10-K, gross sales at Alba were about 2 million tonnes per annum at the 3.7 million tonnes per annum facility. I know that the Alen volumes brings you closer to nameplate, but as you know, Lee, one of the bear thesis on the stock has been the fact that Alba volumes are declining, call it at a 10% to 15% annum clip. And so. I wanted to get your thoughts on how Phase I, Phase II, Phase III of your strategy on Slides 15 can help keep the plant full, the duration that you see from these opportunities and just broader thoughts on Marathon continuing this capital light strategy with third-party volumes or wanting to get more operating volumes through that facility?"}, {"role": "assistant", "content": "Yeah, thanks. Thanks for the question. You're exactly right. Right now, coupling both the Alba equity volumes with the Alen volumes, we're at a relatively high utilization rate through the physical plant and that was really part of the design of Phase I was to ensure that with a long life, low decline field like Alba coupled with some third-party volumes in this case, Alen, that we would kind of bridge to that next set of opportunities and keep that facility utilize. And that's been --that was completed, we now have another piece, the fantastic infrastructure and a pipeline that connects us with the Alen field. So that phase is doing exactly what it was designed to do."}, {"role": "assistant", "content": "As we look out ahead, Phase II is really dominated by bringing the shift in the commercial structure, which is less about really production volume and more about gaining more exposure to the global LNG market and the associated cash flow uplift that we'll see from that. Even though we've seen a weakened gas environment, the reality is that the arbitrage between Henry Hub and global LNG pricing remains intact. And so that's going to be a value uplift."}, {"role": "assistant", "content": "An additional element that we've kind of brought into play as part of Phase II has been the fact that we are evaluating the potential for some Alba infill drilling opportunities, which have the potential to mitigate some of that base decline, but also allow us to move equity, high value equity molecules through the EG LNG facility. Just for clarity, we're still in the early days in that evaluation, but these are going to be -- this is relatively shallow water, this is jack-up drilling, dried trees. So, when you think about it from a capital standpoint, there's not -- these are not going to be material movers in our capital budget, that will also be kind of phased out in time. And the test for those is just making sure that those do compete head-to-head with the opportunities, of course, that we have here in the U.S. So that's a little bit of an addition that we read them to the story this quarter."}, {"role": "assistant", "content": "And then finally, when you get to Phase III, this is again looking at third-party molecules coming from that broad kind of Alen at same area, this the gas cap associated with the same field that of course is operated by Chevron, just like Alen is and it's our view that we will be the monetization path for that. And that was part of the HLA that was signed with EG and other relevant parties. The positive there is all of that work, Phase I, II and III really extend us out through -- into the next decade."}, {"role": "assistant", "content": "So, it gives us this run way to now advance additional opportunities. So, what could be beyond Phase III, well we talked about and I mentioned in my opening remarks, bilateral agreement between EG and Cameroon that opens up the aperture to cross border opportunities. And quite frankly, as I said in my remarks, this is one of the most gas prone areas in West Africa and there's a numerous discovered undeveloped opportunities that EG LNG could provide a very efficient and profitable monetization route."}, {"role": "user", "content": "Great, thanks a lot, Lee."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Scott Hanold from RBC. Please go ahead with your question."}, {"role": "user", "content": "Yeah, thanks. Just turning to the Permian, the results looked pretty impressive. My question would be, can you talk about the depth of inventory and the sustainability of those extended laterals and how do you kind of look at this play going forward? I mean, it seemed like it was complementary to kind of the overall asset base, but it does seem like now it's got the ability to really step-up and be a bigger part of the portfolio. So, what's the depth that inventory look like? And are you guys looking at opportunities to add to that acreage position?"}, {"role": "user", "content": "Thanks, Scott, it's Mike here. I'll hopefully answer that question for you. In terms of the runway that we're looking at, the current consumption rate, current activity rates, I think we've disclosed publicly that you're looking at almost two decades or up to two decades of -- maybe even more than two decades of potential inventory there. So that maybe gives you a feel for what we could be looking like in the future. And you're absolutely right, based on the performance that the team has delivered, not only from a well productivity perspective, but from an execution perspective as well, some of the drilling completion results that the team has delivered since they got back to work in middle of last year, absolutely competing for capital."}, {"role": "user", "content": "I would remind you that while maybe the completion activity wells to sales is from up [Indecipherable] and Permian, we do have a pretty heavy drilling program this year, which will then set us up well for 2024. So we've kind of preempted this a level, but in terms of the performance and with the additional drilling, we'd be looking for those wells. We're not probably going to see those wells coming to sales until the early part of next year. But you're absolutely right, based on the performance that we've seen since getting back to work there. And that said, that asset's debt, we're going to be competing for capital as we go forward."}, {"role": "assistant", "content": "Yeah, if I, maybe if I could just jump in from there. as well. One thing I want to highlight is that in the Permian numbers now, we have fully integrated what we refer to as the Texas Delaware oil play, the Woodford Meramec oil play that has been very successful for us. That is now migrated from more of an exploration play into really part of our base capital allocation within the Permian Basin. And so that's another tranche of inventory that has now moved in to that asset team. And that's unique in the sense that, I'll just remind everyone that our Permian and Oklahoma teams, they are integrated teams and so it makes absolute natural sense for that Woodford Meramec play to migrate into a team that already has such broad experience on how to develop those two zones."}, {"role": "assistant", "content": "To your other question around acreage addition. What I would say to that is that our M&A framework remains unchanged and if anything, the addition of Ensign probably rates that are even further. We still look at everything within our core basins, but I would just tell you that today we don't see anything in the market that really satisfies what is a very demanding M&A criteria."}, {"role": "user", "content": "Got it. And just to clarify one thing, you said, there's two decades of inventory there. Are those extended lateral or are those two decades of extended laterals?"}, {"role": "user", "content": "Pretty much, Scott. There's maybe -- it maybe fails off to the Bakken, but predominantly extended laterals."}, {"role": "assistant", "content": "Okay, quite frankly, the team have been very active converting some of those smaller XLs to 2XL, so maybe those XLs that are at the back-end of the portfolio at the moment, expectation is that we'd be looking to convert those to longer laterals overtime."}, {"role": "user", "content": "Okay, understood. And then my follow-up question is going back to EG again. Thinking about the contract kind of rolling over at the end of this year. How are you positioning for that? Like what steps have you taking right now to look at what is the best way to kind of optimize it going forward? Do you expect to sign some sort of a hard longer-term contract or do you want to keep it more open and flexible just to be more opportunistic? But just give us a sense of how you're looking at setting up the pricing dynamics starting in 2024?"}, {"role": "user", "content": "Thanks, Scott. This is Pat. I'll take that one. Yeah, obviously, we're getting ready to market on January 1, 2024. We will be going to-market shortly with an RFP for the global LNG providers. And that will be as Lee has said linked to global LNG prices, what marker is still to be determined, but we'll will have a bid process through that, expect to tie up those contracts probably in Q3."}, {"role": "user", "content": "Understood. Thanks."}, {"role": "assistant", "content": "Scott, there's still details being worked out there, but we believe that there will be competitive tension in the market for such an advantage set of LNG cargoes that are proximal to the European market."}, {"role": "user", "content": "Right. What is that cost benefit do you think relative to say, like U.S. -- shipping U.S. volumes?"}, {"role": "assistant", "content": "Well. I think we look at it through the lens of kind of how does that look relative to where we stand today. And when you think about the movement -- the bulk movement from a Henry Hub link to a global LNG link. I mean the torque there regardless of where absolute gas pricing goes, it's going to be pretty significant. I mean, you're going to be talking about 2X of 3x kind of uplift as you move to a more index -- global index contract."}, {"role": "user", "content": "Understood, thanks."}, {"role": "assistant", "content": "Thanks Scott."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Doug Leggate from Bank of America. Please go ahead with your question."}, {"role": "user", "content": "Hey, good morning guys. This is actually Clay [Phonetic] on for Doug. I've got a couple of follow-ups on EG. First one, can you discuss what your decline rate is and what the infill drilling opportunity could do to stem that decline? And secondly, you guys highlighted that there will be a turnaround or a turnaround has been completed and that's going to improve the uptime? But does that mean for volumes at '24? And that simply means less downtime. Can you qualify what that downtime is that was avoided? And I'll leave it there. Thanks."}, {"role": "assistant", "content": "Yeah, well, maybe to start-off with the decline question. I mean, our nominal decline in EG is about 10% every year, so that's really where we land. There's no doubt that an Alba infill program will help mitigate some of that decline, it's probably too early to talk about the contribution and the amount of offset until that program is fully defined and ultimately funded by buying partners. With respect to the turnaround that's really a tri-annual turnaround, that's very comprehensive, it occurs usually every three to four years, it is both onshore and offshore."}, {"role": "assistant", "content": "So, it's a very comprehensive turnaround and really that's protecting uptime performance that's already World class at EG LNG. This is recognized as one of the best operating and most reliable facilities globally in the LNG market. And we're really investing to continue to protect that exceptional uptime performance that that team delivers really each and every year. And so that's really is that investment and it becomes even more important as we transition into this commercial phase where we're going to be leveraging much more heavily global LNG price you see in Henry Hub. So, it's very fortuitous to beginning that turnaround done during low gas prices and while we're still linked to Henry Hub contracting."}, {"role": "user", "content": "Yeah clear, obviously, got a little bit more color. We're looking at 99% plus uptime there from the facilities in the EG. So, as we pointed out, it's really about protecting that uptime as we get into next year, specifically."}, {"role": "user", "content": "I appreciate it guys. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Neal Dingmann from Truist. Please go ahead with your question."}, {"role": "user", "content": "Thanks for the time. My first question maybe for Lee or Mike, just on [Indecipherable]. Just wondering, now that you've operated the asset for just a brief time. Can you speak to -- any thoughts or changes on how you think the asset will compete for capital versus the legacy assets, both are good. So I'm just curious how they'll compete."}, {"role": "user", "content": "Obviously, super happy with how the integration has gone ahead of schedule, no surprises, everything's positive and you saw the well results that we put, I think it was on Slide 12 of the deck, top decile performance there in oil basis and within the basin. I think it's a little bit too early to say in terms of what that does from and capital allocation perspective. But I think first impression is very, very positive and. If we aren't going to be doing anything from capital perspective, it feels like we may be allocating more in the future, but a little bit early just to get too definitive or not."}, {"role": "user", "content": "Great. Look forward to see what you can do, Mike. And then second question just on OFS in place, I'm just wondering if you could speak to any Texas, not only potentially some softness that some others have spoken about, but any specific areas, either domestically EG that you might be thinking?"}, {"role": "user", "content": "Yeah, I'll take that one again, Neal, just start with a reminder. In our 2023 guidance, we did incorporate about 10% to 15% inflation compared 2022 while we were assuming was the cost environment of 2023 would be comparable to the fourth quarter of 2022. We didn't we didn't assume any deflation for the second half of the year. We did assume a little bit of moderation in steel pricing, which we're actually starting to see. What it say we're seeing at the moment is maybe a general flattening or plateauing of service costs. And what we are definitely seeing is the access side has definitely improved and that could potentially lead to maybe some improved pricing later in the year. As I look at the specific or the larger areas of spend, start with rigs, I think we've all seen the software guidance and activity that the publics have come out within the second quarter. Again, it could lead to some modest softening in the rig rates later in the year. Pressure pumping, market access certainly improved, but I still think it's a little bit early to make a call where rates potentially go in the second half."}, {"role": "user", "content": "As I mentioned, still pricing is definitely trending lower there and not as pretty consistent with just the general softness that we're seeing in all of the commodities. One point I would make is what's the improving market access situation on the contracting flexibility that we've got in the second half of the year. We've actually already been able to high grade these areas of the business. So, for example, we'll get more experienced crews, we're getting better equipment, that was something that didn't happen five or six months ago. So, I'm prudent, we've seeing a somewhat positive trend there. I would just caution, it does still a little bit too early to be counted as deflation in the second half of the year. I think particularly just when you think about the volatility or the backdrop that we face at the moment."}, {"role": "assistant", "content": "Yes. I think that, if I could just jump in, Neal -- I think that we intentionally left commercial lines and contractual flexibility in the second half of the year such that we would have the opportunity to take advantage of any softening in the market. However, we took no credit for that within the budget. So, as Mike said, our budget fully reflects inflation across the full year. So, yes, we were seeing more softening that would certainly be perhaps a bit of a even a tailwind in the second half of the year."}, {"role": "user", "content": "That's great details. Thanks guys."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the Matt Portillo from TPH. Please go ahead with your question."}, {"role": "user", "content": "Good morning all. Maybe just starting out in the Permian, you turned in line an additional four wells in the Texas, Delaware looking to take gate over the last few years, that's been an area that's been quite surprising in terms of well performance. Curious if you could give us any color on early time performance from these wells? And also just updated thoughts on the spacing design, I know you guys were working on some tests, it may be a bit too early to infer anything, but just curious how you are thinking about the spacing design going forward?"}, {"role": "user", "content": "This is Pat. I'll take that one. As you said, we brought on four wells in the first quarter. I would characterize those wells as performing in line with pre-drill expectations. This is a reminder for everyone, I think we hit on this a little bit last call, this was a down spacing test, so we did three wells in the Woodford at 880 foot spacing and one Meramac about 650 feet above those kind of between two of the wells."}, {"role": "user", "content": "The key takeaway from early time in this pad is that the wells are -- they're acting just like the other wells, strong oil production, high oil cuts, low water ratio and already low decline that we're seeing. The other key takeaway is that there's been no communication between the Woodford and the Meramec, which gives us lot of confidence about the co-development moving forward. We do now have 13 wells online across our 55,000 acre contiguous position, nine of the Woodford and four of the Meramac and that's a separate. We're very confident now in productivity and we've moved it into the Permian asset team and fully integrated it there."}, {"role": "user", "content": "In terms of future development, this was a down spacing test. I think, our early learnings is that we're going to probably pursue a floor by floor co-development, which will maximize capital efficiency. But there's such a large volume of oil in place the Woodford, we're going to continue to look at maybe a little bit tighter spacing in Woodford. And just as we drill the next pad, we will look at that again."}, {"role": "assistant", "content": "Maybe if I can just add too, Matt, we were really first mover in this kind of combination Woodford-Meramac oil window and we were able to essentially amass a 55,000 net acre contiguous position at relatively low cost at 100% working interest. And of course, now we see no other operators are starting to get more active in both the Woodford and the Meramec. And I think that all is constructive and supportive of kind of what we've been saying all along and we believe that this asset can compete for capital allocation. It's one of the key reasons we've now integrated it in with the Permian as we believe we're out of the exploration phase and really moving into that developmental phase."}, {"role": "user", "content": "Okay and then just as a follow-up question, just wanted to clarify on the color for the volume cadence for the year. You guys gave context on Q2 and Q3, which is quite helpful. Just curious as we look towards the second half of the year, I know you've got a heavy infill program in the Eagle Ford in Q1 and Q2. And it looks like the Permian for the most part will wrap up from infill perspective in the first half as well. Any additional color you might be able to provide in Q4 as we should think about volume cadence. I know you gave some color there on Q3, but just trying to figure out how we should be thinking about the back half of the year in general?"}, {"role": "assistant", "content": "Maybe I'll jump in on that one, Matt. I think as Mike mentioned in his opening comments, we expected first quarter to be right where we landed at 186,000. Our guidance for second quarter is right around the mid point of the full year guidance, but we do see second and third quarter being an increasing, if you will, oil production trend moving forward, which is really reflective of the capital program. Having said that, our full year guidance remains intact on both the oil and OEB basis and so that profile will in fact generate those midpoints that we provided. And we also are very mindful of course of making sure that we maintain momentum as we start thinking ahead to 2024 as well."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Scott Gruber from Citigroup. Please go ahead with your question."}, {"role": "user", "content": "Yes, good morning. I just wanted to come back to the theme of the future opportunities, maybe look out a little bit further. But as we contemplate the growth potential for gas demand along the Gulf Coast, we may need more than just the Haynesville associated out of the Permian and Eagle Ford. You guys have a good sense of the economics on the dry gas window, the Eagle Ford, it's deeper, so that the wells are going to toss more of, wondering whether you to assess the breakeven."}, {"role": "assistant", "content": "Yeah, well, certainly as we look at the complete inventory in all of our basins, dry gas today is at a bit of a disadvantage both pricing and as you say cost as you get into some of these areas of these plays, the drilling and completion costs will get quite high. We also have of course dry gas optionality within our Oklahoma position as well. And that's a good example, I think, Oklahoma, we've put in place a JV structure in Oklahoma that allows us to protect our acreage, keep our crews operating and in general be prepared if we do find that we see a more favorable environment for gas production in these combo plays that do rely a bit more heavily on both gas as well as NGLs."}, {"role": "assistant", "content": "But the JV program is a good example of how we're really keeping everything warm and ready to go. So. I don't think that gas question is necessarily limited to the Eagle Ford, I think it can apply to Oklahoma as well. And we just need to be ready with opportunities when that makes sense. It's all going to be done based on return and capital. I mean, I wouldn't say we're completely agnostic on commodity, but at the end of the day, it's going to be driven by economics."}, {"role": "user", "content": "Yeah, no, of course. It's good to highlight the Oklahoma position. I'm just thinking about kind of with gas prices depressed here near term, but given that has the potential demand recovery and future growth, whether it's worthwhile to contemplate building out an acreage position kind of further south from the Ensign acquisition or is that -- I know you guys have a lot on your collective plate today. Just wondering whether that's on the radar or not?"}, {"role": "assistant", "content": "Yeah, well. I think you're right in the sense that certainly there is more gas optionality, even though we're getting a lot of oil production from Ensign, it also brings significant gas with it as well, particularly in this very strong condensate window. But there are dry gas opportunities within Ensign as well that we could certainly look to exploit in the future. I do think, though, if you just step back Scott and you think about our portfolio today, we're generally kind of a 50% oil, 50% gas and NGL company and we like that balance and we like that commodity price exposure."}, {"role": "assistant", "content": "So we want to be very mindful that just again at an enterprise level keeping that balanced exposure to the kind of the full commodity price and that even includes our EG assets, which of course have a different kind of commodity price exposure and that they are exposed to both brand on the condensate side and then right now, clearly linked into global LNG and in the future that linkage is even getting stronger."}, {"role": "user", "content": "Got it. I appreciate the color, Lee. I'll turn it back. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question comes from Umang Choudhary from Goldman Sachs. Please go ahead with your question."}, {"role": "user", "content": "Hi, good morning and thank you for taking my question. My first question is on -- just on the international gas price outlook, clearly the op between international gas and Henry Hub is very attractive today. But would love your thoughts if you see any risk to this ops with the sharp build-out in LNG capacity through 2027?"}, {"role": "assistant", "content": "Yeah, without trying to look too deeply into the crystal ball, one of the things that we never want to pretend to do is to predict pricing going forward, but what I will say is that the world certainly needs more energy, a lot of power generation is going to still lean heavily on gas. In Europe, that's likely going to be LNG. There are LNG projects that are coming on in the second half of this decade that I think will start to meet that demand. But demand is growing and so U.S. LNG, as well as global LNG we believe will still be in strong demand. And I think that arbitrage will still be in play certainly between Henry Hub and global LNG link contract. So even if we see volatility and the absolute gas pricing, we think that arbitrage will still remain intact. And certainly when you look at Europe today and you look at the dynamic there, we still believe that's going to be a strong market for LNG in the future."}, {"role": "user", "content": "Got it. Thank you. And then just given the weakness in natural gas prices today as we think through your plan, I was wondering if there's any flexibility to shift more towards any liquids-rich drilling away from a more gassier areas?"}, {"role": "assistant", "content": "Yeah, well, the reality is we've already optimized our plan around that outcome. As I mentioned, we have a very balanced program at an enterprise level, but the reality is that our program is a very oil weighted program in terms of capital allocation. The bulk of our capital allocation is flowing through our black oil basins, which are the Eagle Ford and the Bakken. And that's again going back to that Oklahoma JV, we recognize that early on and so rather than spending our operated capital there, we're basically leveraging the funding of others for that very reason. So, we believe the program is already optimized around the commodity pricing that we're seeing today and we feel very good that it's going to generate extremely strong returns."}, {"role": "user", "content": "Thanks for taking my question."}]}, {"messages": [{"role": "system", "content": "And ladies and gentlemen, with that we'll be concluding today's question and-answer session. I'd like to turn the floor back over to Lee Tillman for any closing remarks."}, {"role": "assistant", "content": "Well, thank you for your interest in Marathon Oil. I'd like to close by again thanking all our dedicated employees and contractors for their commitment to safely and responsibly deliver the energy the world needs now more than ever. I could not be prouder of what they achieve each and every day. Thank you. And that concludes our call."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] And today's first question comes from Nigel Coe with Wolfe Research. Please go ahead."}, {"role": "user", "content": "Thanks. Good morning, everyone."}, {"role": "assistant", "content": "Good morning, Nigel."}, {"role": "user", "content": "Thanks for the question. So, you guys are the last one, so good to finish on a pretty good high here. So, on the price/cost and we appreciate the extra disclosure around this. 170 for the quarter, roughly half of that in Global Products. Any sense or any kind of color on how that price/cost tailwind looks in 3Q and 4Q?"}, {"role": "assistant", "content": "Thank you for your question. Price/cost will remain positive, of course, in the line rate for the second half of the year, as we keep materializing the strong margin backlog we have in the P&L."}, {"role": "assistant", "content": "In addition --"}, {"role": "user", "content": "Okay. But no -- yeah."}, {"role": "assistant", "content": "In addition to that, when you look [Technical Issues] business, what you see happening is all the work that we did through the course of last year, building a very strong backlog with very strong margins, as you see, as we begin to turn that, we're seeing a nice pickup in the margin rate, which is exactly what we expected."}, {"role": "user", "content": "Okay. But no hard disclosure around price/cost. Okay. And then, on the pie chart of the exposure that -- I thought that was very helpful. So roughly 20% Commercial. Obviously, that includes service renovation and newbuild. So [Indecipherable] suggests the Commercial office newbuilds, what the message here is that -- it's like low-single digit exposure to commercial office newbuilds. So, I think, just maybe just comment on that. And then, thinking about the exposure to regional bank lending, when you look around that pie chart, where do you see the exposures over and above Commercial office."}, {"role": "assistant", "content": "Yeah, Nigel, let me touch upon the Commercial exposure. I think, it's important to understand the secular trends that are underway and well underway within our sector around sustainability, healthy buildings and digital. And I think the value proposition that we're bringing to ultimately address these issues do play out across all of the verticals that we support."}, {"role": "assistant", "content": "Now, when you look at the Commercial sector, we typically are 50% newbuild and 50% retrofit. And so, we're still seeing very strong -- not only the conversion of the newbuild that had been started, but we're seeing a pick-up of opportunities as we're retrofitting that space now with digital, with upgrading equipment, as well as then now focusing on outcomes that we can create now leveraging the connectivity that we have in the building, the data that we extract and then using that data to reduce energy consumed and just overall efficiency of the building. So I think right now, even though that's been a concern as far as the overall pipeline that we're developing around is still very strong. And we stay focused on how we differentiate and ultimately then deliver on the challenges that our customers are facing."}, {"role": "assistant", "content": "Relative to the banks, maybe, Olivier, you can share your thoughts."}, {"role": "assistant", "content": "So, as we put in George preparing remarks, we have a low exposure to the office business. Your number is in the ballpark, Nigel. Our customers also have many funding sources. So we don't see today an exposure to what is happening in US in the banking industry. Another data point, as George indicated, the backlog is strong and very resilient, which is another indicator about the strength of the financing sources."}, {"role": "user", "content": "Right. Okay. I'll leave it there. Thanks a lot, guys."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Jeff Sprague with Vertical Research. Please go ahead."}, {"role": "assistant", "content": "Good morning, Jeff."}, {"role": "user", "content": "Hey, thanks. Good morning, everyone. Good morning. These service orders, look, borderline, fantastic, actually. I'm wondering if you could provide a little bit more color on the composition, obviously, you introduced the call with highlighting some of the secular things that you put in place, but when we think about, for example, North America service orders up 14%, should we think of that as driven by existing customers, who are taking more of your upsell, is that the primary driver or is this a recapture of installed base that maybe you weren't serving before. I'm sure it's -- that's a lot of different things, but I just wonder if you could kind of characterize maybe the key drivers there."}, {"role": "assistant", "content": "When we just -- Jeff, when we lay out the fundamentals of our service business, historically, it has been a mechanical break/fix business. And as we've been transforming the Company with digital going back and making sure that all of our installed base is connected, we ultimately then use the data to not only enhance the traditional services that we perform, but then add on additional value propositions with energy and space utilization. There's a lot of things that we can do with now the capabilities of OpenBlue. And then ultimately, with that, we get better value propositions and better delivery. Our attrition comes down and then ultimately we believe we can sustain double-digit growth with that model."}, {"role": "assistant", "content": "When you look at the quarter, we were up 11% revenue growth, like we said 14% orders, but the underlying to your question, when you look at Connected Chillers, we're up 100% year-on year. We're up almost 14,000 chillers that are connected that real-time we're collecting data, we're performing service and then we're ultimately creating new opportunities on top of that with additional revenue. And then, when you have these agreements in place, you get significant pick-up on additional service beyond just the contract that we have. So our PSAs, when we talk about performance service contracts, we're up double-digit. And that's increasing our recurring revenue base on a forward-looking basis that we're going to be able to achieve, being able to support those customers."}, {"role": "assistant", "content": "And so, when you look at the service business, and then the last thing we highlighted is, when you do that with the insights that we're creating, we can create events, predictive events, which ultimately drive upgrades predictably versus reactively that ultimately generates business. So our parts business is up well over 20% year-on year, as a result of the work we're doing. So it really takes everything we've been talking about as far as mining the installed base, our connectivity to the installed base, we're up over 600 basis points since Investor Day; and in the quarter, 146 basis points year-on-year. And so, that is creating the base that we ultimately then go create new value propositions, supporting our customers especially along the lines of these secular trends."}, {"role": "user", "content": "Great. Thanks for that. And then, just on Europe and corporate, it sounds like you took a couple of hits that you just digested and moved on. Can you give us some sense of what these were, how large they were and if they are kind of truly non-recurring in nature?"}, {"role": "assistant", "content": "Absolutely. So, for EMEA/LA, the fundamental of the business, that's the same as for the field business, meaning we have accumulated rich margin orders in the backlog and those rich marching orders are today being realized in the P&L. We don't see them yet in EMEA/LA, because we had some non-recurring items. Two things; we had last year some tax credits, which are not being reproduced that tax items which are above the line, and we have this year also some UK pension one-off costs which are impacting the EMEA/LA performance. We expect the EMEA/LA performance to increase sequentially in Q3 by a sizable amount, and we expect EMEA/LA performance in Q3 year-on year to be about flat. So that's for EMEA/LA."}, {"role": "assistant", "content": "For corporate, no structural increase to our costs in corporate. Again, some one-off, some one-off which were good last year of about $20 million, some one-off this year which are impacting negatively our P&L. It's a range of items, but no recurring increase in corporate cost."}, {"role": "user", "content": "Great. Thanks. I'll leave it there."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Steve Tusa with JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi. Good morning."}, {"role": "assistant", "content": "Good morning, Steve."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Just on the answer to Nigel's question, just to be clear that Commercial, that's your total revenue, so that's not -- there is also global exposure outside of the US. And you mentioned 50-50 split between retrofit and new, that obviously does not include services as well. You were talking about the equipment split there?"}, {"role": "assistant", "content": "Yeah. See, when we look at our revenues, that takes into everything we do within those verticals for the Company, including our Global Products business and then in the field business, both install and service. Through cycles, the new construction goes down, service and retrofit goes up. But as we've been now capitalizing on the opportunities with the new service offerings that we have, we are seeing a natural pick-up of additional retrofit because of that, along the lines of these secular trends."}, {"role": "user", "content": "Okay. And then, just lastly on the EMEA/LA margins, can you maybe talk about the timing of price/cost coming through there? Is there any -- regionally, is there any kind of like lag or lead relative to the inflection you're now seeing in North America?"}, {"role": "assistant", "content": "We should see the margin to pickup, Steve, in Q3 sequentially by more than 2 points sequentially. And as I indicated, we should be about flat year-on-year. The underlying performance of EMEA/LA is very strong, as I indicated, and the backlog margin is now being realized at elevated rate."}, {"role": "user", "content": "And are you still for the third quarter kind of reaffirming the -- what you had said last quarter with the -- I assume, with the guidance being as strong as it is for the third quarter on margins that you're still comfortable with the profile of the strong year-over-year at North America field?"}, {"role": "assistant", "content": "Correct. The numbers we discussed here were still intact for Q3 across the patch [Phonetic], including for North America."}, {"role": "user", "content": "Okay. Great. Thanks a lot."}, {"role": "assistant", "content": "Thank you, Steve."}]}, {"messages": [{"role": "system", "content": "And our next question today comes from Noah Kaye with Oppenheimer. Please go ahead."}, {"role": "user", "content": "Good morning. Thanks for taking the questions. So, you've got the acceleration in orders sequentially this quarter on a tougher comp. Maybe comment on orders expectations for the back-half and pockets of strength that you see."}, {"role": "assistant", "content": "Yeah. When we look at what's happening commercially, you got to look at right from the pipeline we're developing to how they're converting and what our backlogs are and how they're going to turn. I'll start with the backlog. The backlog is up 9% in the field year-on-year. When you look at the -- what's within that backlog, where we've -- it is very resilient, in line with our core strengths. When you look at -- when we look at North America applied chillers, we're up -- our backlog is up over 30% and our revenue churn was roughly about 40% when you look at all-in relative to our revenue. And that's continuing. We're seeing capitalization of the trends that are underway. We have a very competitive product line out there, we're actually gaining share."}, {"role": "assistant", "content": "When you look at Light Commercial globally, we're -- backlog is up 30% and revenues are turning about 30%. So, extremely strong performance within the Commercial sector. When you look at North America Commercial, which rooftops, in addition to the Applied, we're on a run rate now with backlog significantly up and we're turning now better than 60% growth. And so, our our focus has been how do we continue to strengthen the pipeline conversion and then with the capacity expansion we've had and the resolution of some of these constraints from a supply chain standpoint, it's really helped us not only reduce lead times, so we can ultimately continue the growth, but now being able to execute on the revenue growth."}, {"role": "assistant", "content": "And so, as we look at the secular trends in the pipeline development around sustainability, healthy buildings, digital now with the digital deployments that we have, we see still a very strong pipeline. And so our focus is how do we make sure within that pipeline we differentiate with our products, we differentiate with our solutions, leveraging digital and that is what ultimately gives us confidence that we can continue to convert in a very positive way here through the second-half."}, {"role": "user", "content": "Okay. Thanks, George. And then, maybe you can characterize the inventory build in terms of composition and how you see that working down. Certainly, it's normal to see some seasonal build in parts of the business, but that's a longer cycle higher components portion of it. Would just be interested in your characterization. Thanks."}, {"role": "assistant", "content": "Yeah, let me address that and then Olivier can talk about the financial impact. As you look at what's happened over the last couple of years, we had significant disruption. And as a result of that, we built up inventory, all of that peaked from a days standpoint in the first quarter. We've had the entire team now, now that we've been really leaning out and getting our capacity in place and working with our key suppliers, we've got the supply chain working pretty well. And so, as a result of that, we are not only making sure that we're protecting the significant ramp in the second-half on the Commercial backlog that I discussed, but then making sure that we can rebalance all of our input to output relative to the material required. And so we've got line-of-sight to pretty significant step-down in Q3 and then Q4, which gets us back to where we need to be from an overall inventory perspective."}, {"role": "assistant", "content": "Not much more to add. If you look at the inventory turns in Q2, we improved sequentially by six days. We didn't want to reduce the inventory by much more than that due to the strong demand we'll have to satisfy in Q3. For the full-year, we expect inventory to be back at the level it was at the end of '22. And as we have discussed before, we want to keep improving the inventory turns as we get into '24."}, {"role": "user", "content": "Very clear. Thanks for the color."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Scott Davis of Melius Research. Please go ahead."}, {"role": "user", "content": "Hi. Good morning, fellas."}, {"role": "assistant", "content": "Good morning, Scott."}, {"role": "user", "content": "Appreciate it. George, the parts numbers that you gave kind of echo spreads comment on service and parts, pretty amazing. What -- I mean, I understand digital has a big role here, but is there any way to think about kind of your capture rates and how they've improved over time with digital? Is it -- I'm trying to picture for the most part, if something breaks, people want to replace like-for-like, but maybe around the world it's not always that case, but how much has digital, I guess, improved your take rates or capture rates on those -- the spare parts, I guess, is my question."}, {"role": "assistant", "content": "Okay. So, I think, you start with the installed base that we're serving and we're up pretty significantly another 150 basis points. So we have -- what's driving that, Scott, is the connectivity. So we go back, we make sure that it's connected, we have the utilization of the data, we then manage what we traditionally have managed, we get productivity from that, we improve our value delivery and then we have with the insights after three months, six months, nine months, we're comparing that performance to the fleet. And that gives us and we know what vintage the equipment is. And then, historically, we know predictably where issues are going to ultimately arise. And so, what we do is we then go back and do upgrades with parts and continuing. And this is to avoid any catastrophic failure or just to improve overall efficiency. And so, when you look at our connected chillers now, our connected equipment, we're reducing attrition about -- it's about half of what the traditional service customer attrition was. And so, you get higher penetration of the installed base, you got more ability now to use data to create value propositions on energy, on efficiency, overall utilization. And then, when you look at some of these bigger secular trends around sustainability, healthy buildings and then ultimately smart buildings, it becomes the platform that we can then utilize all of our OpenBlue applications to build on top of. So it's a combination of all of that. And then if you look at historically what has happened when we do have a contract, we're seeing significant pick-up when we say L&M is because it's coming out of the utilization of data and then how we're presenting additional opportunities to the customer to then be able to capitalize on."}, {"role": "assistant", "content": "Does that help, Scott?"}, {"role": "user", "content": "Yeah. No, it does. And I think maybe just as a natural follow-on, when you used the term vintage, I think, is appropriate. I think, there's always been a view that these -- the big chillers just last forever, and in fact, they seem to last a very long time. But given decarb or other drivers, are you seeing the actual kind of useful life or vintage come down? Because there is a greater interest in people pulling 35 year-old, 30 year-old units out of service, because it just doesn't make any sense, where maybe in the past, it did make sense to keep them alive."}, {"role": "assistant", "content": "So what I would say is, we've actually seen both. We have assets that we can go in and on a run rate basis significantly reduce energy consumed to benefit the customer and ultimately address some of the sustainability challenges that they're facing. And then in other cases, we we can put a value proposition together to upgrade the equipment, to deploy digital and then to get a payback based on how those -- that equipment is actually operating. So that's what we do through our sustainable infrastructure business, which today we have a significant pipeline that we're working to convert, it's about $7 billion. And so, Scott, it really depends on what the current operations are, what the current age of the equipment is, how it's operating. And then what we do is then try to provide a value proposition that is the best in their case that ultimately achieves what they're trying to set out to do."}, {"role": "user", "content": "Very interesting. Thank you. Best to luck, guys. Appreciate it."}, {"role": "assistant", "content": "Thanks, Scott."}, {"role": "assistant", "content": "Thank you, Scott."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Chris Snyder with UBS. Please go ahead."}, {"role": "user", "content": "Thank you. So, volumes in the quarter really stood out, that was nice improvement to up 3 versus, I believe down 1 last quarter. Does this pick-up just reflect the catch-up in volumes pushed out of last quarter or more so supply chain improvement or Company capacity additions? And with that, when you look at like around 9% organic in the back-half, how much volume is expected [Indecipherable]."}, {"role": "assistant", "content": "Well, let me start by saying, operationally, we have seen significant improvement across our portfolio. So when you look at our velocity in the field-based business, you definitely see a recovery of the backlog. Because that had built as we -- as you recall, last year, we had extended our project cycle time because of supply chain and other challenges. That now is getting back in line. So that some of the reduction and then the or the increased revenue. And then in the product business, the same holds true. We have really done some significant work and how we've expanded our capacity to now capitalize on these trends to be able to be competitive with lower or shorter lead times in the market to continue the growth in the backlog, which is what we've done. And so, it's a little bit of both, where we're covering the backlog and then because of our ability to be able to better serve customers that is ultimately helping us to be able to drive growth."}, {"role": "user", "content": "Thank you. I appreciate that. And then, also wanted to follow-up on service orders, but specifically the relationship between service and equipment orders. I mean, service, obviously, has some pretty good secular tailwinds with OpenBlue and the market share opportunities offerings, but there also is a connection between service and equipment when we look at attachment rate. So, I guess, my question is if we do hit a period of cyclical pressure and equipment orders are down on that, what is the ability or the opportunity to kind of grow service orders through the cycle? Thank you."}, {"role": "assistant", "content": "Let's start with the overall model. So it starts with the installed base. And even though we've made significant progress, we still are currently performing service on short of about 0.5% -- about 50% of the base that we put out into the field over the last couple of decades. And so, the opportunity for us is to continue to penetrate that installed base, doing upgrades, deploying digital and then ultimately providing these outcomes that, I think, with the combined portfolio that we have, which is the leadership HVAC equipment portfolio and a leadership Building Solutions, the two combined to be extremely differentiating relative to the outputs that we can create. And so, we believe that the continued expansion of the attach rate to that installed base, the ability to be able to connect, use data, there is significant value that we generate to our customers. In any downturn, the single biggest reduction is energy savings. And so when we deploy a full solution, we can reduce energy 20%, 30%, 40%. And then couple that with the improved overall operation of the building beyond just the chiller, there's significant benefits to be able to to be achieved for the customers. So I believe that the differentiation with the value, the ability to be able to go get more of our installed base to build on that real differentiated solutions, utilizing the data and AI is going to be -- it's going to continue to allow us to be able to expand services no matter what the cycle is that we ultimately experience."}, {"role": "user", "content": "Thank you. Appreciate that."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Julian Mitchell of Barclays. Please go ahead."}, {"role": "user", "content": "Hi. Good morning. There's been a lot of questions on the Building Solutions side. So maybe looking at Global Products for a second. You've had very, very good operating leverage first half of this year and the last two years. You're running up against some tough comps in the back-half. So just wondered how you're thinking about the degree of margin expansion year-on-year in Global Products."}, {"role": "user", "content": "And then, looking out beyond the very short-term, when we look at some of your peers Honeywell's margins are quite a bit higher, your HVAC peers somewhat lower. So how should we think about kind of normal operating leverage or incremental margins in Global Products beyond 2023?"}, {"role": "assistant", "content": "Yeah. So let me just give you the overall strategy and Olivier can touch upon the financials. When you look at what we're doing within the Global Products business, it starts with making sure we have leadership product. And we've invested over the last five to six years and I think we're positioned pretty much across the portfolio to lead and differentiate and the differentiation obviously drives value with how we serve our customers. So it starts there."}, {"role": "assistant", "content": "The second is making sure that we're operationally local for local and making sure we have a robust and resilient supply chain, and we made a lot of progress there. So from a cost standpoint, we ultimately can maintain low cost and how we ultimately serve the key markets that we serve. And so -- and then from a overall SG&A, while we've been focusing on is really getting leverage out of the SG&A structure and there's still significant opportunity ahead of us to simplify that, Julian."}, {"role": "assistant", "content": "And so, I think the -- as we look at our product business where we've been and where we are, there is still significant room for improvement. Obviously, it's going to be driven by the continued leadership product, the digital content, the connectivity, that's going to ultimately be valued and then ultimately that translates into the solutions that we provide in the field. And so, we're in a position to continue. We're getting good continued strong price/cost, because of the product and because of the value proposition. That's going to continue, Julian."}, {"role": "assistant", "content": "Olivier, do you want to --"}, {"role": "assistant", "content": "Yes, absolutely. If you look at the second-half GP, as you said, Julian, the strength in the year-on-year margin trend will start to normalize, because of the tough comp. And what will take over in term of margin profile for the second-half is our solution business, where you see the trend which happened in Q2 is going to accelerate in the second half of the year. So, that's your first question."}, {"role": "assistant", "content": "Regarding your second question, beyond '23, we believe we can deliver 30% incremental. George mentioned few of the points supporting this. We believe in a Global Product, we have strong product offering, heat pump is going to be part of this and then we also are very bullish about what our Building Solution margin could be at the back of solutions, services enabled by digital. On top of that, we have strong operating leverage capability in the P&L as we keep growing, we have invested over the last two years, we believe that this investment will start to slowdown and we should be able also to increase leverage next year."}, {"role": "user", "content": "Thanks very much. And then just my second one more on the the portfolio. You've seen some moves that one of your peers recently. So I just wondered, given it's been seven years or so since the large very major portfolio move at JCI, how are you thinking kind of George and Olivier about with the elements of pruning here, do you start to maybe get back onto M&A now that you are quite far through the current three-year plan in terms of savings extracted from the base business. And then to put a finer point on it, what is the appeal to you of that European residential heat pumps market?"}, {"role": "assistant", "content": "Yes. Let's reflect on where we've been. We did the merger with the divestiture of the seating business back back in 2016 with the merger with Tyco and Johnson Controls. And then we said from -- the strategy that we laid out was to really step back and understand what the future of buildings would be and what was going to be required to ultimately win with the trends that are underway. We said, at the end of the day, the value proposition with a leading HVAC business combined with having a leading building management platform that the two combined is ultimately what's going to be required to be able to deliver smart, sustainable, healthy, most productive, most efficient buildings. And that has been our strategy."}, {"role": "assistant", "content": "So as we've been looking at our portfolio, continuing to strengthen HVAC not only with our organic investments, but also looking at potential bolt-ons or gaps that we might have and heat pumps has been a huge focus of ours. I mean, our -- when you look at our heat pump portfolio, about half of our HVAC portfolio is made up of heat pumps. We've had significant reinvestment into heat pumps and that's going to be a continued focus of ours as you stated from an M&A standpoint. And then on the the digital side, what's happening, the combination of what we've done in our building management system platforms coming together now with a leading data platform with OpenBlue, it really does position us to now differentiate the solutions that we can ultimately serve our customers with, Julian, with the combination. And so, with that, from a capital deployment, we've been certainly providing returning a lot of capital back to our shareholders through dividends and share repurchases and that's continuing to be strong and we're going to continue to focus on from an inorganic standpoint, where we can leverage the strength of the strategy that we're executing organically and how do we complement that with M&A."}, {"role": "assistant", "content": "No, nothing more to add. 13 is going to be the name of the game. Services, digital, IP-ing products. And in term of George answer to that is going to be really at the margin, but nothing significant we want to do."}, {"role": "user", "content": "Great. Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Joe O'Dea with Wells Fargo. Please go ahead."}, {"role": "user", "content": "Hi. Good morning. Thanks for taking my questions. I wanted to start, I think, George, you said about 50-50 mix in office on the sort of new versus retrofit side. Just wanted to confirm that it would be something simpler or something similar for non-res exposure. And then, could you talk about sort of retrofit and how much of that activity is dependent on third-party financing or most of that just internally sourced from customers, as well as the push versus pull dynamic, how much of these sales do you think you're sort of generating on the sort of push side and going out there and selling the advantages versus customers coming to you and asking for this?"}, {"role": "assistant", "content": "When you look at our vertical markets we serve and in line with Commercial, we talked a little bit about Commercial, but it's similar percentages, plus or minus relative to install to service. A big focus of our Company now is not only to get the equipment installed, but then to be able to, from a solution set standpoint, leveraging our data to really then capitalize on that installed base with the recurring revenue over the lifecycle. So there's a big focus on continuing to expand our services across all of the key verticals that we support. But it is -- historically if you asked the question, it's similar type percentages install to service, it varies a little bit by vertical."}, {"role": "assistant", "content": "As it relates to non-res, in general, when we look at the overall non-res, the indices that we look at, while we are seeing the benefit of is the construction starts are up and a lot of that was the projects that got put into the pipeline over the last couple of years and that's benefiting us. The good news is that ABI has come back a bit and stabilized somewhat positive here in the month of March. So when we look at out at the indices, there is still very strong, our pipeline around non-res across the board is very strong and our task is to then within that pipeline to really differentiate. And that's what's happening, especially as we focus on these secular trends, as we talked about today around sustainability, healthy buildings, and then ultimately delivering smart buildings. So we don't see significant differentiation across the verticals. I would tell you that right now healthcare is strong and data centers are strong and there's a lot of verticals that play to our strengths that we're capitalizing on. But I would tell you right now, it's pretty much across the board."}, {"role": "user", "content": "Got it. And then, Olivier, just thinking about the back half of the year, I mean, it seems like from a sort of topline growth perspective, it looks like the third quarter would be in a pretty tight band across the segments, something like high-single digit, low-double digit growth in then Q4 may be more mid-single digit high-single digit across the segments. The question is, when you look at it, where do you see the greatest upside risk? Is this primarily a function of ongoing supply chain constraints? And if those were to ease, where could you see things come in a little bit better?"}, {"role": "assistant", "content": "So, if you look at today and you sense it from the call and from also our print in Q2, I mean, of course, you have always some risk in the large business like ours. But we're very confident about the market we are facing. The value proposition of our Company is resonating. If you look at the macro indicator level, the commercial markets across the world actually strengthening. You see the backlog is strong. The backlog is growing. So, today, we see that this is a balanced set of expectations for the second-half. And again, we said that all along, we have accumulated a sizable backlog that's very rich margin and that is going to give us also a lot of momentum going forward."}, {"role": "assistant", "content": "I think a key statistic is when we look at our Global Products business, which kind of spans all of our markets, when you with the exception of the softness we see in resi ducted, our backlog in our Global Products business, when you look at both direct and indirect is up over 20%. And so, you realize that that ultimately plays to to our strength with the work we're doing around the commercial sectors."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you. Thank you. And our next question today comes from Nicole DeBlase with Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Yeah. Thanks. Good morning, guys."}, {"role": "assistant", "content": "Good morning."}, {"role": "assistant", "content": "Good morning, Nicole."}, {"role": "user", "content": "Maybe just starting on the orders, really strong in the quarter accelerated versus 1Q. Any thoughts on how orders are trending into April? Has that strength continued and also any thoughts on how you guys are seeing orders in the third quarter, just because the comp -- your stock comp does get a little bit tougher from here? Thank you."}, {"role": "assistant", "content": "Yeah. I think, when we look at our commercial operating system that we're really driving is really understanding market and the pipeline development, how we're converting by vertical, by region, looking at not only Global Products, but also solutions where we're tracking as we have been now you understand through the quarter, typically, a lot of the project business gets weighted to the second-half. So, based on what we're seeing with activity, with the pipeline that we're building and how we're converting, it's in line with what you would expect, Nicole."}, {"role": "user", "content": "Okay. Got it. Thank you. And then, I know it's a small part of your business, but just wanted to discuss the North America resi market. I was just a little bit surprised to see it down high-teens for you guys, just a little bit worse than peers. Can you just talk a little bit more about what you're seeing with respect to price versus volumes and the inventory dynamics in the channel? Thank you."}, {"role": "assistant", "content": "So, when we look at resi, we look at it globally. Total resi was down about 4 obviously with JCH being up single-digits with our North America business down in the teens. Now, when we look at that, obviously, we're going through -- we are seeing sequential improvement, not only through our operations, but now with the rebalance of inventory with our distributors and that's playing out as we planned. And then, when we look at where the growth is going to come from, while the ducted business is under maybe a little bit of pressure in North America, our ability to be able to now capitalize on VRF in our rack and pack, in our unducted or ductless business is very strong. And so when you look at our business there globally, is starting to accelerate based on what we see. And so, I think that's a position that we believe we're going to be able to capitalize on, given the strength of our unducted portfolio and continue to be able to gain share there with the deployment of that product."}, {"role": "user", "content": "Thanks. I'll pass it on."}, {"role": "assistant", "content": "Thank you, Nicole."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Joe Ritchie at Goldman Sachs. Please go ahead. Well, Joe, your line is open [Indecipherable] perhaps needed. I apologize. We'll go on to the next question and that comes from Deane Dray, RBC Capital Markets. Please go ahead."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "assistant", "content": "Hi, Deane."}, {"role": "user", "content": "Hey, there was a reference early in the prepared remarks about pent-up stimulus still waiting to be released. Could you just take us through the key buckets there the line-of-sight, and then where and how would you benefit?"}, {"role": "assistant", "content": "Yeah. When we look at all the programs that have been playing through with the COVID programs, the Infrastructure Act, the Inflation Reduction Act and then in Europe, the Fit for 55, the building standards, we're tracking that pretty much across the board and we participated in ultimately developing those bills. And so, as we're tracking this, we've seen -- if you look at the problems now our customers are trying to solve, whether it'd be education or healthcare or any of these type of problems, we are seeing -- we started to see a pick-up last year and that's continuing this year and being able to now that funding getting to our customers and ultimately converting, that's going to take -- when we look at the deployment of all of that, Dean, over the next 10 years, it peaks roughly about five years out. So it's not going to come into play immediately, but we are beginning to see those monies flow to the customers that ultimately can put it to work in solving some of these problems that they're solving around sustainability and healthy buildings and the like. So we do see that as a -- when we size the market on a run rate basis, about $250 billion when we did our Investor Day, we believe that the funding that's coming into play more than supports the ability to be able to capitalize on that market opportunity. And then with our early leadership product, but the solution set that we're building with digital then positions us to really get more than our fair share."}, {"role": "user", "content": "Got it. I appreciate that. And then a follow-up question for Olivier on free cash flow. Just given the comments and expectations on the inventory step-down in the second-half, the cash conversion from that, is that included in your reaffirmed cash flow conversion guidance, 80% to 90%, or would that be potential upside? Thanks."}, {"role": "assistant", "content": "It is included in our guide. And again, we discussed about this. We have clear line of sight of what needs to be done. We have reduced inventory sequentially by by six days and we have -- we could have done more. I indicated why we did not, we need to satisfy the strong demand we have in Q3, but we have clear line of sight of this inventory reduction that's indeed embedded in our guide."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Gautam Khanna with TD Cowen. Please go ahead."}, {"role": "user", "content": "Hey, good morning, guys."}, {"role": "assistant", "content": "Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "I had a question that I was hoping you could help us with, which is on orders related to install. So I wanted to get a sense for how much is equipment price up year-over-year in the orders. And then how much does equipment price represent as a percentage of a total job you'll book? Because, I'm trying to understand like are you booking an install higher volumes as well as higher prices, if you could give us some color on that."}, {"role": "assistant", "content": "Yes. So, when we look at our install business, it's really focused on the core as we've continued to make sure that we're increasing our installed base and then ultimately we're capitalizing on the recurring revenue we get through service over the lifecycle. So when you -- on that business, we're increasing both price as well as volume on the core. Where we did focus is some of the other contracting that goes in line with some of those projects that we've de-emphasized. But when you look at the core business that ultimately is driving our product sales and in creating an installed base to be able to generate services, that's continuing to grow price as well as volume."}, {"role": "user", "content": "Okay. Can you say how much price is up on equipment maybe year-over-year within the install business?"}, {"role": "assistant", "content": "It would be, Gautam, it would be in line with the overall price that we're yielding as a company or high-single digits price."}, {"role": "user", "content": "Okay. And then could you maybe refresh us on your targeted -- maybe over the next 12 months where you think service attach rates, how much that could grow? Previously you guys talked about 40%. What are you targeting over the next 12 months?"}, {"role": "assistant", "content": "What we're targeting is continued acceleration. Like I said earlier, we're up about 100% year-on-year with our connected chillers. That ultimately gives us the opportunity to get additional revenues and reduce attrition and improve the overall performance. And so while we committed, we're going to see just continued sequential as well as year-on-year progress in our ability to be able to now connect and mine that installed base."}, {"role": "assistant", "content": "We think that this low-double digit growth in services, is not going to be -- is potentially subject to an exploration. As we keep digitizing services offering, the service business will increase, attach rate is one dimension, that's not the only one."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Brett Linzey with Mizuho Americas. Please go ahead."}, {"role": "user", "content": "Hey, good morning all. Just wanted to come back to Slide 5 and specifically the decarb and the healthy pipeline about $10 billion. Can you just remind us what the hit rate or the conversion rate typically looks like there? And then is there anything unique or elongated about some of the timing on those projects?"}, {"role": "assistant", "content": "So, on the -- let's start with the sustainable infrastructure. We did have a nice pick-up in orders, which was 29%, which was a pick-up from Q1, the revenue turned strong at roughly about 16% and that's going to continue. The pipeline is about $7 billion that we've been working to convert and this is the way we put together solution with our products with our digital and then ultimately create an outcome. Continued strong pipeline execution conversion on that on the healthy buildings on a year-on-year, we're only up 2% orders, but recognizing that was to a tough compare, we do believe our pipeline right now is up about 69% as it relates to these projects. So there is still significant demand, so that hasn't changed since COVID. And we're positioned now with the, I think, differentiation not only with the product, but also now the digital solutions that really differentiate how we can actually serve the customer with those capabilities. So, both are continuing to be very strong. In addition, a lot of that also converts to service. When we go and sell a healthy building solutions, there is a tail that comes through with the services that we built."}, {"role": "user", "content": "All right. Great."}, {"role": "assistant", "content": "So, I think that was the last question. Just I'd like to thank everyone once again for joining our call this morning. We delivered a very strong first-half and well-positioned to build on that momentum in the second half of the year. Certainly, the digitization of our offerings continued to accelerate as we lead the way towards a smart, healthier and sustainable future for our stakeholders. I look forward to engage with many of you over the coming weeks. And with that, operator, that concludes our call."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your first question comes from the line of Brian Reynolds from UBS. Your line is open."}, {"role": "user", "content": "Hi, good morning everyone. John, appreciate the color in the prepared remarks on being able to hit your guidance with the base business without marketing. That said, marketing clearly showcased a really strong results for the quarter. And while I know the segment is volatile, I was curious if you guys could provide perhaps an updated view on maybe an annualized EBITDA run rate for the marketing segment, just given the recent acquisitions of NorTex and MountainWest? Thanks."}, {"role": "user", "content": "Yes. Thanks, Brian. We certainly have seen that since we bought Sequent back about 18 months ago or coming up on two years ago, Sequent has a great ability to capitalize on natural gas price volatility, but also doing that using a low-risk business model. I would say, though, that we're really not ready to take the $50 million to $70 million long-term run rate that we've talked about before up at this point. Some of these positions that they utilize are more short-term in nature, especially the storage positions. And again, we would emphasize that a big reason they've been able to do as well as they have has just been the historically high natural gas price volatility, especially what we saw last year through the summer months and also in the fourth quarter. So those are a couple of reasons that we would like to stick with the $50 million to $70 million long-term run rate. However, as I mentioned in my commentary, I forecast -- our current forecast does show that we do not need any additional EBITDA from Sequent this year to make the midpoint of our guidance. And as I also mentioned, the favorable results really did show in the first quarter how Sequent was able to counter the unfavorable results we saw in our gas processing margins and some of the other things that we saw in the Upstream and Wamsutter gathering and processing EBITDA."}, {"role": "user", "content": "Great. Appreciate all that. Maybe just a follow-up on the nat gas macro. Williams has highlighted that I can continue to show base business growth in a low nat gas environment. So kind of I was wondering if you could perhaps discuss two sides of the coin. One, how low nat gas prices are supporting increased demand for transmission projects in that 2025 plus time frame? And then second, near term, how could load nat gas prices kind of impact some volumetric headwinds on the G&P side of the business over the next, call it, next six to 12 months?"}, {"role": "assistant", "content": "Yes. Thanks, Brian. This is Alan. First of all, I think what we are seeing already, April numbers came out on power generation and power generation was already up about two Bcf a day on a previous 27 Bcf a day load for April of '22. So we're already seeing some pretty good pool based on price on natural gas in the power generation space. And I think we'll continue if prices stay low like they are, I think we'll continue to see that through the summer on the full side. So that's a good thing for us just because obviously, the capacity demand will be important for us. I think on the -- in terms of that impact on the G&P business, I think we're certainly paying close attention to that. Many of our big producers are hedged out pretty well, and we're seeing people continuing to produce through that. So don't expect -- we're certainly not expecting growth on average across the space, to be clear, but we're pretty fortunate to be in some of the lower-cost basins and with producers that have been managing this pretty well. One of the areas that we're really seeing continued growth is in the rich gas and some of the condensate areas in the Marcellus and the Utica areas, and so we're fortunate to be pretty well exposed to that area as well. So I would just say, as always, we have such a wide variety of exposure across so many different basins that will whatever the demand pool is on natural gas, our volumes will reflect that and really excited this quarter to see our Sequent team, it's been a strategy of ours as far as Sequent team to go out and provide market and preferentially to our gathering customers in places like the Marcellus because obviously, there's value for our gas moving over the top of other gas in the basin. And so certainly, our Sequent team has shown their ability in that area and we're excited to see that. So I would just say we're -- I'd say on the macro side, it certainly see an oversupply situation. Supply grew almost six Bcf in first quarter of '23 versus first quarter of '22. So supply side is certainly continuing to grow a lot faster than demand and that means lower prices. But I do think we will see a pretty big response from power generation this summer as we're already seeing here -- as we already saw in April."}, {"role": "user", "content": "Great, appreciate all the color. I'll leave it there."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Jeremy Tonet from JPMorgan. Your line is open."}, {"role": "user", "content": "Hi, good morning. Just wanted to kind of switch to natural gas and exports, LNG, if I could. Just wondering your wellhead to export strategy at this point. So the Sempra, HOA and just wondering if you could expand a bit there. I guess, what your vision is for that dynamic? And how big could that be over time?"}, {"role": "user", "content": "Yes. Thanks, Jeremy. This is Chad Zamarin. We continue to advance our wellhead water strategy since our Analyst Day update. And I'll start by saying you referenced the Sempra, HOA. I mean we think very highly of the Sempra team and have continued to engage with Sempra following the nonbinding HOA we announced last year. But we've also been evaluating a number of competing opportunities as well. We've been spending a lot of time with our producer customers as well as with international LNG buyers, and we're seeing really positive strong interest in both producers wanting access to international prices and international LNG buyers wanting access to domestic producers so they can buy LNG from U.S. supplies at international prices. And so we think we provide a unique solution. We haven't finalized the definitive agreement yet, but we continue to build confidence around our ability to add LNG as an extension of our natural gas value chain in a way it will provide for fixed margins for Williams while shifting that international price exposure to producers and LNG buyers. And so I would just say that we continue to prove up the strategy. We feel really good and feel like we're making great positive strides. And I think we'd expect to finalize a definitive arrangement with Sempra or with an alternative LNG partner sometime here in the near term 2023."}, {"role": "user", "content": "Got it. That's helpful there. And I just wanted to kind of shift to REA in the partial in-service this winter. Just wondering how you think about timing there. Maybe it's not much of a 23% EBITDA contribution, but any thoughts there and really, I also want to see on the Northeast G&P, does that kind of unlock growth there? Or do you think producers might be timing production with when that comes online and just wondering how much EBITDA uplift could you see in the Northeast G&P associated with REA unlocking incremental capacity there."}, {"role": "user", "content": "Jeremy, this is Micheal. Yes, I would just, first of all, I want to thank our project execution team for doing a tremendous job being prepared to start construction on that project. It's a challenging permitting environment, especially in the Northeast right now, and the team designed this project so that it could be permitted and we really got through that process fairly quickly there. Ultimately, and the team was certainly prepared to the tree-clearing window that was closing very rapidly post-FERC certificate issuance and really pleased that we got that tree-clearing done early, and we've actually fully mobilized contractors for the pipeline loop installations. So we do expect a partial in-service by the fourth quarter of 2023. So there will be a contribution to 2023 EBITDA. We're not predicting the actual in-service date of that yet, but it will be before year-end. And I do think that will translate to some opportunities in the gathering business as well upstream. The producers have been awaiting this additional capacity to be unlocked in the Northeast. And we are certainly talking to those producer customers up there to be anticipating when this project will come online. But I do think it will provide additional value in '24 as well, and I think that's really where we're going to see the additional uplift on the gathering business, certainly not only on the Transco side. Really pleased with how it's gone so far, and we'll keep you updated as we progress with the construction through the summer."}, {"role": "user", "content": "Got it, thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Marc Solecitto from Barclays. Your line is open."}, {"role": "user", "content": "Hey, good morning. Could you maybe help us unpack the weather impacts that affected the West segment during the quarter, particularly on the volume and cost side and maybe the underlying trajectory of that business through the course of the year?"}, {"role": "user", "content": "Yes, Marc, I'll take that on. Micheal can add any color. I think break it down into a couple of different areas. One, we've talked quite a bit about the impact of the NGL margins, which is pretty clear. If you look at the analyst package on the appendix to the press release, NGL margins were $44 million lower year-over-year. So that's a pretty good go by in terms of the impact there. Almost all of that decrease in NGL margins happened at the Opal processing plant and almost all of that was related to the historically high shrink cost that we had in January of this year where natural gas prices were in the $50 a dekatherm range. And since then, we've seen that come way back down into something much more normal like $2.50. As far as the rest of the impact, if you kind of look at the sum of what happened in the upstream JV part of the business at Wamsutter plus the Wamsutter gathering and processing impact. Some of those two were about $70 million lower than our planned expectations for the first quarter. So again, between those 2, about a $70 million impact, yes, we saw -- I think one of the things we looked at said that we saw probably about 12 Bcf of impacted volumes for the whole first quarter, whereas in a normal year, that might be a little bit more than three Bcf. So just very historic conditions out there. And the recovery is ongoing. It's -- now we've transitioned to high rivers and muddy roads but the recovery is happening and volumes are being restored and margins are returning to a more normalized level. So expect quite a bit of improvement there when we get to the second quarter versus what we saw in the first quarter."}, {"role": "user", "content": "Got it. That was very helpful. And in terms of the domestic demand outlook in the medium to longer term, there's obviously a lot of focus on the incremental LNG export capacity expected to come online over the next few years. But also curious to get your take on domestic industrial demand outlook in the U.S. with potential onshore and just given everything going on geopolitically."}, {"role": "assistant", "content": "Yes. Thanks for that good question. I think really, if you break that down, the areas that are going to be driven. Obviously, anything that is heavy gas use is coming home. If we're going to be -- we are the major exporter and will be the growing larger exporter. It means we've got the lowest price natural gas around the world likely, and that will bring the industry here, like fertilizer business, obviously, is a big piece that been picking up pretty significantly from that, but a lot of other industries that are heavy natural gas users will continue to be domiciled here in the U.S. So that, I think, is fairly certain. I think in terms of how much that is, it will probably be pretty small in comparison to the LNG growth that we're seeing. And it's pretty impressive right now to look at the amount of NGL growth, I think right now, there's about 23 Bcf of new expected on by 2032. And that's up against a '22 number of about 10.9 Bcf a day. So a lot of growth coming in that space. The other area, as I mentioned earlier, obviously, the power generation sector and for us, that's kind of got two facets to it that I think sometimes the market misunderstands for us. First of all, certainly, when low gas prices are there, we'll see that take out a lot of the baseload coal business that's out there today. We're already seeing that here in the shoulder, but we'll certainly see it this summer. But in addition to that, from a Williams perspective, we sell the capacity. And so as you see more and more electrification occurring, it's very clear that the utilities are going to be left with really no other alternative in gas-fired generation as a backup for that, and we are certainly seeing that in our discussions with our customers and a demand for that incremental capacity that's available that we can uniquely provide into some of those markets. And so that demand for capacity as opposed to volume is a really key thing to note from a Williams perspective because we're not all that concerned about the annual average demand for natural gas as much as we are the capacity that has to be provided to back up renewables. And as you study electrification, that is really going to fall to the benefit of natural gas-fired generation and particularly to the infrastructure, both on the transmission and the storage side that can support that. And obviously, we continue with our MountainWest acquisition and with our expansions on the Transco system, our conversion of Washington storage and our purchase of NorTex storage last year. We are all about being in a position to serve that business and serve it well."}, {"role": "user", "content": "Got it, that's very helpful. Appreciate the time."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Praneeth Satish from Wells Fargo. Your line is open."}, {"role": "user", "content": "Thanks, good morning. Just maybe a follow-up on Sequent. Do you think at this point, Sequent is basically like a hedge against worsening gas prices? In other words, do you think Sequent could generate higher results if gas prices go lower and therefore, kind of offset some of the exposure you have to gas prices on the E&P and G&P side?"}, {"role": "assistant", "content": "Yes. Well, I would just say where there is volatility, that's where Sequent is going to perform well and where there is basis dislocation that's where they're going to perform because effectively, what we're really monetizing with Sequent is we're monetizing storage. So price movement from one period from a time-based period obviously drives value for us, as well as dislocation and basis differentials when we own the transportation between those locations. That's really what drives value for Sequent. And so I would say that it's pretty hard to forecast a period where we don't see quite a bit of volatility in price as we've got a big growing demand for LNG looming on the horizon and people not being exactly certain when that's going to be available. And certainly, the value of storage to serve those loads and to serve quick swing loads for renewables is definitely on the horizon. And I think we'll continue to cause volatility both from a time spread and both from a basis spread perspective. And so we're pretty excited about the way that Sequent will perform in that. But what it wouldn't protect from is if we were sitting here with a completely flat curve at both prices far out in the future, that's the environment that it wouldn't provide us any protection and to be clear. But as long as we've got basis spread and we've got time spread and value there, that's where the Sequent team is going to perform well."}, {"role": "user", "content": "Got it. And I was just wondering if you could comment on your JV with GeoSouthern and the outlook for production there with gas prices at these levels. I guess the futures curve is still pretty good. So is there still an intent to increase production to, I think it was a goal of 800 million cubic feet per day by 2025 or could the pace kind of moderate a bit until prices recover?"}, {"role": "user", "content": "This is Chad. As of right now, that team is continuing to perform and performed exceptionally well. We've got great partnership with GeoSouthern. And right now, they are holding production based on the available midstream capacity. And as Alan mentioned, as you noted, the forward curve is constructive, so they intend to kind of keep that development pace going and we're looking at kind of the gas macro coming into late '24, early '25 and seeing demand pick up. So I think there's a desire to want to be ready to make sure the volumes are there as the market continues to balance toward more demand. And so our expectation is that they'll continue to keep pace with the midstream capacity. They work very closely. Again, the Sequent story, I mean we're working really hard to make sure they find good markets. And so we think also with the Louisiana Energy Gateway project and our ability to get the GeoSouthern volumes connected to really good markets that they'll continue that growth that we've laid out."}, {"role": "user", "content": "Okay, got it, thank you for the color."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Gabe Moreen from Mizuho. Your line is open."}, {"role": "user", "content": "Good morning everyone. Can I ask a quick question on the share repurchases for the quarter? John, it looks like you beat the average price for the quarter quite nicely in the buybacks. Should we think about this still is pretty opportunistic and then the $75 billion figure is that about your bogey for what you think you can handle quarter in, quarter out at this point?"}, {"role": "user", "content": "Thanks for the question, Gabe. Obviously, financial performance continues to be really strong for the company, and the balance sheet is in great shape. Regarding the buybacks, really no change to the returns-based approach that we're taking on the share repurchases, very similar to what we discussed at Analyst Day, we're really looking at all of our investment opportunities that we have in the company and seeing that our lowest expected returns on capital investment in the business are really associated with our regulated rate base investments, principally through our emissions reduction program, which we've talked about being at that 11%, 12% return range. Obviously, this year, since the beginning of the year, we've seen a pretty sharp decline in our valuation as natural gas prices dropped. And we saw our dividend yield expand to 6%. Even while we continue to have a lot of confidence in our long-term 5% to 7% growth rate. So that looked like a pretty attractive investment opportunity relative to all of our options. So we took action to utilize some of that financial flexibility for share repurchase. And I think going forward, it will be a similar approach. We'll just monitor conditions and weigh that investment opportunity up against the other investment opportunities that we have."}, {"role": "assistant", "content": "Yes, Gabe, this is Alan. The only thing I would add to that is we are not capped at $75 million kind of number that you referenced there. So that just happened to be how much we could buy at the price targets that we had set based on our dividend yield and our expected growth up against our rate base returns, as we mentioned."}, {"role": "user", "content": "Got it. And maybe I could just ask a 2-parter on growth projects. One is on the MountainWest opportunities that I think you alluded to, to the extent you can describe maybe some of those that are coming to fruition? And then second is low gas prices at all impacting discussions with potential LEG customers on that expansion or new projects?"}, {"role": "assistant", "content": "Yes, sure. First of all, I'd say on regional energy access. Obviously, there's a big spread between the eastern end of the MountainWest and the Opal basis. And so obviously, that drives need for any kind of expansion that can be built there. And that has certainly shown up in -- as we've gone out to the market testing for support on that. So we're really excited about that and more to come in pretty short order on that particular front. In addition to that, though, there's things like in the [Indecipherable] particularly in the [Indecipherable] area over there. A lot -- that area is kind of getting capped right now based on lack of gas takeaway capacity out of the area. And so some opportunities on that front. And then as well some pretty significant conversions from coal to gas on some of the big western coal plants out there. And so we'll be -- we're extremely well positioned to capture those expansions as well. So I would say we were pretty conservative in our approach to that acquisition and really thrilled with the work that, that team has been doing in terms of identifying opportunities and I think Williams' strategy that we bring to those efforts will maximize the value of those opportunities in and around our assets there. So that's what I have to offer on that. And Mike, why don't you take the Louisiana Energy Gateway question?"}, {"role": "user", "content": "Yes. The LEG project in regard to the opportunity there, I think we still see an opportunity to have that project online later this fall. We're in the permitting process for the project today. And I don't see any obstacles to being able to achieve in service that as we have expected to come online in the 2024 time frame. Right-of-way acquisition is occurring there as well, and we're seeing a lot of expectations there with our producer customers to bring that online and those are take-or-pay type contracts. And so very comfortable with where we're sitting today on that project."}, {"role": "user", "content": "Got it, thanks everyone."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open."}, {"role": "user", "content": "Hey, This is Jake Nivasch on for Neal. Just a question on your G&P fee-based contracts, given where commodity prices are today, I just wanted to get a sense of what those contracts are looking like. Have the contracts at a fee floor? And if so, any way to quantify that? Thank you."}, {"role": "assistant", "content": "Yes. So was that on our gathering contracts?"}, {"role": "user", "content": "Yes. Sorry, on G&P. Yes, correct."}, {"role": "user", "content": "Yes. So we have a number of contracts that do have exposure to natural gas pricing. We talked about those in the past, where some of those have direct NYMEX exposure like in the Barnett, some like midstream at the floor underneath those. And then we have some of the Haynesville wells that have exposure as natural gas prices ratchet up, where we have peers that we haven't publicly stated what they are. But as natural gas prices do escalate, we have an opportunity to increase our fees on those gathering grade. So I would say, for the most part, we're very comfortable with where we stand in regard to our guidance this year and the expectation for what those triggers are in regard to our gathering rates. And I'll just also remind you that we do have a lot of fee escalation in those based on inflation indices. And so many of those have kicked in over the last several years as well. And our team has done a really good job controlling our costs, and we feel really good about where those escalators are in relation to our cost escalation being able to cover those -- any cost increases that we see. And a lot of those cost increases that we're seeing are in power generation, for example, and a lot of those are pass-throughs to our customers as well. So we don't have exposure to that. But all in all, we're very comfortable with our G&P rates are today in regard to the low natural gas prices."}, {"role": "assistant", "content": "And I would just add to that, many of the structures for these expansions that we're doing, and you heard me mention several expansion in our -- in my prepared remarks. And those expansions are tend to be backed by either MDCs, which are pretty simple, obviously, or they're backed by rate increases on the base volumes. And therefore, we're not all that exposed to the volume increases as much in terms of recovering the capital for our expansion. So the majority of those contracts are set up that way for the expansions that I referenced."}, {"role": "user", "content": "Perfect, thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Brandon Joe from Scotiabank. Your line is open."}, {"role": "user", "content": "Hey, guys. This is Tristan with Scotiabank. Can you hear me okay?"}, {"role": "user", "content": "Yes."}, {"role": "user", "content": "Appreciate it. Appreciate your comments, Alan, on Gulf of Mexico and bringing Taggart online, but maybe kind of curious just a general update on the progress of sort of the big five coming online in '24, just general progress and an update there would be great."}, {"role": "assistant", "content": "Mike, do you want to take that?"}, {"role": "user", "content": "Yes, sure, I'll take that. No real change from what you've seen in our published materials in regarding our projects. We've made really good progress on the Whale project in the Western Gulf of Mexico, we have the offshore pipeline that was installed last fall, and we just recently installed the deck modifications on the platform that brings the gas and oil to shore there, and that was just done last week. So that work is progressing with an outage there as we speak. And all in all, we feel very good about that work. Marathon processing plant modifications are underway as well. So we'll be well in front of when the producers are expected to come online in 2024 for that project. The Shenandoah project in our Discovery system is also going very well. A lot of the offshore work by the producers is underway. Our onshore work has been fully permitted and that we're working under the construction projects also. And so nothing's changed on the timing of those. We hope that producers will accelerate those, and we'll be ready for that if they choose to do so. It's really up to their schedules right now as to when they bring those online. But like for the Whale project, they've wanted us done well in advance of their offshore activities. And so we are prepared to go early if they choose to do so. And that's where we stand today on those. But really good progress on the non-capex tiebacks and the opportunities that we've had out there also."}, {"role": "assistant", "content": "And we also -- on the Chevron Ballymore project, we finalized contracts with the producers on Ballymore this quarter as well. Of course, that doesn't require any capital on our part, but a significant accomplishment to finalize that deal, particularly with the other producer -- working interest producer on that platform. So things have gone -- as Micheal said, things have gone very well out there and great to have the primary risk for us was that offshore installation on well, and the majority of that risk has been put behind us. So really great work by the team. It's nice that the team is doing such a great job that you don't hear anything mentioned by it because things have been going so smoothly on that front."}, {"role": "user", "content": "Okay. And then maybe just on LEG. I appreciate the updates there. But maybe curious on how things are progressing on the carbon side of that project. Do we need to be in sort of a primacy in Class six world for that component of LEG to go forward? Or maybe just an update on what you're seeing on that."}, {"role": "user", "content": "Yes, sure. Thanks. This is Chad again. That's also progressing well alongside the gathering project. And what we see today is an interest in the ability to move CO2 along that pipe and then remove the CO2 and sequester. It is not dependent upon privacy. I mean we are prepared to work likely with third parties for the sequestration, but the timing of the project, we think can work full based on kind of the existing permitting process, but also I think primacy just makes things that much more efficient in Louisiana. I think there's been some recent progress in Louisiana that looks like primacy is likely to be near term. But we don't think the project is dependent upon achieving that. And right now, the project is on track and looking positive."}, {"role": "user", "content": "Appreciate that, thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Spiro Dounis from Citi. Your line is open."}, {"role": "user", "content": "Thank you. First question, going to upstream actually. It sounds like not an urgent need to monetize those assets, of course. But as I recall, you obtained pretty close to an asset sales in the last year. So just curious where does that process sit right now? And is that forward curve strong enough to maybe incent some buyers to come in here at attractive levels for you?"}, {"role": "assistant", "content": "Yes, Spiro, I would just say, no, obviously, we haven't kept that any secret that we're interested in monetizing those. I'd say, certainly Haynesville because it's proven up its capabilities here in short order with great work by the GeoSouthern team there of developing that acreage so fast. But really the way that deal is structured, our capital has been required has fallen off dramatically on that as that reversion continues out there on those interests. And so I would just say that the -- we've been pretty clear with the market that if somebody wants to put an attractive offer on the table, we're very interested in those discussions, and we certainly have been and we'll continue to entertain offers on that. But we're not in a passive sell mode. And so we're not going to sell at the bottom of the market. On the Wamsutter piece, obviously, we've got a lot more development out there to prove up to really, I think, get the volumes where we need that to be for the benefit of our midstream business. So I'd still say there's still some execution to be done on the Wamsutter development out there and again, the right party came along that could convince us that they could develop that aggressively and that would be great but I think there's probably better value right now and improving up the opportunity out there and getting the volumes up for the benefit of all of our downstream business. If you realize, if you think about how much margin we make off the Wamsutter area that is clearly our highest unit margin area for us because not only do we obviously have interest in the production, but we also have the condensate gathering. We have the gas gathering. We have the gas processing. We have the NGL takeaway. We're soon that likely have the gas takeaway via the MountainWest acquisition. So a lot of coupons to clip off of the production out there that makes that a very valuable area for us to get developed, and we want to make sure that, that occurs. So anyway, that's the way we're thinking about it for sale signs out, I would say, but we're not selling at the bottom of the market."}, {"role": "user", "content": "Got it. That's helpful color. Second one, just wanted to come back to the guidance quickly for a second. I think back at the Investor Day, you mentioned that the guidance contemplated a producer slowdown just given where you saw the natural gas price at the time and it looks like, to some degree, that's been proving out. We've seen a handful of announcements now on some slowing of activity. I guess I'm just curious, compared to what you were thinking in February, how does that kind of track to your expectations?"}, {"role": "user", "content": "I can take that, Spiro and others can chime in. But I think as we went into Analyst Day, establishing our guidance. We went in with a pretty sober outlook for the year and embedded some pretty conservative estimates for what we thought would be happening with our producer customers. Since then, we've ran another bottoms-up forecast and continue to feel good about the guidance."}, {"role": "user", "content": "Perfect. Thanks for the color guys, thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Sunil Sibal from Seaport Global. Your line is open."}, {"role": "user", "content": "Hi, good morning everybody. My first question was related to some recent comments from the administration, especially with regard to gas infrastructure. I was just curious, is that something that you also picked up on based on your discussions with the administration. And then is there a specific opportunity for Williams to capitalize on that note?"}, {"role": "assistant", "content": "Yes. No, great point, and we were thrilled to see Secretary Granholm's letter in support of Mountain Valley Pipeline and recognizing the critical role that natural gas plays and particularly the more we want to electrify and the faster we go at electrification more dependent we're going to be on natural gas to help support that. And so I was really pleased to see Secretary Granholm's acknowledgment of that. I'll tell you, we certainly have been close to that, but the credit, I think, there is due to a few things. One, the utility industry has become pretty clear in this last quarter that to try to deliver on electrification and the Inflation Reduction Act goals that we are going to have to have more natural gas capacity to help support that and help support backup of electrification. So the utility industry and a lot of the utility leadership, Lynn Good as I think a prime example from Duke have been pretty clear about the importance of natural gas. And I think their messages have hit the mark with the administration on that front. But as well, I would tell you that folks like Senator Manchin, who certainly understands energy very well, has been very vocal about the need for getting the permitting reform done as well. And so there are a lot of people that are starting to kind of move beyond what is just politically correct and what is popular to say and getting down to the cold hard facts of physics and science and realizing that we're going to have natural gas to be able to carry out our goals around emission reduction and support aggressive electrification of our grid. So we're really thrilled to see that. I'm glad you picked up on that as well. And I think that bodes very well for the natural gas industry here domestically and abroad."}, {"role": "user", "content": "Got it. And then on the LNG marketing strategy. So we'll kind of stay tuned to updates coming up on that. But I was just curious, is that marketing strategy more driven by supply push currently? Or is it more of a demand pull in the international markets?"}, {"role": "user", "content": "Yes, thanks. This is Chad. I'd say it's both. I mean one of the things that we offer that's unique today, if an international LNG buyer wants to buy U.S. LNG and if you think about we are the low-cost, most reliable producer of natural gas in the world. And there is a great interest in sourcing gas supplies in the United States, but the international buyer has to primarily buy LNG at domestic Henry Hub prices, indexed prices. And we have producers that we're connected to that are interested in selling a portion of their production into international markets and gain exposure to international prices. So what we are offering is the ability for international LNG buyers that buy U.S.-supplied natural gas but to be able to buy that at an international price because our producers are interested in gaining access to international prices. So we can be a unique bridge between domestic producers and international buyers for a product that really isn't available broadly today because the international buyer has to buy U.S. gas at a Henry Hub index. And so that's why we're seeing, I think, really strong interest from both domestic producers that do want to gain exposure to additional markets and additional price opportunities, but also international buyers that would like to source U.S. supplies, but do so in a more native price index that they could buy again. So it's really a combination of both."}, {"role": "user", "content": "Yes. If I could add to that, this is Micheal. The opportunities that we're looking at also involve some pretty significant FERC-regulated fee-based pipeline opportunities for the infrastructure to be built there well beyond what we're thinking about with the LEG project. So we're certainly looking at the opportunities to build FERC-regulated transmission projects associated with this wellhead water strategy."}, {"role": "user", "content": "Got it. And just one clarification on that. I think in the past, duration of contracts between the -- duration of contracts at the international parties were looking for and what the domestic parties were looking for, there was a bit of a mismatch in that. Based on the recent discussions, do you think there's -- those two are kind of closer to where they were say, a few months back?"}, {"role": "user", "content": "Yes, I'd say that we're not going to take large open mismatch positions. There may be some modest mismatch across the portfolio of LNG transactions. But our goal is going to be to not have a lot of speculative open positions, again, kind of offer a unique product to the market and our goal would be to, for the most part, derisk the term of those commitments. And if we do take any lesser term on a commitment to make sure that the margin that we're capturing is more than adequate to support that. But for the most part, we're targeting significant coverage and matching of the terms across the portfolio."}, {"role": "user", "content": "Got it, thank you."}]}, {"messages": [{"role": "system", "content": "Your final question comes from the line of Jean Ann Salisbury from Bernstein. Your line is open."}, {"role": "user", "content": "Hi, thanks for having me. I just have one. You have several Mid-Atlantic demand pull projects, Commonwealth Energy connector, sell-side reliability enhancement Carolina Market Link. Do these also create more capacity south of Transco 165 than exists today if MVP starts up? Or are those kinds of low capex, high return opportunities that you've referenced in the past, like completely, like they're not even on the board yet?"}, {"role": "user", "content": "Yes, Jean Ann, this is Micheal. I would say those are more of the latter right now. These are fairly low capex compression with some small looping opportunities with really healthy returns on those projects. Anything that would be associated with MVP completion would be a much more substantial capital-intensive project opportunity that we're certainly looking at with customers. But at this time, we haven't announced anything in that regard. But there definitely are opportunities that MVP is successful and the takeaway from Transco will ultimately be built."}, {"role": "assistant", "content": "Jean Ann, this is Alan. I would just add. I think Micheal hit that nail on the head. But we do have decisions to make around MVP because obviously, MVP is critical and that gas that would come in there is going to be searching for new market and we've got decisions to make on how to really optimize that southbound capacity if MVP gets built. If it doesn't get built, then we've got some decisions to make around expanding southbound capacity from the Pennsylvania area on Transco along the mainline, in terms of brownfield expansion along the mainline as well. So those -- that's really what we're kind of waiting to see is how big those projects might be and it's somewhat dependent on whether or not MVP gets built. Certainly, we think it should get finished, but it's just getting harder and harder to predict that given the time it passed. So anyway, we're standing ready with alternatives there, but MVP, I think it is the right sensible solution for our nation, and hopefully, we see that get completed."}, {"role": "user", "content": "Great, thanks a lot."}]}, {"messages": [{"role": "system", "content": "There are no further questions at this time. Mr. Alan Armstrong, President and Chief Executive Officer, I turn the call back over to you."}, {"role": "assistant", "content": "Great. Thank you. Well, we're really, as a team, I tell you, we're really excited to deliver the quarter that we just delivered, particularly within commodity cycle that we're in and really excited about how we're set up for the future and some of the great accomplishments that team delivered this quarter as well. So we look forward to rewarding our shareholders with more growth in the future and are very well positioned for that. So thank you for joining us today and look forward to talking to you in the future."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] We'll take our first question from Glen Santangelo from Jefferies."}, {"role": "user", "content": "Yeah. Hi. Thanks. Scott, I just wanted to start with you. It seems -- it's been a couple of months since you've been onboard and you had a chance to look at everything, and encouragingly, you seem to agree with the strategic plan or comfortable with everything. So, could you maybe revisit what you expect the proceeds to be from the three asset sales coming later this year? And I think from memory, you said $5 billion to $6 billion pretax, and what is that after-tax? And then what's the plan for those proceeds is, would 50% of that be returned to shareholders because that would imply the share repurchase that's significantly bigger than the authorization you currently have outstanding? So, any more details around the back half of the year as it relates to capital deployment will be helpful. Thanks."}, {"role": "user", "content": "So, good morning, Glen, and thank you very much for the question. So, you said I'm comfortable with strategic plan. I think I'm more than comfortable. I'm very, very supportive of the strategic plan. As I came in on the board at the end of the year, one of the things I was most impressed with was plan and the way forward. I think it's a very, very strong plan, and I'm very, very much supportive of it. You asked a question about divestitures as well. And I think it's really important to note that we expect to be -- as I said in my prepared remarks, we expect to be in the previously-announced ranges for both value and for timing. And it's really important to note that we don't need to do these divestitures, we have strong financial performance. These are a matter of strategic choice and not a necessity. So, these are strongly performing assets. There's a lot of interested parties who are on track to announce, all of them hopefully about a year, in 2023, and we hope to be able to announce one or more early in the second half. So, we're very, very pleased where we are from that perspective. But again, it's really important to note that we don't have to do these divestitures in order to execute on our plan. Our plan is strong and due to the strong operational and financial performance of the company."}, {"role": "user", "content": "Sanjeev, do you want to talk a little bit?"}, {"role": "user", "content": "No. I think, Scott, you covered everything. I think just two points to kind of just double-click on that, Glen, to your point about the ranges. So, we talked about in that net proceeds of about 4.9 to 6.1. And that after the taxes, onetime costs and the Oyster Point acquisition at that point. So, we stayed within the range. And the idea that is the proceeds that will be available for additional debt paydown, buying back shares, and investing in the business for the capital allocation plan that was already laid out."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Chris Schott from J.P. Morgan."}, {"role": "user", "content": "Great. Thanks so much. I'm just following up on the divestiture process. It sounds like things are on track. But you mentioned this position of strength. I guess, to the extent the current rate environment does not result in valuations that are aligned with your targets. Can you still kind of push forward with this capital allocation story and kind of targeted acquisitions just given the step-up in free cash flow? Or, would that part of the plan have to change? I know that's not Plan A, but just to the extent that we weren't able to get all these to go line kind of -- should we think about there being a different outlook, or is the outlook pretty much the same regardless? Thank you."}, {"role": "user", "content": "I think it's -- thank you very much for the question, Chris. I think it's very important to note that due to the strong operational and financial performance of the company, we can execute on our financial commitments and on the plan without the divestitures. These are really good well-performing assets. Yes, it's been some deterioration, I believe, in interest rates in the macroeconomic environment. And we don't have to go into any sales that we don't think minutes the value that we see in these important assets. Again, having said that, there's a lot of interest in these assets, and we believe they're going to move forward, and I believe they're going to be, by the time we get to the end of this process, I believe they're going to be in the previously-announced range both for value and for timing. But no, they're not necessary for us to be able to execute on the plan."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Jason Gerberry from Bank of America."}, {"role": "user", "content": "Hey, guys. Thanks for taking our questions. This is Bhavin Patel on for Jason. So, firstly on your monthly GA for multiple sclerosis. How do you see the market opportunity given decreased use of GA overall? And do you believe you can increase the use of GA with a monthly depot? And then on Tyrvaya, just barely impressions, what do you think is needed to drive the launch curve to look like more successful dry eye launched analogs? Thank you."}, {"role": "user", "content": "Thanks for your question. First of all, very happy to announce today the submission of this NDA, very important product for us with our partner, Mapi. And our -- it's not just a compliance play. We have studied this data very carefully over the last couple of months, dug deep into the previous studies which are available, the significant treatment effect of the depot product in reducing the ARR strengthened by the MRI endpoints supports the use of GA depot for the RMS patients and just puts your head around just as against one injection per month, 14 injections the what current treatment is, and almost 560 milligram drug against the 40 milligram. Moreover, not only this was our annual relapse rate, but GA significantly reduced the contrast enhanced lesions by 28%, as well as new or enlarging T2 hyperintensities by about 17%, and significantly how strong the EDSS which is Expanded Disability Status Scale. So, I think with all these, we are looking forward to -- GA, still -- this molecule still has a secretive market share. And this product will revive -- this product will further revive and boost that acceleration."}, {"role": "user", "content": "On the Tyrvaya side, if we look at Tyrvaya performance in 2022, it's predominantly driven by commercial coverage. And as we enter into 2023, we have increased Medicare Part D coverage from single-digits now you leaving the quarter about 54% of Medicare Part D cover life being covered. So, if you think about the marketplace, approximately half of all dry eye disease prescriptions come from Medicare Part D. So, we expect that to be a significant tailwind. As we exited the quarter in March, we have the strongest launch to date for prescribers and prescriptions. We expect this to continue as digital advertising ramps and we initiate the DTC campaign at the end of the year. And furthermore, when we leverage Viatris' commercial infrastructure, we feel that's going to drive an additional intermediate and long-term tailwind for Tyrvaya and the overall portfolio."}, {"role": "user", "content": "So, just a very quick comment on Tyrvaya and the eye care business as well. We need to remember that this deal closed in January. So, this Q2 is our first full quarter with Oyster Point under the Viatris tent. Both revenue and demand for Tyrvaya were in line with our expectations for Q1. And March had the highest demand as previously noted. We're seeing opportunities for leverage as strong parts of the existing organization including commercial access and our large development team to help accelerate revenues in the future, including initiating DTC later in this year. I just want to say that we're very, very excited about not only Tyrvaya but the eye care business in general. Our next question comes from Balaji Prasad from Barclays."}, {"role": "user", "content": "Hi. Good morning, everyone. Thanks for the question. Scott, just couple of questions on the EBITDA side. You called out $2.3 billion of EBITDA for 2024, at least. Can you help us understand what this factors? I would imagine these factors are your asset divestments. And maybe some helpful color would be on what is that like-for-like. Continuing on EBITDA, the cadence implies that Q2 EBITDA is below where the Street is currently. So, was there any pull-forward of EBITDA from Q2 to Q1? Thanks."}, {"role": "user", "content": "And yes, I did confirm $2.3 billion going forward. But let me take it to Sanjeev to get into some of that in more context around your EBITDA question."}, {"role": "user", "content": "Yeah. Thank you, Balaji. I will cover both points that you've talked about in terms of 2024. So, simple way to think about this is the 2 -- what Scott mentioned, minimum $2.3 billion free cash flow for 2024 is after taking out all the divested assets that we've announced. So, if you talk about today's 2023 guidance that we have the $2.5 billion, that includes all the divested assets that we have with us. But this is to kind of show you the starting point for Phase 2, which is assuming all the divested assets are out of the numbers and that's how you get to that $2.3 billion. Important note that's before any cost for divestments or any taxes, which will obviously be funded through the divestment proceeds on that. And we are well on track and we feel very good about where we are on that particular point."}, {"role": "user", "content": "As far as the EBITDA is concerned, again, we had a strong quarter, came in at our expectations slightly ahead of our expectations. The way to think about EBITDA in terms of the phasing is going to be now evenly phased between first half and second half. And that's going on because of there are two factors that is driving it. First is obviously the gross margin, which, first quarter came in ahead of our expectation. So, gross margin is going to step down in Q3 -- Q2, and then go to moderate in second half of the year. So, there is a function of product and portfolio mix, the continued impact of the inflation, and non-repeat of certain positive variances that we had in the first quarter. And then you obviously have the SG&A and R&D stepping up starting from Q2 and later in the year because the investment that we're making in the IT division, the R&D pipeline on organic products, and the DTC that Scott talked about for Tyrvaya which is going to kick in, in the later part of the year. That's why we feel great about overall where we are. But that's the cadence that we expect now. But it still will be at the midpoint of our EBITDA guidance."}]}, {"messages": [{"role": "system", "content": "Our next question comes from David Amsellem from Piper Sandler."}, {"role": "user", "content": "Thanks. So, just wanted to ask a couple of product-specific questions. So, you still have a lot of exposure to Lipitor and Norvasc. Can you talk about how sticky you think those products are going to be globally? And then secondly, just in general, how are you thinking about the trajectory of the established brands portfolio over time? And then another question I have is just a high level philosophical question. If you think about your exposure to regular way, generics, oral solid generics in developed markets in particular, how do you think about the role of that business in the overall organization? And I guess more specifically, is -- are oral solid generics a business that you want to de-emphasize over time? Thank you."}, {"role": "user", "content": "I can start with the -- from the second part. I think we never were de-emphasizing the oral solid business. All we did was diligently looked into our portfolio, looked into -- there are multiple options, products are commoditized. That are more than 10, 15 suppliers out there. Access is not an issue. And we pruned that portfolio and focused on going up the value chain, focused on excess of the more complex, hard to make for us, because somebody is going to take the lead to bring those products too. So, I would say that generics are still a very important part. Our access, basically, it's all about access, and that's where we have been focusing on, bringing access to this hard-to-make difficult products in this segment across the globe. So, we're not walking away from that segment. That's the first thing."}, {"role": "user", "content": "Second, from the brands point of view, established brands point of view, not just Lipitor and this. These brands -- we have been -- these brands, some of these brands were before Upjohn are even the Abbott experience, we -- they were declining at an accelerated rate. And we -- why? Because there was perhaps not enough focus over the last two years. We have -- I know what we have to work with and we have focused on these products. Over the last several quarters, six to eight quarters, we have been able to stabilize this bucket very successfully from decline of -- initial decline of 4%, 5% to about 1%. And in fact, this quarter, it was flat and next quarter you will see this segment coming to a little bit of growth. So, it's all about stabilization of this bucket, which is leading to the further robustness of this platform. So, we're very excited with the work which we have done around this and our ability to manage this portfolio."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Ash Verma from UBS."}, {"role": "user", "content": "Hi. Thanks for taking my questions. So, I have two on pipeline. One on BOTOX, have you received clarity from the FDA. Can you share with us like, what's going to be the trial design by similarity, endpoint, etc. for this program? And are you pursuing this as an indications here, and not esthetic? And then separately, for Xulane Low Dose, can you elaborate a little bit like what is the value proposition? Does this in any way expand the market opportunity, or is it going to cannibalize the high-dose product that you have? Thanks."}, {"role": "user", "content": "On Xulane Low Dose, as market is already like commoditized, cannibalized, I would not say it's cannibalized, but kind of commoditized with now one, two, three players out there. And Xulane Low Dose actually is a medical need, it's an unmet need over there that has been always in ask for a low-dose hormonal product over here and we are well on track. We are Phase 1 studies are now completed, sensitization, irritation, addition, and Phase 3 studies underway, targeting about 1,200 women and we're looking forward to bringing this to the market maybe by '25, -- sorry, '26 in this case. As far as the BOTOX, yes, very early on, maybe almost year and half back, we sought the alignment and we got the alignment with the FDA. Very clearly what they have expectations were on CMC and what are on the clinical trials, like for example, one of the clinical studies they were looking on a cervical dystonia as well as extensor digitorum brevis. So, all those studies are well in -- all that work is well on track. And we will be submitting our IND later this year for the initiation of Phase 3 study."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Umer Raffat from Evercore."}, {"role": "user", "content": "Hi, guys. Thanks for taking my question. I have two here, if I may. First, it seems like China has been a very good tailwind through the duration of COVID lockdowns. And considering it did so well last year and considering it's doing so well up 5% in 1Q as well, how are you baking in potential for a restart and implementation of VBP programs across China into back half of this year and especially into next year? Number one."}, {"role": "user", "content": "Number two, Symbicort -- I know Advair opportunity did not necessarily play out versus your internal expectations. And it perhaps wasn't really a needle-mover. In fact, one of the big droppers this quarter is your Wixela product. Why should Symbicort be different? And to what extent has the brand discounted on Symbicort already? Thank you very much."}, {"role": "user", "content": "Wixela is and Wixela always has been, ever since launch, a very meaningful contributor. Even this quarter, it has been a very decent contributor to our projection or to our numbers and all that. And it's a very important product. We have met and exceeded every expectations we had around Wixela. And we expect to leverage what have we learnt in the market to further leverage the same expertise to leverage in this product. We are very much looking forward to bringing this product once the regulatory exclusivity expired, everything is lined up. And we anticipate launching this with 180-day first-to-file generic exclusivity unless, as we mentioned, subject to FDA's future determination of this issue when another ANDA filer becomes eligible for final approval."}, {"role": "user", "content": "Now let me switch back to China. Four years of successful implementation of VBP, China has significantly improve the cost efficiency. And first, I will tell you. We don't have any more products to go through the VBP rounds at this point of time. We have gone multiple rounds. The market has evolved towards segmentation of privately paid and government reimbursement paid. And what have we done at our end? Commercially, we have aligned -- we have continued to make a lot of progress effectively to compete in -- especially, in the private paid channel, leverage the brand equity of the products in the private paid channel, and reorient ourselves over there. Operationally, what we have done is loaded up the pipeline. We have already 10 products under active review with SFDA, and sooner than later, this pipeline will start coming up into the -- add to the growth. And on the last one, I was just there with our management team as well as [Indecipherable] China to review. And I'll tell you, we had a great team. They have performing really wonderful well during the COVID or even during the integration, we have -- this was the first time we ended up thereafter integration. I have nothing to say but the great things and our confidence in that business has been reconfirmed."}, {"role": "user", "content": "Scott, do you want to like to add something?"}, {"role": "user", "content": "Yeah. I just -- thank you, Umer, for the question. And just to add to what Rajiv said there, my first international trip on behalf of Viatris was to China and to meet the China team. And I was incredibly impressed by the leadership, by the strength of the leadership team, and the overall strength of the operating affiliate in China, very, very strong, particularly commercial organization that we have there. And as Rajiv noted, lots of products in the pipeline and really looking forward to the next step with our affiliate in China."}]}, {"messages": [{"role": "system", "content": "And our last question comes from Nathan Rich from Goldman Sachs."}, {"role": "user", "content": "Great. Thanks for the questions. One high level and then one on the quarter. I guess, Scott, how are you thinking about the best way to prioritize the free cash flow that you're planning to reinvest in the business either organically or to drive growth inorganically? And any thoughts on therapeutic areas that you think the company should focus on? And then on the quarter, the level of base business erosion was a little bit high relative to the full-year guidance. I think complex generics were called out as a soft spot. I guess, could you maybe just talk about how this is expected to trend over the balance of the year? Thank you."}, {"role": "user", "content": "Thank you for the question. And just relative to the BD strategy going forward, what was laid out in November is the areas we were going to focus on were GI, dermatology, And of course, eye care. And I'm very, very comfortable in all of those areas. I've had very significant experience, both development experience and commercialization experience in GI and dermatology. And again, very comfortable moving forward in those areas. I will say, however, though, we will also be opportunistic if there's something and we're very open to something outside of these areas, if it fits our business dynamic, and is right and will bring the right kind of value to the company. So, I'm very excited about the strategy going forward. Again, focused eye care, derm, GI, but opportunistic and are open to other opportunities as they come in. And I think if you take a look at the model of the type of acquisitions that we would like to make, take a look at the Oyster Point and Famy Life Sciences that was completed earlier in the year. So, an excellent example of the execution of that strategy. We acquired a company with an approved asset, customer-facing organization, and we were able to marry it with the Famy development assets. So, I think that's a really good example of the type of deals that we'd like to do going forward."}, {"role": "user", "content": "Yeah. And Nate, on the erosion, everything that we had expected, everything that was expected, it came from the complex generics category as you noted, largely driven by three products in the North America. One was the stasis because we had almost exclusivity of the stasis last year over this period. We had additional competition come on Xulane Amneal. And that's one second contributor. And the 3rd was Wixela where we are seeing some hyper-competition over there. So, I think these three products largely contributed to the erosion in North America in the complex generics category. But as we look forward, we now -- I think we're looking forward to, in fact, bringing developed markets back to the growth in the second half of the year."}, {"role": "user", "content": "Hey, guys. I believe that was the last question and the end of the questions. And except I'd just like to take a moment to say thank you to everybody on the call here for time and attention today. I just want to say really, really proud of the strong operational and financial quarter we had in Q1. A great start to the year.[ And I really look forward to meeting and spending more time with all of you as we move forward in the future here. So, thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now begin the question-and-answer session."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]"}]}, {"messages": [{"role": "system", "content": "Your first question comes from the line of Doug Mitchelson with Credit Suisse. Please go-ahead."}, {"role": "user", "content": "Thanks so much for taking the question. David and JB, I think most interesting, how would you define success for the launch of Max or the relaunch of Max as you want to define it? I think, there's lot of discussion in terms of choosing Max as a brand and the need to build that or rebuild that, David you mentioned actively trying to include News and sports in the lineup and so, I just curious whether it's engagement, whether it's subscribers, whether it's ultimate profitability? How should investors think about what to expect from Max in the coming quarters?"}, {"role": "user", "content": "And Gunnar, I think you made some strong statements in your prepared remarks, but obviously, a lot of investor focus on free cash flow generation and balance sheet here, and I guess the just general question is, what's your level of confidence in the balance sheet targets over the next couple of years and what gives you that confidence, especially with the year being back-end weighted? Thanks so much."}, {"role": "assistant", "content": "Thanks, Doug. So we're excited about the 23rd. And look, we've turned the corner on our streaming business. We had a different view of it. We've -- we've focused on it very hard and we built what we think will be a very strong Independent business and it starts with profitability. And so we made $50 million this quarter. Our US streaming business will be profitable for the year and we have real scale. And so, and when you run a business, you're looking for growth, which we're going to get in the streaming business, and we're driving to get throughout the company. And there are a number of areas where we think that we're, as we know that as the economy improves, we'll see real growth. But the key here is, our US stream business is no longer a bleeder. It's hard to run a business when you have a big bleeder. And so, getting this business under control, focusing on what people love to watch, how do we create content that people love. And now, as we launch Max, we'll be able to nourish and delight subscribers with the greatness of HBO, which on Sunday nights is really a cultural moment, whether it's White Lotus, House of the Dragon, The Last of Us, Succession and then put it together with Discovery, which has Discovery -- the Discovery content, which has been really strong for us."}, {"role": "assistant", "content": "So, number one, we want an easy smooth transition. That's why we're not doing anything with pricing, we focused very hard on letting everybody know how to make that transition. We have a -- right now, we have a really good hand. And so let's make the transition. We've got technology that's far superior in terms of delivering the platform itself and how it can work against all this great content, but let's do a smooth transition and then have people discover the quality content, the diversity of content and the quality of the platform itself, which will only accelerate growth. JB?"}, {"role": "user", "content": "Yes. I think, Doug, just to add on to David, I think in the very near-term migration success is sort of one key metric, are you getting the customers who are on HBO Max today successfully migrated over to Max? And then over time, there'll be three other metrics and a fourth that will come, the three would be brand awareness, obviously, we're building a brand with Max, now that is new, that has a different proposition, a broader proposition for something for everybody in the family. Number two, customer satisfaction. Number three, engagement. As we talked about on April 12th event, a lot of it is around seeing all this content coming together and the breadth of the proposition driving higher utilization and therefore, helping retention. Those I think are core ones in the initial few months and then over time, obviously, as that flywheel continues, we obviously want to see subscriber growth and scale as the additional metrics. So those are the ways that we look at success."}, {"role": "assistant", "content": "Right, and Doug, on the free cash flow question as you -- as you just heard me say in the prepared remarks, I have -- I have a high-level of confidence in our guidance and our ability to deliver here and taking a step-back, there is no doubt the environment continues to be challenging. We're working against pretty significant reductions in ad sales. And as I laid out, we see a gradual improvement for the second-quarter, but it's gradual, so, so there is that. But what you're also seeing in our results is what we refer to as a built-in hedge, right. We've got a great game, Hogwarts Legacy, box office was a little weaker, but across the entire footprint of the company, managing as one integrated company, we have enormous opportunity, and so we don't want to be in the business of predicting ad-market developments in the second-half, as I said. I am confident in our guidance without assuming a complete turnaround here because we're focusing on what we know and what we know is the control that we have over the initiatives that we put in-place over the past 12 months and they are -- we're knocking them out month-after month, quarter-after-quarter. We've got systems coming online, we've got individual workflow that are going from from 10 to 12 hours a pop to three three minutes. I mean there's a lot that's happening and we have clear milestones scheduled out for the rest of the year and looking at that, I will -- I have great confidence that we're going to continue to deliver these these improvements and as I pointed out earlier, on the cash flow side, it's even more exacerbated than on the P&L side, with the seasonality of our free cash flow. And the $930 million in Q1 was pretty exactly in-line, actually a little bit better than what we had budgeted for and with that, I have full confidence we're going to deliver free cash flow."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Robert Fishman with MoffettNathanson. Please go-ahead."}, {"role": "user", "content": "Hi, good morning. I have one for David and one for JB or Gunnar. First, David, can you expand on the strategy you mentioned in your prepared remarks. And maybe that financial benefit of licensing your HBO and Warner Brothers library content internationally and some of the deals you discussed? And how do you balance those licensing deals with your ambitions to scale Max outside the US, if and when you choose to launch in those markets?"}, {"role": "user", "content": "And then for JB and Gunnar, on DTC, anything you can share about the DTC retail versus wholesale trends, noticed the wholesale revenue dragged down overall DTC revenues and just whether that wholesale pressure should continue throughout the year? Thank you."}, {"role": "assistant", "content": "Thanks, Robert. We are, we're focused on taking HBO around the world. The fact that we have real scale around the world, that we have content in every language, we have channels in every country to promote is a real advantage for us, but we're really driven by free cash flow and long-term free cash flow growth. And so, if there's a market like India, where we could -- we could structure a deal where we can make a lot more money by licensing our great content in that market, with an option, which we always have at the end of that deal to take another look at that country with our platform that's already built. We're not building a new platform for each country and see if we can go in ourselves, can we generate more long-term profit and free cash flow?"}, {"role": "assistant", "content": "And so it's really an economic analysis. You will see in most markets, it will be us building asset value, owning it, driving it for long-term value and growth. You saw us do it at Discovery. We were the first outside the US, we were in 200 countries and it generated a long-tail of free cash flow and real EBITDA growth for us. So I'm very optimistic, we're in less than 50% of the countries."}, {"role": "assistant", "content": "It's very hard to have a business that's profitable just in the US. I've always thought that you really need to be above the globe and that's the advantage. That was the value-creation of the parent companies, that they had that scale. We own all of our content and the idea that we're starting off by having a business that's profitable this year, in the US, and then we go on this journey of driving it outside the US with a strong platform that's already built. I think it bodes very well for us."}, {"role": "user", "content": "Yes and Robert. I'd just add to what David said, there's two filters as we look at it, there is the strategic filter and financial filter that David just talked about, which obviously, is pre-eminent, which is a market like India, if we don't believe we can be profitable at a streaming service within a three to five year time horizon, at the end-of-the day, right now, that's not going to be our priority focus. And so if there's opportunities to license, take a bunch of money off the table to help support our growth initiatives in other markets where we think we can scale more profitably and more effectively, we do that, number-one. Number two, there's just a practical reality that some of these licensing deals are done in markets where we're just not going to be ready to launch from a platform perspective, as you talked -- as David mentioned in his prepared remarks, we've got a timetable to rollout our new product and convert and migrate our existing HBO Max customers over the next 12 months plus. Then some of these things are going to take into '25 and even beyond to launch in new markets for our platform to be ready. And so in the meantime, it just makes perfect sense for us to take as much money off the table as possible. And so, that's the thinking."}, {"role": "assistant", "content": "The added advantages in these markets, there's still seeding our brands in those markets. So we're getting value. The brand itself is being driven as quality curated and then we have the hand-off when we think that market can be profitable."}, {"role": "user", "content": "And we have -- sorry, one other thing I'd say is, in all these deals, oftentimes, what we've done, which is better than what we have in existing licensing deals, is ensuring that when those deals expire, we have stronger cliffs for the content to come back, so we can actually, when we're ready to launch, if we assume we're going to launch in those markets at the end of those deals, we get more of our content back immediately."}, {"role": "user", "content": "Well, the only thing. I would add is, on your revenue growth and wholesale question, two things to keep in mind, number one, Q1 had a bit of an overlay with content sales revenues and as we pointed out in the prepared remarks, obviously, the ad market, also on the digital side isn't the greatest right now. I see a lot of upside opportunity here as that market comes back. And specifically, for wholesale, remember that our subscriber base contains the linear HBO subscribers there are obviously showing similar trends to what we're seeing in other parts of the linear ecosystem. Needless to say, we expect the total to be a growing business. We'll see how the launch goes in May. We're looking-forward to getting that product out, I pointed out some of those overlapping subscribers. We'll see how those wash out, but we're definitely looking for revenue growth for the second-half of the year and then many years to come."}, {"role": "user", "content": "Great. Next question."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Steven Cahall with Wells Fargo. Please go-ahead."}, {"role": "user", "content": "Good morning. Maybe first, David, and JB on DTC profits that are tracking ahead, just curious what's performing ahead of your expectations there, is it the subscribers and revenue, is it more about the cost-reduction? And I know you're new into the Max launched domestically, but I'm just curious if you're seeing legacy HBO subscribers, which I think, David, you were talking about on CNBC this morning if you're seeing those folks engage with the Discovery content. It's kind of in different genres, but I know that's the hope. So just wondering what kind of early trends you might be seeing there?"}, {"role": "user", "content": "And then Gunnar, on the adjusted EBITDA guidance for the year, I think it's still implies low $11 billion, from your comments, it sounds like the macro is still a little tough, but you're bullish with the incremental US DTC profits. So I'm just wondering with DTC performing better and no change to that guidance, is there anything that's performing worse or is that better just kind of in the range as we think about all those different components? Thank you."}, {"role": "user", "content": "Let me to start with the second, with the guidance quickly, because you're right, obviously, the DTC point is a big, big positive driver here. The most important point as I laid out is, we have very clear visibility into our transformation initiative and the impact that's going to have on the cost base, also for the studio, definitely, a support here for the second-half of the year, very strong summer slate that we're really looking-forward to launching, and the revenues of those are going to hit from Q3 onwards."}, {"role": "user", "content": "Again, don't want to speculate about the linear business, but remember that the comp in the second-half is going to be much more beneficial, because especially the fourth quarter last year was pretty anemic in the scatter market and but at the end-of-the day, we still have a lot of shots on goal here and it's a hit-driven business, especially on the studio side. That's why we're giving a range and I feel comfortable with that range with what I know today."}, {"role": "assistant", "content": "When we think about Max, as we launch, we have real scale, quality content, a broader aperture. The real challenge is the churn. Very difficult to build a strong business with churn, the churn on Discovery Plus is quite low. The churn on HBO Max is high. And so driving that churn is as or maybe more important than driving the growth. If we can drive down the churn, the growth will be very substantial. And so we have a series of attacks in order to do that. The primary one is how do you know or some more people in the family? And the more people use it, we've seen that we've been at this in Europe for more than eight years, the more people that use it in the family, the more engaged people are, the broader the offering, the lower the churn. We also have a technology advantage now, in terms of catching people that want to buy the product that we weren't able to reach-out to. And this is a business of artillery. We're adding a lot of artillery here to the offering in order to get more -- to get more viewers in the family engaged and excited about the the amazing quality content that we have, but we have more weapons. When we have sports, and we have news, and those are on the sidelines right now, we have a great product, we're going to -- that's now going to be profitable for the year. Let's drive that -- let's drive the brand and know that we have, we can move to the left and into to the right with sports and news, which we've done in-markets in Europe, which has been additionally advantageous. JB?"}, {"role": "user", "content": "Yes, Steven. To echo what David said, we've seen it across multiple metrics. We've seen it across retention, as David rightly pointed out. We've had in the first few months of this year, record-low churn on HBO Max."}, {"role": "assistant", "content": "But the churn is still -- is still pretty high."}, {"role": "user", "content": "It's still high, but we've been with the acceptable range in order to build the kind of business that we will build, yes."}, {"role": "user", "content": "And as we've talked about at the April 12th event. That was all done through kind of what I'd call a slightly more analog attack plan, we're now getting to a tool and a platform as we launch, Max, that we think there's a lot more ammo to be able to actually attack churn and more aggressive fashion. So we think we're just at the beginning of that upswing."}, {"role": "user", "content": "The second is, we obviously had price rises in the US as well as a few of the Latin-American markets. And the reality is the great news there is we've seen much better reaction and much better retention as well on ARPU increases in those markets. And so that's been a positive. We've seen efficiencies across-the-board in some of the items that Gunnar talked about. And then obviously, over time, we've started seeing some scaling. But we've been measured in our scaling. And so that's been great."}, {"role": "user", "content": "And as it relates to the content, the cross-pollanization, reality is, we've done very little so far, but we have done stuff with Magnolia, for example, and as you've heard us, I think to what we've talked about before, it was a top 10 performer on the service at launch, and even at top-five in the initial week of launch. And so we feel very positive about what that means. And as we've cross-pollinated content outside of the US, we've seen similar trends of great reaction and reception from HBO Max consumers to Discovery Plus content. So when we go full throttle with it when Max comes together, we feel very optimistic."}, {"role": "user", "content": "Steve, if I can just add one thing, from the perspective of the longer-term outlook here again, we gave guidance a year-ago. Around how we see this DTC business developing, as I said earlier today, many of the operating KPIs are tracking much better than what we assumed. Again, the big thing is getting this product launched and then we will learn so much about assumptions that are now assumptions and hypotheses and in two-three months, those will be backed-up by a lot more actual data. So this is going to be super important period, but needless to say, with the US breakeven and actually hitting profitability for the full-year happening this year, a full-year ahead, now remember, as we said before, we are obviously losing money in the business internationally, as we are launching market and as we are earlier in the the maturity curve in many of the international markets and that's going to continue. But as I said earlier, we've got that $1 billion-plus guidance for 2025 for the entire combined business and we'll update that on the basis of what we're learning once the once the product is in the market."}, {"role": "user", "content": "Great. Thanks for the question"}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Peter Zaffino with Wolfe Research. Please go-ahead."}, {"role": "user", "content": "Hi, good morning and thank you. On the subject of free cash flow, adjusted for one-time charges, you mentioned that the last 12 months, the company had produced a little over $3 billion free cash, adding that one plus of one-time charges to the two-plus of underlying. If your expectation is that synergies will contribute $2 billion in '23, it seems like your free cash flow has an easy path to $4 billion, which is within your guidance range. I'm wondering if you'd add any significant puts or takes to that analysis and specifically, is the DTC upside that you described today, the idea that EBITDA will be $1 billion better than previously expected in '23, incremental to the math I just laid out? Thank you."}, {"role": "user", "content": "Peter, again, in the current environment, I wouldn't characterize anything as easy, but I have very-very high confidence in the range that we laid out. We have confidence in the ability to generate these these synergies, you're right on the trailing 12 month number, but it's -- it's a lot of work, we have we have line-of-sight. And we'll take it from there. I don't want you to take this as an upgrade to our cash flow guidance."}, {"role": "assistant", "content": "So we were the -- I think, we were among the first to say that the advertising market was basically -- was starting to be challenging. And so we have been pretty careful in projecting because you can't, how an advertising market is going to turn and when it's going to turn. And so for purposes of how we looked at this year, the market is quite challenging, it's improved a little bit, but it still remains a really challenging environment. But the good news for us is, we've built that into our projections for the year and into how we talk to you about what this -- what we'll face this year and how we'll perform."}, {"role": "user", "content": "Great. Next question."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Bryan Kraft with Deutsche Bank. Please go-ahead."}, {"role": "user", "content": "Hi, good morning. I wanted to ask you about Hogwarts Legacy, sales have obviously been extremely strong to-date, can you talk about what you expect for sales of the PS4 and Xbox One versions, which I think become available today. Maybe just relative to sales to-date, how much of a lift could you get?"}, {"role": "user", "content": "And also, I wanted to ask how the next let's say X hundreds of millions of dollars of sales would be --would look from a margin perspective relative to that first billion? Because I would assume that there is a lot less marketing and amortization running through in the second-quarter and beyond. So just wanted to ask about that as we think about profitability for the studio going-forward. Thank you."}, {"role": "assistant", "content": "Thanks, Brian. We have a very, very good gaming business, with 11 different Studios and a real talented capability. But the real differentiator for us as a company is, we own our IP. And that IP belongs to us and we're developing it, in some cases, we may decide to develop it with a third-party game technology company, but we may be the only media company that owns, whether it's the DC Universe, Harry Potter, all of the content that we own, Game of Thrones, that's for us to deploy and I think that's particularly strategically important, because if you look at Hogwarts Legacy, a big piece of the success of that game, if you go into it, if you're a player, you go into that game and you're in that world. That's kind of a new concept, before it was really it was gaming and it was storytelling. And now, I don't -- it's very difficult to figure out what anyone's definition for the Metaverse is, but when we launch a product as a motion picture or a long-form story on Max or HBO, and then we have a game, that game belongs to us, but now there's this tweener, which is that may be in the next couple of years that we launch our Superman movie and then -- then people spend more time and there's more economics of people just hanging out in the Superman world and universe, and the fact that we own all that is something that I think is going to be really important as we look for -- as whether -- as technology develops and given the amount of time people spend on gaming, we don't want to be in the motion picture and story and long-form storytelling business and have somebody else in the business of hanging out in those worlds, those world that they are going to be quite profitable in the years ahead."}, {"role": "user", "content": "And Brian, to the Hogwarts Legacy, obviously, the gen 8 release is going out today. Is -- it's important, I would say, obviously, those consoles are a much smaller base than the current-generation consoles that we released back in February. So it's obviously a much smaller portion of the whole, but nonetheless important. I think the other big call-out is obviously, the Nintendo Switch release which will come later this year, we see that as probably a much bigger install-base and a fan base that as it relates to the franchise of Harry Potter, which obviously appeals to a very big audience globally and a more -- and in-markets like Japan where Nintendo has a big footprint and Harry Potter skews very strongly in terms of popularity. We see a much bigger upside probably from that release, certainly with the gen 8. So that's kind of how we see the rollout over the next few months."}, {"role": "user", "content": "And the margin profile, Bryan, is not going to change materially. We'll be a little lighter on marketing obviously, retail price points are a little lower. So I from a gross margin perspective a little bit of a headwind, but no material change."}, {"role": "user", "content": "Thanks very much, appreciate it."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities, please go-ahead."}, {"role": "user", "content": "Well, thanks. Two questions. So, David, if you step-back and think about the last year, where the heavy-lifting is done, integration and the restructuring, and now the focus is on operating and building your businesses, where do you see the most opportunity and maybe you can touch on timing beyond the existing business? You touched on games, but this I'm sure there is a bigger business plan? [Indecipherable], you've mentioned in the past, you were talking about driving your franchises deeper and animation, you just mentioned you hired a head of animation. So -- and that's a huge driver for Universal, so maybe if you could -- maybe there's something I'm missing."}, {"role": "user", "content": "And then secondly, on sports. You kind of alluded to it coming to Max, I don't know if you can say anything more about that and maybe touch on the NBA, what do you think the timing is and ways to slice -- are there ways to slice and dice the rates among the various players, so that you insure it's a profitable contract in the next round?"}, {"role": "assistant", "content": "Thanks, Jessica. There's when we look at this business, you're exactly right. We reset the business for the future by looking at each company and saying what should this comp-- how should we be structured to have the best chance for sustainable growth today? We took out a lot of layers, we built a new leadership team, but we still have a lot of the benefits that will be flowing through this year and next year and we're still finding -- we're still opening up some closets and stuff, which I think is a good thing, more opportunity. And we've got some businesses that aren't doing well."}, {"role": "assistant", "content": "Warner Bros. turns 100 and they've had two of the worst years, if you look-back at Warner Bros., it was really just very difficult, very difficult on every level in terms of what was turned out. And so we think we've turned the corner on that, we've got a very strong leadership team in place now. We got James Gunn, and Peter working very hard on DC, which is going to be a very big growth driver for this company. And so but very bullish on DC and you know -- we -- the Superman script first draft is done, Gunn is -- he is on a mission from God. And I think it's a really good moment for us to prove out on DC, what we got and how strong it is globally for long-term sustainable growth."}, {"role": "assistant", "content": "We got some more movies coming up that are better. We've been working hard on fixing them and enhancing them and investing. We said no movie before it's time. With with Barbie and Flash, we have two very good movies, Dune two, very strong and so I think the slate coming up now, that will make a big difference. We've lost a lot of money in the motion picture business and making that turn is important. Continuing to build on Max and we haven't done much with animation at this company. We own Hanna Barbera, Looney tunes, if you take a look at animation, t's a critical -- we have, we have three animation studios and we don't have a lot of you know, production in terms of -- it's not productive in terms of free cash flow. It's not productive in terms of market-share, it's not productive in terms of growth. And so driving that, and we now have a a really strong leader, our leadership team is in-place. If this was Formula One and we're dealing with a very difficult environment and it's raining and the track is wet and it's a challenge, we've got a leadership team of race car drivers here, in every case. And so we got a lot of confidence in Mike and Pam on the Warner Brothers side and the games business is just getting started, which I think is something that people didn't really pay a lot of attention to, and maybe the most important portion is the fact that we have this great diversity of assets, it's hard to predict what's going to go on, but we've restructured this company now, we're really tight. We're really tight and we're continuing to figure out how do we drive productivity, so we can invest more in storytelling. that's all we do."}, {"role": "assistant", "content": "And right now, it's sort of the environment is challenged, challenged, challenged. But as things start to pick-up, and they will, in different areas and we can't predict exactly when. You're going to see a very quick turn at this company. So the idea that we can end this year, drive toward, to be less than four times levered, with a very tight cost structure, with command and control of this business, with strong brands that people love around the world, and then all of a sudden, things improve a little bit and you will see an acceleration."}, {"role": "assistant", "content": "The NBA, look, I just saw Adam two days ago at the Nick game, go Nicks, the night at the garden. Well, I've been waiting a long-time for that one. And -- but -- we'll -- we're doing a terrific job with the NBA, when you look at Barkley and Ernie and that team and Shaq. The programing we're putting on. We're setting records with the NBA, we're setting records with hockey. We also have March Madness, where we did very well. We couldn't do as well with the -- with the marketplace because Sports is relatively strong, but sports used to be strong enough that it was also able to help you with the rest of the business and that was happening for a long-time, and the market was just quite soft. And so we're able to take advantage of the sport. But we weren't able to take advantage of the piggyback halo and I think that's true in the industry, it just got more difficult, but between baseball playoffs, March Madness, hockey, we have, we have long-term deals that are quite favorable to us. We like the NBA. The deal's coming up in '25, there's lots of, lots of ways it could be conjugated, you know, we did a very favorable deal in the UK with our BT Eurosport business, where we ended-up with 90% of the football -- the soccer games and Amazon got less than 10% of the of the Champions League games. We produced that content for Andy Jassy and they promote to us, we promote to them and the economics of that deal very favorable for us."}, {"role": "assistant", "content": "And so there's lots of ways to re conjugate it. We like the NBA, we hope we can get there, but we're going to be very disciplined. We worked very hard to build this company to drive profitability, to have a strong balance sheet, to provide real growth and real free cash flow, that's the long-term sustainable nature of this great company and we're not going to jeopardize that for any piece of IP."}, {"role": "user", "content": "I would like to add one slightly less strategic or operational point, that nonetheless I think is super important, Jessica and that is our -- for the sake of the argument, we're spending $20 billion of content, a lot of that still goes through siloed systems, still imperfect processes, and in many cases, still through a mindset that's very business unit oriented. So I have no doubt, we're in the very early innings of looking at this as one Warner Brothers Discovery content."}, {"role": "user", "content": "We talked a lot about the stuff that we discontinued because it didn't make sense financially. I think the opposite is true as well. I think the Company also passed on very-very interesting and attractive investment opportunities, just because someone into our company budget wasn't in-place or. So all of that is going to change, will get much better in allocating capital as a company and we'll get much better in the day-to-day operational management of spending of that cash. We just harmonized those processes and centralized those teams, they were all fragmented. So looking at that, the ROI on our capital in the ballpark of $20 billion, hopefully growing over the next few years, is set to improve and I have full conviction in that."}, {"role": "assistant", "content": "When we talk about our marketing campaign, one of the things to bear in mind is, we're using our platform now. That wasn't happening in -- we're really hyper-focused. As I've said on many nights now, we're getting 48%, 45%, close to 50% of all viewership, broadcast, cable. On any given night, we have 25% to 30% of viewership on the platform and using that -- using Bleacher and House of Highlights, which is a very young demo, using CNN.com, so yes, yes, we're -- the campaigns are bigger, but we're one company. And so the ability to promote on HBO on our own platform is a big savings. It's a big savings for us internationally and we're deploying it."}, {"role": "user", "content": "Great. Let's go to the last question please."}]}, {"messages": [{"role": "system", "content": "Your last question comes from the line of Matthew Thornton with Truist Securities, please go-ahead."}, {"role": "user", "content": "Hey, good morning everyone, thanks for taking the question. Maybe a couple on Max, if I could. Could you update us just how you're thinking about migration later this month, in terms of any friction as folks go from one app to the next? Your latest thoughts on any potential friction there and how you're managing that?"}, {"role": "user", "content": "Secondly, you talked about the overlap of Discovery Plus users that also have HBO Max. What about those that don't, how you're attacking and trying to up-sell those to the the more the higher price point Max service? Any color there."}, {"role": "user", "content": "And then just final one, I think this was mentioned on a prior question, but any thoughts around a fact here and just how to think about the fact here around Max helped drive top of funnel, help drive advertising, help monetize deep library any incremental updated color there would be great as well. Thanks so much."}, {"role": "assistant", "content": "Yes, thanks Matthew. Just on the migration point first. A couple of -- couple of things, number one is, remember there has been no change in the billing process. So as it relates to revenue, there is no change and there is no migration as it relates to billing. So revenue and billing continues to be exactly the same, irrespective of whether somebody has actually clinical migrated, i.e. accepted the new app or downloaded the new app if they need to. Number two is, as we said at the April 12th event, there's a large portion of the basin that will have to do absolutely nothing, where the app will automatically convert and upon streaming again you'll have accepted the terms of use and you'll be off and running. For the portion of the base that actually has to download, re-download. We've done everything we can to make it as seamless as possible, including not having to input -- basically two clicks to get to the -- to streaming again your video content, you have no need to -- your username, password will be migrated, your watchlist, all your history will be migrated and so we tried to make everything as possible. Now, inevitably, in these processes, you're going to find some friction. But we think it's fairly limited in terms of the subscriber risk associated to the migration. And so we feel very good going into it. We've tested it, we're already for the migration. And the flip side is on then switching to the Discovery Plus as Gunnar said, we do see about 4 million subs, largely in the US, but there is some of that internationally as well, that overlap between the two services and obviously, we're gonna be doing everything we can to upsell those that are not subscribed. But as we said, again, the flip side is, we're not going to be too in-their-face about it, at the end-of-the day, if people want to stay subscribed to Discovery Plus and that's the environment they prefer, that business by itself is profitable and we will continue to maintain it and serve them there, but we will over time, initially through marketing efforts, try and see if we can get them to come in and sample it, we will have offers that incentivize them to sample it for some period of time at favorable economics and we'll see how successful we can be in upgrading them."}, {"role": "user", "content": "On fast, we always believe in what we call a hybrid strategy, which is ultimately first and foremost, kind of what we call channel syndication, which is ultimately, we realize that the platforms and the distributors out there, there are many who have the scale and the size and we want to get our channel portfolio out there and viewed, as it's audience aggregation and advertising business. We've already gotten out with Roku and Tubi, and we've been very pleased with the initial success with a very small, but a handful of channels that we out there already. We will continue to look to see if we can increase that volume, to your point for a second, third, fourth monetization windows for certain content. And then we are continuing to explore the owned and operated strategy and at some point in time, longer-term, we do see this opportunity for the WBTV brand and platform to exist in an owned and operated environment. I think at some point, that'll be dovetailed with the state of the advertising business and we want to make sure we come to market at the right time when the demand is sufficient, but we will continue to execute this hybrid strategy of syndicated channels initially and then over time, at the right time launch our own service."}, {"role": "user", "content": "Great, that's it, thank you very much for joining and we will speak with you soon."}]}, {"messages": [{"role": "system", "content": "Our first question comes from the line of Jason Bednar with Piper Sandler. Please proceed with your question."}, {"role": "user", "content": "Hey there, thanks. Good morning, everyone. Ron, wanted to start on the margin performance in the quarter, really a couple entertaining questions here. First, the gross margins hit a multiyear high in the first quarter. Hoping you could expand upon maybe the drivers of the margin performance in the quarter, especially considering your higher-margin high-tech equipment sales were down year-over-year. And then I'm sure there's questions out there regarding the lack of drop-through from that gross margin upside looks like some maybe above normal SG&A spend and as fixed cost absorption wasn't as great because of the PPE dynamics you mentioned. Just wondering if you could talk about any other puts and takes that impacted SG&A spend in the quarter is really, we think, through gross and operating margin cadence for the rest of 2023?"}, {"role": "assistant", "content": "Hi, Jason. I think the -- on the margin question and as you mentioned, the specialty businesses perhaps did not grow as much, but they did grow, and this is a year or a quarter, I should say, were year-over-year we actually had some contraction in reported sales. So that growth still takes on a greater mix, right?"}, {"role": "assistant", "content": "So we're getting the benefits of a greater mix from our specialty products and the growth that we experience on the technology and value-added services side. And that mix is favorable to the gross margin. I think, too, that while within the distribution sector, we tend to get slightly better gross margins in dental and the growth we had in dental versus medical and the growth we had in dental versus medical I think also contributes to that particular margin performance being as high as it was."}, {"role": "assistant", "content": "On SG&A, I think that we have a fair number of expenses that are fixed. So the operating margin itself is going to come down some as those gross profit dollars are lower from the lower contribution from PPE and COVID test kits. So I think that's what we're seeing primarily the drag on the operating margin. I think -- from an SG&A standpoint, we had -- we did have a little bit of an increase in costs, but some of those are related to the acquisition costs that we incurred during the quarter. We've got a very robust pipeline, the nature of these transactions that we've been doing, as you can see from the last couple of implant transactions that we announced require a little more work on the acquisition side. And so I think that, that was a bit of a drag on SG&A as well."}, {"role": "user", "content": "Okay. That's helpful. Maybe I'll actually use your response there as a bit of a segue to the next question. If we look at the guidance adjustment, modest reduction you're making today for EPS, you were pretty transparent with the Biotech deal that was going to be dilutive from some of those one-time costs. How should we think about the recognition of that headwind throughout the year does that higher cost inventory from inventory step-up, mostly flow through your model of the 2Q and 3Q. And then I know the recent S.I.N. transaction is a bit smaller than Biotech, but maybe just to be clear, we should expect another kind of one-time impact from inventory step-up once this deal closes? And then can you confirm each of these deals are accretive in year one when excluding these inventory accounting adjustments? Thank you."}, {"role": "assistant", "content": "Yes. So I'll start with kind of the effect of the inventory adjustments. And your typical implant business will turn inventory, say, a couple of times a year. So that means it's going to take us about six months to work through that inventory step-up value that will kind of be a drag on the gross margin for that period of time. So yes, Q2, Q3, as we work through the inventory step-up. And we're still working on finalizing what that actual. We have some estimates. We don't have a final number on that inventory step-up."}, {"role": "assistant", "content": "In terms of the remainder part of Biotech, there are going to be some costs incurred this year that are what I'm calling integration-related costs, it's really -- we bought a company that has multiple sites, multiple locations, and it was a privately run business. So you have to spend some money to get it ready to be part of a public company, right? So we're going to incur some expenses in that respect. But we do expect Biotech to be accretive post 2023. We think once we get into 2024, it will definitely be accretive for us."}, {"role": "assistant", "content": "With reference to S.I.N., the deal that we just announced, that deal has not closed yet. And it's going through the process of being reviewed by the Brazilian regulatory body. So we're not sure when that's going to close. I think in our press release, we just basically said the latter half of 2023 because we don't have a strong estimate of when that will close. So we don't really know the effect on the current year because, again, of that inventory step-up that we'll have to manage, but we also believe S.I.N. once we get through those inventory adjustments, and we get into -- and hopefully, we can close it earlier in 2023 rather than later because then when we get into 2024, it should be accretive for us in 2024 as well."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Nathan Rich with Goldman Sachs. Please proceed with your question."}, {"role": "user", "content": "Great. Good morning. Thanks for the questions. Ron, maybe just a clarification. Have you sized the sales benefit of 1Q not having -- not starting with that holiday week in terms of impact on the dental consumables business? And then maybe more at a high-level, it sounds like you feel like patient demand has been pretty stable through the first quarter. I guess kind of any puts and takes that you're seeing from an end market standpoint, especially since the international consumables number in particular, continue to look pretty strong."}, {"role": "assistant", "content": "Yes. I think I'll start with the fiscal calendar question, Nathan. I think that it's probably worth -- it's worth a couple of points to us of growth in the quarter, right? It can kind of vary market-to-market. It's more pronounced internationally than it is in the U.S. You do -- we had some international markets where dental practices, they close that week between Christmas and New Year's, right? So you get very limited sales. So it's more pronounced in some markets than others, but I think overall, globally, it's worth probably a couple of points on that merchandise. When I say a couple of points, I'm talking about specifically on the dental merchandise number."}, {"role": "assistant", "content": "In terms of patient traffic, I think we're seeing pretty steady patient traffic at this point. I think it's a fairly normalized market in that respect in that we're not seeing the fluctuations in patient traffic. We're not hearing about this from our customers as much as we have historically. So I think that -- and I think that continued into April as well where patient traffic was fairly consistent with what we saw in the first quarter."}, {"role": "user", "content": "Great. And then can you talk maybe about how you expect the specialties business to trend throughout the year? Because I think if I caught the number right, it was about 4% in the quarter. I think you had talked about maybe mid to high-single-digit growth for the year. I know comparisons for that business get a little bit easier. But just from a demand for implants and orthodontic procedures, can you just maybe talk about what you're seeing and how that -- you expect that to trend over the rest of the year? Thank you."}, {"role": "assistant", "content": "Yes. I mean as you mentioned, we think the comps will get a little easier for this dental specialty products in the back half of the year versus the first half of the year. But even like within implants, as we mentioned in the prepared remarks, in Europe, we had double-digit growth in implants. But in the U.S., it was a much tougher comp. Last year, the U.S. had double-digit growth in implants. So it was a tougher comp when we saw -- as a result, we saw lower growth there. Endodontic products are still doing very well; very steady for us and growing kind of in high-single-digits. So that's -- there are pockets of really, really good performance. And we think that as we progress into the back half of the year and those comps get easier, we expect that growth to become a little more robust."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of A.J. Rice with Credit Suisse. Please proceed with your question."}, {"role": "user", "content": "Hi, everybody. First, I thought I'd ask you about the conference in Cologne. I know that's a big event. Did you -- and you mentioned last quarter that you were watching to see whether it had any impact on sales? Does that -- is there any impact that you've seen in Q1? Or do you think there would be any spillover benefit in Q2? And then obviously, you've got a European market where there's some concern about the economy. Did you walk away with any takeaways regarding the equipment market because of what you picked up at the conference?"}, {"role": "user", "content": "Yes, thank you, A.J. Cologne -- the Cologne Show was good for us. Remember, it's primarily focused on Germany and Austria from a selling point of view. And overall, it was as good as previous years. The equipment market in Europe is quite stable. And yes, there's a slight issue in France. There was a strike in April, but that doesn't really have significant impact on the whole business. We'll call that out if it is."}, {"role": "user", "content": "But generally, I would say the European and international equipment market from our point of view is stable. There are puts and takes. The traditional equipment is a little bit better. And there is some deflation in units pricing for the DS -- the DI products. Mills are starting to be stable again. And there's some growth you can expect from 3D printing. But I think generally, the market is pretty stable now."}, {"role": "user", "content": "Okay. Maybe just a follow-up on the medical ex the test in PPE, you did about 4% -- a little better than 4% this quarter. Is that what's sort of embedded in your expectations for the rest of the year? I know there's this whole debate about people coming back to the health care system, etc, and maybe that's adding some incremental demand? Are you seeing any of that? Do you think you might see more of that as we progress through the year?"}, {"role": "user", "content": "Yes. There are some device companies that were much more impacted by the ups and downs. We were only slightly impacted because there were a lot more visits last year because of -- early part of the year because of whether it was COVID or flu, different kinds of flu. But we had pretty high comps there, but I think it starts getting better as the year goes by. And our businesses continue to be steady when you really take out the test. I would say that PPE is -- we're pretty normalized now. But the test, obviously, for -- COVID tests are going down. And I don't know if that will continue. We've tried to give you best guidance, but the medical business is quite stable and doing quite well, actually, growing nicely."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Jeff Johnson with Baird. Please proceed with your question."}, {"role": "user", "content": "Thank you. Good morning, guys. Let me start, I guess, just to see if I can get any more color out of you Ron or Stanley, on the specialty business, the 4.5% growth in the quarter year-over-year. One, did that get the benefit, the same two-point benefit from the timing? Just wondering on that. But more importantly, it sounds like you said, I think, Ron, endo was up high-single-digits. If I kind of assume away the ortho business, which I know is growing in the Clear Aligner space, but it's still probably the smallest of the three. Would that put implants closer to flat year-over-year in the quarter? Just trying to kind of gauge between those three business lines within the specialty business. Thank you."}, {"role": "assistant", "content": "I think on the implant, it's really -- you got to look at the kind of the specific markets. Like we were saying before, in Europe, our implant business grew quite well, actually grew about double-digits. And in the U.S. we had growth, but it was much more tepid than that. It was just a click of growth that we got in the U.S. But again, the U.S. was coming off, I think, a much tougher comp than what we had in Europe last year."}, {"role": "assistant", "content": "Yes, endo has been -- that's been steady. I mean endo quarter-to-quarter has been steady in that mid to high-single-digits. Ortho is really hard for us to pick out a trend. It's just such a low base for us that we have had some -- we felt like we had very good growth in Clear Aligners in the quarter. That's mostly through our relationship with some DSOs there, but it's still off a very low base."}, {"role": "user", "content": "All right. And I guess just to help me out here, if U.S. was kind of flat to up a bit in implants, Europe up strongly. I think you said upper single-digits and endo up high-single-digits. I mean your Camlog business in Germany, obviously, the number one, number two player there is a big business. I would think that means your Global Implants were somewhere at least kind of 3% to 4% and endo high-single-digits, how does the whole specialty business end up just 4%, 4%? I still can't reconcile that math."}, {"role": "assistant", "content": "Well, I think that keep in mind; implants are about 60% of that category, right? So they carry the most weight when doing that math. And while ortho -- while they had decent sales, ortho is about 10% of that category, endo being the balance of 30%. So I think that it's the -- you're right. I mean, the implants had about a 3% to 4% global growth, and then that tends to drive the overall number because of the weighting of them in the -- within the category."}, {"role": "user", "content": "Fair enough. And then just one clarifying question on the model. So when you started excluding amortization, at the start of this year on deals, you don't include -- or don't exclude, I'm sorry, any kind of inventory step even if you have to go and do some restructuring yourself, that stuff stays in your model. So those are costs on future deals that we'd assume to stay in the EPS, we don't exclude those, just to clarify that."}, {"role": "assistant", "content": "Yes. Well, let's clarify your question, though, because inventory step-up will be -- is very different from restructuring, right? So to the extent we have to incur restructuring costs in our transactions, as we incur those restructuring costs, we will add them back. Inventory step-up, we will reference inventory step-up. So people are aware of the impact it will have on earnings, but we are not adding back inventory step-up as a non-GAAP adjustment, nor are we adding back the costs we incur when doing our deals. We see it as an integral part of our business, acquisitions is a very important part of our strategy and the costs we incur doing the deals, we do not add back of non-GAAP adjustments. But when we have a quarter such as this quarter, when we have an unusually high volume of acquisition expenses, we want to make sure we reference it, so people understand the impact it has on operating income as it is a component of operating expense."}, {"role": "user", "content": "Yes, that's very helpful. Thank you."}, {"role": "assistant", "content": "You're welcome."}, {"role": "user", "content": "Jeff, just to be clear, our North American implants sales were flattish, and that's because we had significant growth last year. Our implant business outside of the United States, outside North America had high single-digit growth."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Jon Block with Stifel. Please proceed with your question."}, {"role": "user", "content": "Thanks, guys. Good morning. Stanley, maybe for you, just any more details on the U.S. Hi-Tech equipment environment. I know you had some commentary. But maybe at a high-level, what's working well and less well. And then the pricing pressure in iOS? I'm just curious, I feel like that's been going on for a couple of quarters now. So I get it. It's a year-over-year headwind, but has that stabilized of late and it is starting to level off the pricing pressure more Q-over-Q?"}, {"role": "user", "content": "A very good question. I'm glad that was asked. Yes. I think the year-over-year pricing on intraoral scanners and iOS has stabilized. When you look at our numbers, you will see that iOS sales and units went up quite nicely in the first quarter. What was down was the DSO business because we had some significant sales in iOS in the first quarter of 2022. So I would say the iOS units are good, the pricing has stabilized. And I think the mills now have also stabilized. Of course, the 3D printing is being viewed at as an option. But I think we've gotten back some momentum in the mills and expect to do well with the 3D printing for the remainder of the year as well."}, {"role": "user", "content": "Great. Thanks for that color. And then the second one is just a quick clarification. Ron, the revenue guide unchanged, I believe, reported. So COVID comes down. I don't know your exact FX assumption. Biotech comes in. Sometimes, there's other small little deals. But I guess just to clarify; did anything change organic maybe to help offset the COVID sales step down? Or is that just Biotech and some other nickels and dimes? Thanks guys."}, {"role": "assistant", "content": "It's more the latter. It's more that we pick up a little bit of additional acquisition growth. But I think that the -- we still think the core underlying business can grow kind of mid-single-digit in sales up towards approaching high-single-digits in sales."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Elizabeth Anderson with Evercore ISI. Please proceed with your question."}, {"role": "user", "content": "Hi guys, thanks so much for the question and all the details. I appreciate what you -- all the details that you're giving us on sort of the equipment growth in the different categories. It was nice to see on a stack basis that the equipment comps actually improved sequentially. Can you talk about sort of -- for people who are worried about kind of like that continued demand environment? Can you talk about sort of how the backlog stands? I know you've given us some helpful details on that in the past? And then also sort of how has the environment been if we think about the end of the quarter and maybe into April, if you can comment?"}, {"role": "assistant", "content": "Yes, certainly, Elizabeth. I think with reference to the backlog, I mean, during the quarter, we actually saw a bit of a tick down in backlog sequentially, but the backlog at the end of the first quarter this year is still greater than the backlog at the end of the year last year. And it's still quite a bit higher than the backlog levels we had pre-pandemic. And that is principally traditional equipment, right? And so that's helping with the growth and gives us, I think, some optimism in terms of our ability to continue to sell traditional equipment at pretty good growth rates going forward. Now that's in North America."}, {"role": "assistant", "content": "Internationally, we've seen the backlog come down a little bit. And -- but it still is ahead of pre-pandemic levels. So while the backlogs are working down a little bit more internationally, there's still a fairly healthy backlog there."}, {"role": "user", "content": "Okay. And sorry. And just in terms of the comment of how sort of the end of March, if you can comment on April, trended sort of post some of the recent financial turmoil?"}, {"role": "assistant", "content": "You said -- I'm sorry, I didn't quite understand what you said at the beginning of that, Elizabeth."}, {"role": "user", "content": "Oh, sorry. So I was just talking about if you could comment on sort of the demand environment in equipment. If we think about the end of March post the start of some of the financial turmoil and if you could talk about April as well, if that's possible?"}, {"role": "assistant", "content": "Yes. I think the trends we have in April have been really a continuation of what we saw in the first quarter. I wouldn't say there's been anything that's coming out of the financial markets. That's been a significant disruptor to that."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Kevin Caliendo with UBS. Please proceed with your question."}, {"role": "user", "content": "Thanks. In the context of just the cadence, if you had this benefit in Q1, is there any falloff at the end of the year or anything else we should contemplate? And just thinking about cadence in terms of earnings for the year, any color or guidance you can provide us?"}, {"role": "assistant", "content": "Kevin, when you say benefit in Q1, can you be more specific which benefits?"}, {"role": "user", "content": "Oh, I'm sorry, the calendar benefit."}, {"role": "assistant", "content": "Oh, the calendar benefit, okay."}, {"role": "user", "content": "Is there any falloff in Q4, anything that we should think about the rest of the year from a calendar perspective that might be off or different --?"}, {"role": "assistant", "content": "No, I don't think -- I think the balance of the year should be -- other than the fact that our Q4 this year will be 13 weeks versus 14 weeks last year, right? But outside of that, I don't expect the calendar to have a significant effect on the cadence. I do think where you could see some lumpiness still in our quarterly numbers is that the headwinds that we are dealing with as it relates to PPE and COVID test kits are more pronounced in the first half of the year than they are in the second half of the year and most pronounced in the first quarter as was evidenced by the $0.24 headwind we reported this quarter. But that headwind will be greater, just the math of it is that, that headwind will be greater in the second quarter than it is in the third and the fourth quarter. So we'll continue to have a little bit of a hill to climb in Q2 that we think levels off for us as we get into Q3 and Q4."}, {"role": "user", "content": "And just a follow-up on the backlog question, if I just want to make sure I understand. Is backlog like quarter-over-quarter flat or down on the equipment side? And would that be related to core equipment or digital equipment? Like how should we think about that?"}, {"role": "assistant", "content": "The backlog is principally standard equipment, right? So it's chairs, units and lights, and we really kind of analyze it more sequentially what was it at the beginning of the quarter versus the end of the quarter. And that's what I was saying before that the North American equipment backlog remains -- it did come down some over the course of the quarter, but it's higher than where it was last year at the end of the first quarter. So it's still a fairly healthy backlog and well higher than where the kind of backlog levels we had prior to the pandemic. Internationally is kind of the same story. We're seeing a bit of a work down quarter-to-quarter. But their backlog versus last year's first quarter is also a little lower. And that's how it differs from North America."}, {"role": "user", "content": "Thank you very much."}, {"role": "user", "content": "And we also think that the digital side from a pricing point of view has stabilized, and we're seeing good growth on the units."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Brandon Vazquez with William Blair. Please proceed with your question."}, {"role": "user", "content": "Hi, thanks for taking the question. I'll just ask both of them upfront since they're somewhat related. The first is just you guys have obviously been more acquisitive, curious if there's any notable pipeline or -- sorry, any notable gaps in your portfolio that you're kind of focused on going forward from an M&A standpoint? And the follow-up kind of related question is, as you become more acquisitive and I'm looking at Biotech Dental, for example, there might be areas where you have a little bit of overlap in portfolio, right? You have a Reveal and now you have another Clear Aligner. What's kind of the thought process do you kind of keep both of those running separately? Do you combine them into one brand greater efficiency as it grows? Curious your thoughts on integrating businesses like that. Thanks."}, {"role": "user", "content": "Brandon, thank you for that question. As we indicated early on, our pipeline remains quite good. Our bold strategic plan calls for us to continue to advance those businesses that are high margin, high growth through organic growth and through acquisition growth. There are parts of the portfolio that we could add to, of course. I don't think we have much overlap. But we are very much committed to advancing our high-growth, high-margin businesses, and there's no deviation from that. We outlined that quite clearly in our Investor Day, and we're executing."}, {"role": "user", "content": "As it relates to brand alignment, I think we've always been pretty good at that. We will, over time, align brands. We've done that with Camlog and BioHorizons, I think, quite well. We never lost any business when we aligned the brands. We have a combined BioHorizons Camlog brand today in many parts of the world, certainly all the big markets in a few parts of the world where each of the particular brands is distributed through different distributors. We may keep it. But generally, in the big market, we keep them separate in the big markets, we're aligning have aligned for the last two or three years in a single brand. We will keep both the line of brands going. It goes to different markets."}, {"role": "user", "content": "But I would imagine, over time, we will align brands. But more important, we're aligning the production, the -- all the administrative activity, which should be accretive, of course. So we are very, very careful with brand alignment. We've done a good job of that over the years, and we'll continue to do that."}]}, {"messages": [{"role": "system", "content": "We have time for one last question coming from the line of Erin Wright with Morgan Stanley. Please proceed with your question."}, {"role": "user", "content": "Okay. Thanks. I just have one question here on the DSO side. Are there any anticipated changes in DSO relationships in the 2023 guide? And have you been -- or how have you been performing across the DSO market segment? And any growth rates you can give us across that segment that you're seeing and anything to call out there? Thanks."}, {"role": "user", "content": "Yes. That's a good question also. Our DSO business remains a good grower. It's pretty stable. We've continued to add DSOs specifically in the mid-market area. A couple of our larger DSO customers have made some good acquisitions and taken us along and included our -- the purchases of products from us. I think we're making good progress on the specialty side in the DSO world. Of course, on the equipment side, it can be lumpy. I mentioned earlier on that on the iOS side, we had a very good significant sale in the first quarter of last year. So it impacted us in terms of units a bit. That will occur. I don't think we've lost any, I'm sure we've lost some smaller ones, but I think, on the big side, we're doing well. And on the midsized ones we're gaining as well customers. So overall, it's a growing business. And of course, the goal is to advance the high-growth, high-margin products, specifically our software, where I think we are appreciated and our additional value-added services. So the growth continues quite nicely is pretty stable, and we have very good relations with our large and midsized DSOs."}, {"role": "user", "content": "Okay. So thank you, everyone, for calling in. I realize there are a couple of complexities in this quarter. But if you peel out the PPE and the tests and you understand that the accounting regime for acquisitions on inventory step-up, takes those expenses relating to the step-up and runs them through the operating income against operating income, likewise, some M&A expenses are run through operating income. If you take all of that out, you'll see our core business is doing quite well, good internal sales growth. Gross profit is doing quite well, moving it a bit higher, all on with our strategic plan. And I think you will see that the business is quite stable. We anticipate operating income to continue to grow as Ron outlined in our guidance and we're happy with the business."}, {"role": "user", "content": "So of course, if you have questions, Graham and Ron are available. And we're optimistic about the business. So I appreciate all the questions and look forward to our next call in a couple of months' time. And I think we're going to be at some conferences and happy to provide more color on the business. But overall, we're very pleased with the performance of the business and nothing really unexpected at this time. So thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions]. Please state your name and affiliation before posing your question. [Operator Instructions]. Our first question comes from the line of David Barden with Bank of America Securities. Please go ahead."}, {"role": "user", "content": "Hi, this is Marlane Pereiro, on for David Barden at Bank of America Securities. Wanted to start-off the questions regarding capex, can you talk about the run-rate capex, post the June 2023 build-out? And then if possible, provide what potentially could be a new run-rate? When that run-rate would start? And then potentially when capex would ramp again heading into '25 through build-out requirements?"}, {"role": "user", "content": "Hi, this is Paul, I'll jump-in. That's a good question. I think we'll come in slightly lower than last year's capex, but unlike last year, it will be front-end loaded with the dropping off after we hit our June milestone. But other than giving future capex guidance, we're not going to -- we don't provide that."}, {"role": "user", "content": "Got it, [Speech Overlap]"}, {"role": "assistant", "content": "This is Charlie. I think -- I think, I may add a little more color to that. I think that obviously, we had two back-to-back milestones in '22 and '23, with the vast majority the population -- 70% population. So you can look for us to to be able to -- two things that we really would do from a capex perspective; One is, we can go -- we certainly will be able to take a little bit of a pause in terms of some of the new markets, but we will continue some capex to densify the current markets that we have once we're with customers, you always find you have some gaps and things, so we will have some capex on current markets, but future markets, we'll be able to take a bit of a pause, until the -- late 2024 or early 2025 timeframe."}, {"role": "user", "content": "Got it and then as you build-out the licenses to meet the mid '23 requirements. Is it possible to give any update on the build of the 600 megahertz that you might be building out concurrently with the other licenses?"}, {"role": "user", "content": "So, yeah, hi, this is Dave Mayo, we've started construction on about 18,000 sites as of the end of the first quarter. It will take approximately 16,000 sites for us to meet the objective. And those sites will have to be fully fibered and powered and we're well on our way to achieving that."}, {"role": "assistant", "content": "Yeah. I think on the second part of that question. In the 700 and The 700 megahertz is in -- are -- is in those numbers, but additional six more -- excuse me 600 is in those numbers, but in terms of new cities for 600 that's something that we'll take kind of case-by-case basis. As you find that you have more roaming charges and you could do it by putting something on your own network, you'll make that -- you'll built for success, ultimately you build for the FCC. [Speech Overlap] in addition to that."}, {"role": "user", "content": "Yeah. we're well on our way to meeting the 70%, with respect to the 600 megahertz licenses."}, {"role": "user", "content": "Got it. Thank you. And then once you do hit the mid-June requirements, is it possible to give us a sense of how much this will make in terms of business operations in your go market -- go-to-market strategy, it was 20% last year, 70% this year, so just trying to think about the impact it could have on the business now with a much broader offering."}, {"role": "user", "content": "Good morning. It's john Swieringa, I'll take that part of the question. So as the end of the first quarters, we're now serving 70 million people with commercial bonner or DISH 5G network through Boost Mobile. That's a little bit more than 50 cities. So as we build out 5G broadband, we then come in and optimize the network, densify it, and move those markets towards commercial launch. So we would expect that by the end of the year, we'll be serving the majority of the U.S. population with commercial bonner. And loading retail customers on to that network, we're making steady progress with getting Avantor advanced 70 devices into our distribution and our supply-chain and we expect that to pick-up as the year continues."}, {"role": "user", "content": "Got it and then just turning to your cost-of-capital, just given the current cost of capitals, can you walk us through maybe what's some of the levers are that you could have pull -- could pull to address one upcoming maturities and two other funding needs, including additional capex."}, {"role": "assistant", "content": "Hi. This is Charlie. Well, obviously, we focus on our maturities with obviously the next one coming up in March of next year. So for a billion dollars and that's a convert. So we look at the levers there, and so that needs to be -- dealt with[Phonetics], ideally would be equity or equity-like In terms of nature because it's kind of equity-like today. And we think there's a number of levers, obviously, we're liquidity poor in the sense that the market is probably from a debt perspective just really aren't open to us and but we are asset-rich, and so we look at all the different levers we have. I'm not going to give you those on the call. But over the years, we've been a good steward of capital and we think there's -- there are many things that we can do and some that -- that we can do to meet those maturities. And so, we're focused on two things; one is the operations of our business and obviously, to the extent that we operate our business efficiently, start putting people on our network, then start competing a bit stronger way with postpaid, which is a more profitable customer on our network. Liquidity, becomes a little bit easier to attack, because people will see the growth and the profitability of what you're doing, if you're not able to do that, that's a different story."}, {"role": "assistant", "content": "And obviously we have to wait-and-see where the markets are. Next year. What that -- means is even the government having a debt crisis. So obviously, there is market -- there is money available today out there in the marketplace. There is a fair amount of capital in the marketplace. We hope that doesn't change, but, we're like everybody else, we don't control. where the economy goes."}, {"role": "user", "content": "Thank you. And then one final one, if. I could. Can you provide any update on the 800 megahertz spectrum auction. Is there anything there that you could share, in terms of timing or potentially what you'll do with?"}, {"role": "assistant", "content": "I think I can repeat what. But the CEO of T-Mobile said, we did get an extension of 60 days on that, and at a minimum, we think it's 600 megahertz -- 800 megahertz is extremely important for us to be able to compete. And so obviously, capital wise we're challenge to be able to do that transaction today, but we think that there a ways that we can make that transaction happen. And we think it would be from a competitive -- competitor point-of-view that's important low-band particularly out like spectrum."}, {"role": "user", "content": "Great. I'll leave it there and pass it on."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Ric Prentiss with Raymond James. Please go ahead."}, {"role": "user", "content": "Hi, guys, can you hear me?"}, {"role": "user", "content": "We can Ric."}, {"role": "user", "content": "Okay. And follow-up on that, if. I could, with the 800 megahertz spectrum, are you required -- is there a regulatory requirements to build that? Is it possible to resell it? Also spectrum securitization market, typically what mentioned about 35% - 40% of value. Just wondering if you could elaborate a little bit on what the requirements are with that 800?"}, {"role": "assistant", "content": "The requirement is demand is to build it, but we have -- we built it. So part of what Dave and his team have done is to build 800 megahertz and and. It's my understanding that T-Mobile, for the -- as turn that network down for the most part, there's still some statutory requirements that they keep a couple of towers up, but they pretty much turned that network down, so we basically have a functioning 800 megahertz from a retransmission point-of-view be at 70% of the population in a few week. So, we wouldn't have a regulatory problem for meeting the commitment for build out."}, {"role": "user", "content": "All right. [Speech Overlap]"}, {"role": "assistant", "content": "If for some reason -- if for some reason we weren't able to exercise the option, we would have a penalty of $72 million to T-Mobile, that's the other piece of it."}, {"role": "user", "content": "Were you able to take over, any of those old Nextel antenna sites line so they help you with the transmission?"}, {"role": "assistant", "content": "We did not take-over. [Speech Overlap] We take taken -- we've taken some sites, Ric, but not not so. I wouldn't call it a significant number, but it's not the next cell radio gear that we would use the 800 megahertz frequencies are in the radios that we've deployed the low band radios that we've deployed. But I'll put that in perspective, if you were if you were if you were to do a new-build of 800 megahertz, you're talking several billion dollars to do -- if you were to go out on your own and build 800 megahertz to the extent that we have, that would certainly be a -- that would potentially be a multi-billion dollar build, it will cost you almost much to builders as we've had to build for all our frequencies."}, {"role": "user", "content": "And last one, Charlie."}, {"role": "assistant", "content": "You'll have to -- I'll leave it up to Analyst on here to figure out that's positive or negative, but. I think that's a big positive for an asset we have that people just don't recognize."}, {"role": "user", "content": "[Speech Overlap] Last one for me is on the private networks side. I think you said several times that the best use of the network might be for wholesale business enterprise kind private network type applications. Update us as far as what you're seeing in the marketplace? I know it's a long sales cycle. How is the team performing there? What are the hurdles in pulling that revenue stream? And are there any opportunities for financing with potential strategic partners in that area?"}, {"role": "assistant", "content": "I think you're talking about the enterprise side of the business."}, {"role": "user", "content": "Exactly, Yes."}, {"role": "assistant", "content": "Yeah, we haven't made substantial progress in terms of the enterprise business in terms of announcements, but behind the scenes obviously there really -- and you mentioned that a couple of ways that we would approach the market. One would be, we'd actually build it out, and lease it which would take capex, that obviously is a bit less attractive to us. The second is, we would just pay for it from the get-go, so it's cash-positive from day-one. And the third is that some of our -- some of our partners in our build, whether it be Cisco or Dell or AWS come to mind, where they already have a big enterprise business, that they just add our spectrum into their thinking about how they would design private networks. And at that point, we'd be we would be at more of a wholesale provider of spectrum. So any of those three things are possibilities of how you would go ahead and build an enterprise business, but. It's going to -- it's gonna be a huge market for all the players. I just think we're -- I think we're a little bit better positioned, because I think the kind of network we have is the kind of network that companies when they really become a mission about what a private network can do for you and what it should do for you. The architecture of what we have is just -- is just without the legacy. It's just a better -- if you're going to build a new, you should build it right."}, {"role": "user", "content": "Any idea when we deliver it formally announced, so we can see it on our side of the fence?"}, {"role": "assistant", "content": "Don't have a timeframe for you. I mean, we said before that we think you'll see as a 2024 event for us."}, {"role": "user", "content": "Great, thanks a lot guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Michael Rollins with Citi. Please go ahead."}, {"role": "user", "content": "Thanks. Couple of questions, the first one is, I'm just reading the 10-Q this morning. There is a comment in there, that DISH plans to implement one or more of the following options. Raise additional capital, pursue strategic transactions and/or advance additional cost-reduction initiatives. Just curious if you can unpack that a little bit more? And what investors should expect over the next number of months from that?"}, {"role": "assistant", "content": "Well I mean, I. I think we're good stewards of capital and we obviously realized that we're more of a -- right now we're more of a liquidity story than anything in the market and obviously we have to address that. And, I think, there's two-ways. I don't know what else I can say about the options out there. But, obviously, the first thing we do is, focus and I've really focused the team on executing to build the best network in the world and enter the postpaid business, which is more profitable, and to make sure we get more devices that we can put on our network. Because that makes the liquidity that much easier, because obviously you're proving you can compete and we really haven't proven that yet. So, that's kind of, number-one."}, {"role": "assistant", "content": "The second thing is that the to meet our milestone with the FCC, we just have to do that. And the third thing which is maybe a bit more nuance for people on this call, but we've been on the TSA agreement with T-Mobile since inception which is -- which is basically our billing and provisioning and our back-office functions and we have to be off of that by the end of this quarter. So, those are big things that we need -- that we need to do and if we do that then then we're successful with that, then you got -- you start to see the growth that everybody has been hoping for and expecting. Probably a year-earlier than this and then, then that obviously helps you in your -- in your liquidity side of it, because you're showing you can compete."}, {"role": "assistant", "content": "John, there's one other thing we need do this quarter, which we actually have done. Well, there's two things; One was to get the cyber security behind us and that was a massive effort and I wouldn't say it was record time based on, but certainly for us, it was, I think, right up there best-in class and how you recover from a incident. And a lot of real solid effort in our team and it gives you a lot of confidence going-forward that your team can when under pressure can operate and the other part, maybe John can talk about."}, {"role": "user", "content": "Well, there's been a lot of focus on getting Boost Infinite ready to go and we've made a lot of progress there. You'll see us ramping-up marketing later in the year, as well as distribution and then one of the things, big things there, that's been a focus for us is.bringing the iPhone to Boost Infinite and you'll see it come later this year. [Indecipherable] they're across the teams to make sure we're ready to go in postpaid."}, {"role": "assistant", "content": "Yeah, and. I think that iPhone is important because it's obviously a big part of the market-share out there and. I think it would be very difficult to be successful in the postpaid business, without it. And so we're pleased that we have -- that we have -- that we will be able to bring the iPhone to the market, actually, within the next few months. So we've done a couple of things, already this quarter that we needed to do and we got two more things to do, and then. I think we get to go a bit more on offense, then it's been a little bit frustrating to play defense as long as we have."}, {"role": "user", "content": "And then just shifting gears to the video side. I also read that you entered into a contract to build and launch another satellite. Can you share a little bit more details on the cost and just the thoughts around continuing with the satellite side if there is an opportunity at some point to maybe take these customers and leverage the Sling product and accelerating migration to streaming?"}, {"role": "user", "content": "Yeah, Michael, this is Eric, I'll take that and maybe Charlie has a few comments. But we did enter into an agreement to build that what we would call EchoStar 25. It's our 25th satellite, and we entered into that agreement with Maxar. We fly Maxar satellites today, and so we're -- its satellite that we're familiar with. Obviously, as we've been talking about on the call for quite some time, from a DISH TV perspective, we've really been focused on adding profitable subscribers and in rural America. And we've had some success there and we've had decent success in retaining some of those customers. And so as our fleet continues to age, we're in a position where we need to -- add a satellite in order for us to continue to operate the service with appropriate backups within the latter half of this decade. So that satellite is under-construction now, we under contract with Maxar and we would expect to launch that somewhere in the neighborhood of 2020..."}, {"role": "user", "content": "26."}, {"role": "user", "content": "2026."}, {"role": "user", "content": "Thanks."}, {"role": "user", "content": "[Speech Overlap] We don't think the DBS business has gone away, it's still a --it's still a preferred choice for a lot of Americans in terms of an efficient way to watch TV and obviously, there has been -- obviously, we're able to add apps and things to the set-top box for a seamless experience. So really good business going away, we just want to make sure that that we have the right facilities in-place for our customers and -- to some extent, some of these satellites -- you have to have a satellite for insurance -- insurerance purposes too. So that's the reason."}, {"role": "user", "content": "Is there a rough cost that we should just keep in mind for this?"}, {"role": "assistant", "content": "We don't disclose that, but if you take a look at the capital commitments footnote in the queue. It's included in there."}, {"role": "user", "content": "So what is it. We don't make them read, just how tell them what it is --"}, {"role": "assistant", "content": "We don't disclose [Speech Overlap] in the total"}, {"role": "user", "content": "Oh!, it's in the total, okay."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Walter Piecyk with LightShed. Please go ahead."}, {"role": "user", "content": "Thanks. Charlie, when you look at the sub losses in DBS and and Boost, what would they have been if you hadn't had the cyber security event? And then similarly, to the extent there wasn't collected revenue, how do you account for that, is it show up in ARPU and then like a receivable that gets written-off as you just not reported in revenue? And then kind of a third-part, the same question which is, what's been the impact, I know you said as of March. It's been -- the systems have been repaired, but given the impact that had on customers, What have you seen in April and early May in terms of any lingering impacts to subscriber churn or usage or anything?"}, {"role": "assistant", "content": "Let's unpack that, probably a couple of different people here to answer that. I think the Boost in early quick, but not a material impact on Boost Mobile. We're in a situation, while as you might expect, -- we realized we're entering the post-paid business now as we bring up our network. And postpaid customers, just a lot more profitable than prepaid customer so. If you have limited capital you're going to spend your capital on the most profitable customers and so we haven't been perhaps as aggressive in Boost is as -- but just knowing that we get better things coming better economics coming so a dollar spent today that makes a small return you're better-off waiting. So next quarter to spend that money, where you have a much better return at least that's our theory. And then for Boost Mobile, we also know that there is another benefit of putting those people on our network and that's starting to happen now two. So that's -- I wouldn't read too much into Boost as it relates to the accounting question about the Ad revenue, you can take that -- Can you take that Paul?"}, {"role": "user", "content": "Yeah, I'll jump-in. This is Paul. The revenue impact was really immaterial. So you -- and you are seeing it immaterial amount show-up in ARPU, to answer your question."}, {"role": "user", "content": "[Speech Overlap] Walter this is Erik, may be [Speech Overlap]..."}, {"role": "user", "content": "How is that possible? Because. I mean, if you weren't able to collect revenue from customers and there's reports that people have like go to stores and bring cash to stores, how is that possible? Like did you go back and people [Speech Overlap] able to collect [Speech Overlap] you did collect."}, {"role": "assistant", "content": "A lot of --a lot of the pressure now is exaggerated. It's just really hard to okay. It's really hard to comment on every exaggeration that's out there, but. I think it's a case that -- I think the more cases maybe you didn't collect a late fee or something like that. I think there's -- I think there's a little bit of that maybe, Paul you know maybe..."}, {"role": "user", "content": "Yeah. I know that we are up and running, collecting all amounts by the end-of-the quarter. So that did get all caught up. So you would have seen it answer your specific question, would have been sitting on AR, but as you can see our AR balances are down from year end, but there might we might have waived the late fee -- you probably a little down-- a little down on the margin because you waived delayed fee, are you extended somebody three more days than you would have, because you know, you'd be able to collect -- there's some stuff around the margin there well, but nothing that material."}, {"role": "user", "content": "Walter you had third-part of the question."}, {"role": "user", "content": "Yeah. I mean, Walter -- I mean, this is Eric, just to add a little bit more color. I mean, obviously, my opening statement, we talked a little bit about it, but. On the DISH side of the business, that's where most of the impact was really felt, right, the legacy ---"}, {"role": "assistant", "content": "You might explain why that was."}, {"role": "user", "content": "Sure. Legacy infrastructure, as you can imagine, we've talked about it here, we definitely modernized kind of our tools and staff associated with Sling. Obviously, one of the TSA for some of the business through T-Mobile for Boost, and then obviously we're building out our new digital operator platform for our new Boost and Boost Infinite businesses. And so, the modern architecture really wasn't as impacted as much, right. We have different principles cloud based etc., but -- So when you think about DISH and the legacy side of the business, that's where the impact happened and quite frankly, we've been given award-winning customer service. We talked about our JD Power Aawards here, which are five in a row and we're quite proud of them and so quite frankly, we just didn't live up to the expectation. And so there were long hold times and we weren't able to process payments and DISH, I mean, obviously, we're in a postpaid billing cycle. And so, as Paul mentioned, we caught up on some of that. So there might have been a late fee here or there, which benefits the customer, but in some cases obviously we weren't able to answer a phone call or answer customer issue with any technical issue and they may have disconnected. And you're seeing that In the India, in the Q1 numbers, but essentially we put that past us. Like I said in the opening remarks, Boost and Sling, not really materially affected DISH on the legacy side of the businesses where we had the impact and that's generally behind us now."}, {"role": "user", "content": "And just because, I know -- the way you guys are to answer your question, well two things have happened on the on the DBS side of the business, which is; One is we had elevated churn, but the second thing is in Indian market, I mean, we didn't make sense to go out and try to get, so we had lower gross adds and we had higher churn. We would expect obviously that we return with the outage behind us more normal run-rate then to more normal run-rates. And that's what you've seen thus far in the first month of the quarter, but, there high."}, {"role": "assistant", "content": "I don't think I can give you accurate. I don't know. Thanks for asking question again, we don't give guidance, but. I think we back that we will return to operation, how about that. That's fine. So let me just do one a different one. Mind -- you hit the 70% or whatever it is. I don't think the FCC has an obligation to do anything, but clearly. It's going to help you in terms of raising capital and becoming the fourth competitor. The market, yada, yada, yada like have they, given you any indication that when you're done you submit whatever you got to submit In terms of engineering studies that they're going to give you some formal stamp or is it going to be normal standard or normal procedure, which is like they don't really have to say anything. Yeah. I think my. It would be very helpful if they would they would give some indication to the market. They did not do that with the 20%. It would have it would be helpful. It's one of the things we don't control which is which. The regulation and the government and so forth. Probably the more frustrating things, because I think everything that we can control. We just work really-really hard. To be successful at. And we've done that for 40 something years, right, but the. From a regulatory point-of-view, as an example. My congratulations to space X, but there is a 12 gigahertz study that was out there that we came on the shorter end of that stake SpaceX was allocated to spectrum and we were not able to even though we paid at auction for that spectrum, we weren't able access spectrum for mobility. So you're a bit of a losing streak there, but we've had -- we've been on both sides of that and I hope that. It be helpful, but. I don't think we should expect that the FCC's will stay."}, {"role": "user", "content": "Anything, in-part,"}, {"role": "assistant", "content": "Because will take --- they're going to have to do their study to verify our team will certify, under penalties of perjury, that we've made it. But they have to certify that themselves, so. I mean, which they showed Do you think they're going [Speech Overlap] take them that -- will take them some time. So I think from an expectation point-of-view. I don't think anybody should expect that the FCC is going to sometime in 2023 is going to say. This has made their build-out requirement, but we will be certified the extent we do, we will certify that underpin perjury. So we take that [Speech Overlap]"}, {"role": "user", "content": "All inhibit. Did that all inhibit your ability to reduce capex to the extent that like, let's say, hey, you believe you hit the 70% you pulled back on capex, and then T-Mobile or whatever and they're Reg people are like look at Charlie cutting capex and training at the FCC to hold your feet further to the fire or do you think these are two different things, and you shouldn't have to continue to spend, which is unrelated to hitting that milestone with the FCC?"}, {"role": "assistant", "content": "No I don't think we're -- first of all, you can expect our competition to always go to the FCC, we were hoarders, we were speculators, none of that was true. But when you got three-four companies coming in and saying the same thing. That punches we don't quite punch above our weight versus three or four people at the FCC, so. You can expect that there will certainly be a lot of, you're going to hear about ORAN and ORAN's three years ago ORAN didn't work and then, well maybe word -- and then it was like additional -- maybe it work additional never make it work and now it will be well -- well, maybe, DISH made it work, but it's still, but decade away, so you're always going to have that noise from people who aren't doing it. But. I don't think that we're required to continue to spend on capex, once we believe we've made our milestone, with the exception of the thirrd milestone which is -- we'll have to continue, which we will a little bit continue ramp-up in late '24 and early '25."}, {"role": "user", "content": "I understand. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Doug Mitchelson with Credit Suisse. Please go ahead."}, {"role": "user", "content": "Thanks so much. I think two questions. I'm curious. If you're willing to share what percent or maybe ballpark, what percent of Boost traffic is running on your own network at this point versus T-Mobile or AT&T's network. And, Charlie, we've booked around it a little bit. So, fair to figure out how to ask the question. The most constructive way, but my experience with you historically has been pretty conservative approach to operating the company, but the markets obviously think you're flying pretty close to the sun, on your capital structure and. I guess I'm just wondering if you feel like you're in a pretty conservative position or if or if you sort of sympathize with the market's views that things are pretty tight here? Thanks."}, {"role": "assistant", "content": "Yeah. I would say -- I would say that. I do think we operate pretty conservative, but. I do think the markets had historical rate changes in the last year. So that certainly has pushed us more into that purchase closer to the sun but not to the sun. So we have a narrow -- look we have a narrow window of opportunity here. We have an -- with narrow window to to perform and execute and address our capital structure. So we have to do a lot of things, right. We have a small margin of Air, but it's all doable. It's not a place that's unfamiliar to us, right. So we started in 1980 I think mortgages were 15%. I mean, the capital markets were much worse than they are today, we started the business from scratch with no money, So a very little capital. So we had a merger denied with DIRECTV by the Just department, we were -- and that said we had a very narrow window back then. So we've been there before, and again, the things that would worry me would be to the markets get worse. And where are they next year. We don't know that for sure, and obviously from a regulatory point of view, there's obviously a lot of things from a regulatory point-of-view that we have or continue to have in front of the regulators and how did they rule in those things, we haven't --we didn't do very well on the CDMA shut-off which was pretty bad. We haven't done -- we didn't do very well in the DE litigation. We haven't done very well on some things. But my experiences, you don't -- you don't always -- you win some, you lose some. We've been on both sides of it but to loose is -- you don't have a losing streak forever. And so I'm hopeful that, that will be a positive, but we'll see."}, {"role": "assistant", "content": "But again, we focus on, we focus on the window of opportunity we have, control the things we can control and we have a good -- we have a path. And it's not evident that people on this call, but we have a path and we have to execute on that and hope that nothing gets any worse in the marketplace."}, {"role": "user", "content": "Got it. And then on the Boost traffic?"}, {"role": "assistant", "content": "We don't disclose that, but it's not -- it's not a material amount yet, in-part, because we only have five -- we only have five -- maybe John can talk, we have five -- we only have five handsets now that have Band 70, which is the which is a major part of our spectrum."}, {"role": "user", "content": "Yeah, as Charlie, says, it is early days. We're going to continue to have a growing portfolio of products, they're going to be available for Boost Mobile and Boost infinite on our own network, including iPhone. We're really just getting radios support that business from a supply-chain perspective, that works up and ready to roll-in, those markets and we're gonna be loading customers and then once we clear the 70% and we're on-track to do that, we'll then start optimizing those markets and loading on our network there as well."}, {"role": "user", "content": "Yeah."}, {"role": "user", "content": "So we're ramping this year."}, {"role": "assistant", "content": "And we should make one distinction realize our realized one of the things that we've done is built a network with voice over new radio. So we're they only the only person in United States, really in the world other the Chinese partly that does that at-scale. So that's the new way to do -- to do voice and. Our goal is to have the vast majority of -- vast majority of the population be able to utilize our network with Bonner by year end. And obviously, to extent that you do that, then the next step is the majority of all your traffic is going on your network. So that gives you a feel for where we think it goes, but we're not there yet."}, {"role": "user", "content": "Great. Thanks so much."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Jonathan Chaplin with New Street. Please go ahead."}, {"role": "user", "content": "Thank you very much. Couple more questions on the 800 megahertz auction. So based on the value ascribed to the the option, it looks like the underlying spectrum is being valued at about $5.3 billion. Does that value assume like a certain exercise of the option or is it still probability-weighted. And if -- If not, what would the value of the spectrum be if it was sudden[Phonetics]?"}, {"role": "user", "content": "This is Paul. Yeah, it's still probability of weighted at this point in time. And the only change that you saw quarter-over quarter from year end and the valuation is really just the time value -- time value of money impact."}, {"role": "user", "content": "Got it. And how much."}, {"role": "user", "content": "We don't give we don't. We're not given the amount nine probability. Correct."}, {"role": "user", "content": "Right. Can you give us what the sort of the reference transaction or the reference value that establishes -- establishing that $5.3 billion value?"}, {"role": "assistant", "content": "If we look at other options and so forth out there, we won't give you the net the number specifically, but that data is out there and I'm sure you know who you can compare it to."}, {"role": "user", "content": "Got it, okay. So it would be something like that. T-Mobile just from Colombia capital or something like that for 600 megahertz that you might look at?"}, {"role": "assistant", "content": "It will be something like that."}, {"role": "user", "content": "Got it and then the. Can you tell us the exercise date has been extended till, is that July 1st or is it September 1st? And do you still have to notify the FCC of your intention by June 1st."}, {"role": "assistant", "content": "It's little complicated, because they have -- they haven't rolled on that, actually haven't rolled-out an extension requests. But the exercise they design as I understand is July 1st."}, {"role": "user", "content": "July 1st, Got it,"}, {"role": "assistant", "content": "We're still we're still waiting on the formal. Really."}, {"role": "user", "content": "And then one last one on the top gigahertz. It looks like there is a prospect that you might use that for fixed wireless broadband. Given that you can't use it for mobile use. Can you give us some more context for your thoughts around that?"}, {"role": "assistant", "content": "Well I mean. I think for us, mobility is really the key use and we were disappointed that we weren't able -- we believe we could have -- We believe that we could have used it on an interferon basis with mobility. But look, the engineers are good, the FCC and I respect their decision, because they had they had enough information, they did their own analysis. So. I think, the FCC is opening comment on the 1207[Phonetic] to 1375 frequency and, again, given that we paid at auction, given that we believe mobility is imperative for us to compete. That would be,-- you can imagine that that would be another place to go, but, we'll just have to wait-and-see."}, {"role": "user", "content": "Got it, thanks very much guys. I appreciate it."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Kannan Venkateshwar with Barclays. Please go ahead."}, {"role": "user", "content": "Thank you. [Technical Issues] in the 600 megahertz spectrum. I just wanted to clarify something. I think last week you guys or maybe the week before there was an application to cancel some of these licenses. I just wanted to get some clarity on why cancel instead of just waiting on the license period? And then secondly, when we think about, the 60 day extension for the 800 megahertz spectrum, is that based on some concrete discussions you may be having with maybe potential partners in terms of funding it or is this just an extension of an option to see what else is out there that you can go out and explore. That would be helpful. And I have one follow-up on funding."}, {"role": "assistant", "content": "Yeah, on 800 megahertz. I just don't want -- I just don't want to comment on strategically where we are there, other than we believe it -- it's expected that we need to compete and we think it's valuable spectrum. obviously. On the cancellation of 600 megahertz, we made a mistake. So when you go to the FCC website, we have a lease with T-Mobile, first in markets and that lease we can't -- that lease was was up by the terms of the lease, so we went into cancel the lease and it inadvertently canceled the license. So that was a footfall to -- on our part. But. Again, we believe that the FCC will have to put that unplug nodes, and -- not cancel the lease and we don't think that's going to be an issue."}, {"role": "user", "content": "Okay, and does the strip any anything on the secured debts, because -- I think 600 is the collateral for that bed frame."}, {"role": "assistant", "content": "The answer is no, because I believe the inadvertent mistake is going to get rectified."}, {"role": "user", "content": "Okay. All right. And then on funding. I just wanted to -- I mean you have maturities, which obviously are the evidence need as you go into next year, but then if you really want to be aggressive competitively. I mean, this is a working capital heavy business, so you potentially need capital for that as well. And so when you think about the scale of funding, you might be -- you might go-to-market for. How should we think about that as you go into next year? Is that mainly to fund the debt maturities, early in the year or might you be proactive and maybe accessed the market for more than just a maturity amount? Thanks."}, {"role": "assistant", "content": "I mean, look. I guess when we look at it, you have your -- the first priority is to fund the debt. So and that's and then we'll be opportunistic beyond that and creative. I mean I think again. That's why management gets paid is to make sure that that you can navigate when you have narrow windows, you can navigate those their windows and teams that are really good, they do really well when they have to focus and I'd. I'm quietly confident here that this team can navigate that, right. And we just have to focus on the things we control and do that we -- They way I'd say it is. I think the market look market looks at us is half empty, maybe even 90% empty today, right, and. I think the truth is that the glasses more than half-full, right. This is a company has been we're in our 40 year - 30 year, so we didn't start yesterday. So we've had a lot of experience in similar[Phonetic] situations. It's a seasoned management team, we're not starting from scratch here. So we know-how to work together. We know how -- we know how to assess risk, right. And we are asset-rich so, arguably, we have spent $34 billion for spectrum, that has gone up in value. We are building a World-class network, there is not another network in the world that is advanced as ours. So you're -- we -- and again, I've traveled the world there is not another network as advanced as ours and it's up and operating in 50 markets today and working so."}, {"role": "assistant", "content": "With cloud-based open RAN, with voiceover new radio, it just doesn't exist. So we have some advantages in the architecture and I think one of the people -- one thing is people not -- and we're getting we're lucky which is nice, but you read a lot about AI. And an AI needs data debt and the most data-rich places in wireless network and if you want to access data, you better be in the cloud and you better have a very sophisticated network. That works more like an IT network, As we've built an IT network that kind of operates as a telco. Our competition is the telco that has to start operating like an IT network, that's a tough transition for them, they'll get there, It's going to take them a decade to do it. But we're already there. And so if you think, -- if you think AI is going to have an impact, it's not going to have -- probably the first-place, you're going to see is when you're talking to your phone because just asking two questions. And now you have access to the world's information, at your fingertips in a way that you didn't have before, but you need a network to be able to do that. So we have a lot of things going on from a handful of prospective. That from a short-term Wall Street perspective, obviously, it's probably not that relevant, but when you look at strategy and your long-term investor and your long-term that we think that -- that we think we that the killer application ultimately will be AI and all that goes with it and we're fortunate that we've designed the network to take advantage of that."}, {"role": "user", "content": "All right., Rachel, this is Tim. We'll take one final analyst question here before we move on to the media."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now take our final question from the analyst community. Members of the media on the call [Operator Instructions] We will begin the media portion of this call, following the answer to this final analyst question. And our question comes from Craig Moffett with SVB, MoffettNathanson. Please go ahead."}, {"role": "user", "content": "Yeah. Hi, thank you. Charlie. I want to go back to something you said earlier in the Q&A session where you said the debt market looked like they were effectively closed in but you are asset-rich. Am I correct in reading that as you're saying that you would be open to selling some portion of your spectrum as a way to finance your build, and if so, are you referring to the 800, if you exercise the option? Or are there other spectrum bands that you think of as less critical for your build that you would be willing to consider an offer for if they were available? And I mean. I guess I'm -- I'm also thinking you could you could presumably use spectrum as as collateral. But it sounds like since you already have done that, you were saying that, that's not sufficient in saying the debt markets are closed. Am I reading that correctly?"}, {"role": "assistant", "content": "Well I mean. I think that our debt is trading for literally 20% returns, right. Yield to maturity, so. It doesn't bode well for our ability to access in a competitive way to the debt markets, that could change, but that's the way it is today. So when you look at -- you look at the financing that we need to do for debt repayment and growing and growing our business. I think there is levers that we have, obviously, we have assets obviously anything is on the table when it comes to as a business person to get to where you -- where you want to get to run a successful business. But we're certainly not going to go into strategies and all the levers that we would pull there. I just think that it's -- that it's. I think there's more opportunity for us than people realize, let's put that way."}, {"role": "user", "content": "All right. Thank you."}, {"role": "assistant", "content": "Yes, thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now take questions from members of the media [Operator Instructions] When your line is open, please announce yourself by name and affiliation before asking your question. And we will take our question from the line of Scott Moritz with Bloomberg News. Please go ahead."}, {"role": "user", "content": "Yeah. Hi. It is Scott, Bloomberg News. Question about Boost. The -- it sounds like that there's have been ramping going on towards a possible launch, you have the iPhone coming in few months. Curious about the voices over net network and whether that's the gating factor here, but is there a date on the calendar where you would call with a full launch?"}, {"role": "user", "content": "Hey, Scott, it's John. So I'm going to interpret your question meeting Boost infinite, which would be our postpaid offering."}, {"role": "user", "content": "Yeah."}, {"role": "user", "content": "So we're bringing, iPhone to Boost infinite and we'll be looking to ramp our marketing distribution opportunities in the back-half of the year. We certainly do have our own network on the way, we've got sort of more progress there with Boost Mobile, as of today, but we're looking to launch devices and competitive products with Boost infinite on our own network as well."}, {"role": "assistant", "content": "And realize the iPhone is on Boost Mobile prepaid today. It's just coming to postpaid."}, {"role": "user", "content": "And did you have a date for launch."}, {"role": "user", "content": "We're not going to share a date right now. I mean, obviously we are not wanting to broadcast our strategy to our competition, but you'll see us significantly ramp activity in the back-half of the year."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question is from the line of Andy Kaplowitz with Citigroup. Please proceed with your question."}, {"role": "user", "content": "Hey, good morning everyone. Duke, your backlog has been accelerating over the last few quarters. It seems like you are announcing more large projects. Are you just generally seeing an acceleration in these types of projects? And would you expect their frequency to continue? And then I know you talked about backlog continue to increase, does the higher backlog in your view raised the probability that Quanta could deliver at higher end? I think you had told us at the Analyst Day like 15% plus term EPS growth that you discussed."}, {"role": "assistant", "content": "Yes. Andy. I think when we look at the market and especially the larger projects within the market, there's a significant amount that you got to get through permitting, you've got to get through a lot of different things. More importantly, if you're going to transition the need for transmission in North America, for that matter, is significant, way more than what people will estimate. I think you hear it quite a bit if -- where -- were moving towards the transition we are. So that said, we do see large projects across the board, but you have multiyear projects as well with existing customers that are also addressing this need to provide load to the load centers from the areas where you have renewables. So those things, along with what you're doing with EV penetration and things like that are certainly increasing. Our dialogue with customers is robust. The amount of capital necessary to go where we want to go, continues to grow. I don't see a path to get to anywhere near where we want to go in 2030, 2040, 2050 without significant infrastructure build across this grid. It's not meant to handle the modernization, the penetration of electric vehicles and what we're trying to do from a carbon environment without modernizing this infrastructure in a significant way."}, {"role": "user", "content": "Are we at least trending towards your higher-end target that you talked about last year?"}, {"role": "assistant", "content": "Our backlog growing. We don't even have SunZia and it will go up significantly. I think it will go up significantly every single quarter throughout the year. It may not be a perfect CAGR, but it will grow through this year, and I don't see that stopping. I mean we've given you good guidance on a multiyear 10% type growth at the EPS line with the ability to grow 15%. I stand by it today, even more so."}, {"role": "user", "content": "Appreciate it."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Adam Thalhimer with Thomson, Davis. Please proceed with your question."}, {"role": "user", "content": "Hey, good morning guys. Congrats on a strong start to the year. Duke, at a high level, where do things stand with renewable -- with the renewable supply chain?"}, {"role": "assistant", "content": "I think it's getting better. I mean you still you still hear Congress even today or yesterday, I can't remember. You start to see things around your reliance on China for panels. And I do think that will continue to play through this. But all in all, for what we see for what we have, we certainly have risk-adjusted kind of how we're guiding this year. So I do think we've watched it. We know what panels are in. We know what panels aren't in. I do believe that has alleviated a bit and we'll continue -- so the supply chain has gotten better in many ways. Certainly, if there's any kind of regulation or things like that, it could change. But I do see more -- for that matter, everything being more onshored than offshored. And I do think that's a good trend for us in the way that we think about providing those solutions. Jayshree can comment."}, {"role": "user", "content": "No, I have nothing more to add. That's right. I think it is opening up. We're seeing the supply chain, the panel manufacturers make -- do a better job of ensuring that they're meeting their requirements under the -- under the tariff provisions. But yes, if there is any sort of regulation, any sort of anti-China sentiment that continues to push through, that can obviously affect the supply chain again."}, {"role": "user", "content": "Okay, thanks guys."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Alex Rygiel with B. Riley. Please proceed with your question."}, {"role": "user", "content": "Thank you gentlemen. Real quick question here. Where do you stand on the percentage of revenue generated from self-perform versus external subs? And how could this change over the coming years?"}, {"role": "assistant", "content": "Yes. Thanks, Alex. I think in general, we're about 85% still. I think that remains the work mix for us. If it's more material concentric, we'll make some comment on it. Today, it's the same for about 85% of the business is still self-performed. We like that. We like that mix. I think it will continue. We certainly to have certainty in our projects and to the client on delivery times and on for our ability to provide earnings power, we need to be able to self-perform about that mix. And the constraints that we have, no one understands those and we have to make sure that we can operate through any kind of issue. So that's about the mix you'll see."}, {"role": "user", "content": "And then secondly, can you talk a little bit about the competitive environment, particularly as it relates to SunZia? Congratulations on that. But how many bidders were on that? And how does that compare to a few years ago?"}, {"role": "assistant", "content": "Yes. Honestly, I don't have any idea. I know we had a great collaboration with the client. It was a collaborative effort. And I believe it shows what the Blattner acquisition did for us. When you put both of us together what we can do together, what we can do for the client, the synergies that we can create for a client in a project like this. I would say it's proof of concept, it's proof of what can be done with the client to ultimate consumer and I don't think there is anyone that can do what we can do with these type of projects based upon history based upon what we're able to really think through for early in construction we can certainly create impacts and solutions to both sides of this transition, unlike any other."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Justin Hauke with Robert W. Baird. Please proceed with your question."}, {"role": "user", "content": "Great, thanks. So I guess I had a couple of questions on SunZia, just because it's been out there, obviously, forever, it's had all kinds of moving pieces on the financing side and the regulatory side. I'm just curious, is there anything that it still has outstanding that it needs to receive to start construction in 4Q? Or is that pretty much all cleared up? And then I guess related to that, is there any contribution that you're assuming in your guidance for this year from it?"}, {"role": "assistant", "content": "Yes. We have some revenue in our guidance this year from it. It was in our uncommitted prior to the award. But that said, it's minimal. And I don't -- we don't see a pullback or a path where it doesn't go. So there's a lot of commitments being made here. We feel like the project is a go project, it's a great project, patterns of longtime customer, Blattners and IR is for that matter. So we're confident, and we've worked hard with the client to make sure that this project is a showcase for them and us, and the industry, what can be done through hard work. And yes, it's a long, long project. It took a long time. It shouldn't take this long in America to build infrastructure. So certainly, it's -- we're glad to get it across the finish line for everyone."}, {"role": "user", "content": "Okay. Great. That's helpful. And then I guess my second question is just on the Canadian renewable job. You said it's 90% complete, and you're expecting it to complete with the next winter build. So does that mean that for the next couple of quarters, there's really no contribution on that, and so we shouldn't think of that as kind of a source of potential pressure and it won't start up again until we get back to next winter when it completes? Is that the right way to think about it?"}, {"role": "assistant", "content": "Yes, a little bit on the project. That's the way to think about it, but a little bit on that project, just so we can discuss it a bit -- it's a project that we did through the pandemic. And it's a project no one's done in northern climes like this, where we've taken people off fuel and putting them on renewable power I think it's significant in the way you think about the northern climes and what can be done. Our people work through a pandemic and built this. And so that said, no one's ever done that. No one's ever -- so the way that we're thinking through it, we've taken a prudent approach taking a prudent approach the way we've looked at it. All I can say is we can build things in northern climes better than anyone in the world. I'm confident in our position. I think it's much better than what we have, but we took a prudent approach to it. We'll continue to do so. I don't think you'll see any more fluctuations unless it goes the other way. I feel confident in where we're at, and it was our decision really to make sure we derisk the rest of the year and the rest of the job with the approach that we've taken. So we're extremely happy with our people, this build was significant for us in a COVID-free environment of what's possible. Our productivity rates and everything else were off the chart. So real pleased with how we finished up, and I do believe it will pay dividends in the long term."}, {"role": "user", "content": "Okay, great. Thanks. Perfect."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Steven Fisher with UBS. Please proceed with your question."}, {"role": "user", "content": "Thanks, good morning. Congrats on SunZia. I just wanted to follow up on that last point there. I mean, this seems to be a reminder that things can happen on these renewable projects. And so how can we get comfortable that these risks can be reasonably controlled? What comfort can you give investors that SunZia is not going to be an execution overhang on Blattner has done other work in New Mexico before. You're taking great efforts to derisk the business, but it's obviously -- it's a big, huge project. We do have a margin impact this quarter from renewables projects. So what comfort can you give investors that there's not going to be an execution overhang now?"}, {"role": "assistant", "content": "Steve. SunZia is right down the middle for us, both from -- we just got off a wind project, with Pattern, did really nicely. We built line across that part of the world, many, many times, not concerned. What I can't control is a pandemic, so if our project has a 24-month pandemic in it, I don't know how to address that yet. I'll let you know when we get done with all the settlements on the claim. But the one in Canada, we work through a 24-month pandemic in a camp in the most northern territory in North America. So -- and by the way, like every other project up there is off the rails. So look at coastal gas, look at Trans Mountain what they did, and compared to what we've done. I'd like our chances. So I know -- we know we're doing on large projects, and this one is right on the middle. I expect many more of them to come."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Chad Dillard with Bernstein. Please proceed with your question."}, {"role": "user", "content": "Hi, everyone. First of all, can you talk about what is the mix of small versus large projects today, particularly in electric transmission? And then like with the recent spate of large wins that you've had over the couple of quarters, like where do you think that mix goes over the next couple of years? And what I'm ultimately trying to understand is like, how should we think about the margin impact of a potential mix shift?"}, {"role": "assistant", "content": "I think when you look at it, it's about the same between 80%, 85% base business, the way we're -- why we've laid it out. Large projects will grow significantly. Our base business will grow significantly. We're signing much larger MSA type programmatic expense than the projects that you're seeing. It's just there over multiyears. This -- SunZia is over -- I think we get done in '26, end of '26, the line goes a little faster, '25. But that said, we have multiyear type MSAs type agreements with our current customers that are longer in nature that are much bigger. So we continue to see both the base as well as these larger projects, as we've talked about the stacking effect due to the transition and all the things that we're able to accomplish there on the companies in front of it. And I do believe the outlook looks good. And certainly, our strategies are five years out. And I like where we're at. And I think we're right on track, maybe a little better."}, {"role": "user", "content": "That's helpful. And then maybe, can you give a little more color on the Navistar partnership? Is this something where it's exclusive for Quanta? And then just like at what stage of the sales cycle is Quanta brought in? And is this like the type of like -- probably like work that you've been talking about?"}, {"role": "assistant", "content": "Yes. When we look at the Navistar contract, I think it's just how we relate with our -- not only us, but our suppliers we collaborate. And that collaborations leads to other things that we can do together such as try to create the safest truck in the industry, which I think is where the start -- it was trying to create the safest truck what can we do with automated driving, what can we do with other things. And then it led to -- well, what can we do together to build the infrastructure necessary to go to electric vehicles. That said, if you think about Navistar's -- their amount of market share in school buses, in every school district across North America, it's significant. Many of the school districts load once you put buses and you go to an EV type bus, it will pull more load at the bus depot than the town. So when you start thinking through that and you're struggling in all the school districts that are out there, I think it's a significant build. It's meaningful for the company. And if we work together, we work with our utility clients and municipalities on the front end of this, we can certainly do it cost effective and create an environment that allows everyone to move towards carbon free."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Jamie Cook with Credit Suisse. Please proceed with your question."}, {"role": "user", "content": "Hi, good morning and congrats on SunZia. I guess first question, is there any way you could size the number of projects or in dollars, what you're bidding on, where you're bidding both the transmission and the renewable side sort of like SunZia, so we can see how many more opportunities that are out there? And to what degree are you worried -- or I know you've been investing in labor for some period of time, and you always have, but that -- you need to ramp your investment in labor even more? And could that be a risk to margins in the short term? And then my second modeling question is just on within renewables, understanding the first quarter margins were below your expectations, and you explained that fine, but I think you maintained your renewable margin guidance for the year despite the first quarter being lower. So I'm wondering if that implies potentially the rest of the business is performing at a level slightly better than you expected?"}, {"role": "assistant", "content": "Jamie. So I do think when you think about that we're on -- call it '25 renewable projects today. All those have interconnections. The discussions with the customer are usually -- when we didn't have Blattner, you weren't combining that. You were really -- we were doing a lot of the interconnections for the utilities or for the developers. Some are going towards a combined approach I think the more we show the economics around it, the more we think through it, the bigger the projects, certainly, the more economical it is for us to think through both wind solar and interconnection with the client, and we do that quite a bit. As far as -- there's a significant amount of projects out there that are ongoing or from utilities driving wind towards the West on the East Coast coming down from Canada, where you're absolutely bringing load wind, whether we're on the wind side or not. Usually, we're on both sides of it. If they combine it, it's better. I think it's our job to show the client the economics around that and how we see it."}, {"role": "assistant", "content": "And is that the ultimate -- is that the ultimate project for the consumer at the end. Can we do it cheaper and more efficient. So I do think I like our chances. SunZia is certainly a highlight of what can be done. And I think it -- when you collaborate early, you get those kind of results and everyone wins. As far as the margins on renewables, I think a lot of that was the Canadian project pulling it down a bit. I do believe when you start to scale the way we're scaling, what happened in the renewable business across the board, you had a stop six months, nine months where no one did much because of all the regulations in '22."}, {"role": "assistant", "content": "And that -- and also the IRA coming in. As the IRA comes in, you're going to get on more of a run rate base rate that you can see and you'll stock on top of that as you grow, I don't think you'll have this cadence that you have where you're growing from the first quarter significantly into the second, into the third and the fourth. And you get more -- obviously we have to perform on the back side much better than we did on front. And I believe everything in historicals, nothing on the back side, outside of any historical margins. In fact, it's right down the middle for us on the backside of this. And I think that should create -- you'll have some seasonality in the first quarter, but your fourth quarter is going to obviously grow you have some impacts in the second due to your -- the way that we're mobilizing on projects and things of that nature, but it should smooth on out into '24 and beyond."}, {"role": "user", "content": "Yes. And we are seeing better performance in the rest of our business, Jamie. When you see the impact of the Canadian project at 120 basis points. The rest of the business, we were -- we were pleased, as I said, the performance there -- margins are doing better than we expected. And as Duke said, as we move out of first quarter into second, third, you're going to have more volume, you're going to have better fixed cost absorption and you're going to just have better productivity as a result of getting into better climates."}, {"role": "user", "content": "Well, not to push you, I'm just wondering if the back half margin implied double-digit if that's a new run rate going forward given just what you're seeing in the market?"}, {"role": "assistant", "content": "We don't have enough history Jamie to give you that. If I can get 12 months' worth of run clean on renewables, I'll be in a much better place to give you some dialogue, but it certainly will -- if you do the math, you've got to be in double digits on the back half."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Marc Bianchi with TD Cowen. Please proceed with your question."}, {"role": "user", "content": "Thank you. How much should SunZia contribute to backlog here in the, I guess, second and third quarter? And then how is your -- how does that constrained, if at all, your bandwidth to take on additional work? Is there a level where backlog gets filled up and you're probably just going to continue to work on that level for several quarters?"}, {"role": "assistant", "content": "I think we'll continue to grow backlog. We're not going to comment on how big the job was. We said, is the largest renewable project in North America, so it's quite large. We'll put it in backlog next quarter, and you can infer what that looks like. But -- that said, in general, as far -- we hear a lot around constraints. The company has grown about 1,000 employees a quarter. We're roughly very close to 50,000 today. And I do think that growth continues. We were set up to meet the demands out there. I've not seen the demand outpaced our ability to grow and grow in a efficient way where we can certainly put the resources on the projects and anything that we've seen, anything we've seen in the market, anything out there we're bidding on. We can certainly handle and handle more of it. I challenge the supply chain to catch our ability to perform the labor because that's where the problem is."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Neil Mehta with Goldman Sachs. Please proceed with your question."}, {"role": "user", "content": "Good morning Duke and Kip. I guess my first question is just around the cash flow, free cash flow progression over the course of the year and how we should be thinking about the $750 million to $1 billion guidance and whether you're on track and whether you're targeting where -- within that band you see yourself being."}, {"role": "user", "content": "Yes, Neil, yes, we are tracking toward that $750 million to $1 billion. We still feel good about it. Our first quarter was negative, which is typical for us in the first quarter, given the working capital requirements coming back from the holidays, ramping up. We did also have a little bit of pressure in the first quarter with some retainage as well as some material procurement that impacted our DPOs. But again, well within our expectations, and moving forward, as the work increases, we've got more renewable projects coming through. You're going to see that cash flow and the revenue come in as a result. Our expectations are still within that $750 million to $1 billion. I think we're on the midpoint is where -- Neil, if you're asking me today where we are, that midpoint is right down the middle and where we would be. And so we feel good about where we are today and see no reason to change that."}, {"role": "user", "content": "Okay. That's really helpful. And then the follow-up is just on one of the core competencies and capabilities of your organization has been around making strategic acquisitions, not just large ones like Blattner, but also smaller bolt-on ones as well. What's the opportunity set in the M&A market for tuck-ins, recognizing big strategic ones or probably less likely as you are working to integrate Blattner right now?"}, {"role": "assistant", "content": "We made three in the first quarter, I think, are extremely strategic, so that said, it addresses the mid-market solar and many other things. So our ability to think differently and to get in front of these type trends as well as families that want to perpetuate their business I do believe we'll have the ability to do that. We'll certainly weigh that against organic growth on the way that we're thinking about the market. So there's opportunities for sure. And I'll go back to cash flow. If we grow the business for every $100 million we grow, we pull cash out. I think it's around $12 million of free cash, somewhere in there. So don't -- like if we grow another $500 million of guidance, you're going to pull out another $70 million of cash $60 million of cash. So just that happens. We've got to make sure that everyone understands that is if we grow more than what we say, it does pull cash."}, {"role": "user", "content": "Thanks team."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Sean Eastman with KeyBanc Capital Markets. Please proceed with your question."}, {"role": "user", "content": "Hi team. So it's great to see the Blattner kind of revenue synergy story coming together with this big SunZia win. Duke, you had alluded to the economics to the customer being better when you guys kind of come to market with this combined transmission generation solution. Could you give us a little more color on that and kind of what the go-to-market pitch is? And what the benefit to the customer is here?"}, {"role": "assistant", "content": "Yes. I mean I just -- there's a lot of synergies, Sean. It's kind of like the Coke secret sauce, I'm not going to tell you what it looks like, or what the ingredients are. So the issue is, for us, if you get us in early, our ability to put a construction-led engineering package together is what I think leads the industry forward, not only from a safety standpoint, just the way we think about supply chains, everything with a long -- the build. So it's just our ability really to think through how we're going to build something and then make sure the engineering matches and where we build all kinds of different things from logistics to everything else, and we know a ton. And look, we know who's going to build it. So we know the craft that's going to build -- know the superintendents there that are going to build it. When they sit with the customer early it always ends well."}, {"role": "user", "content": "Okay. Interesting. And then a little bit more granular. We haven't hit on the Underground segment. The first quarter margin performance was quite a bit better than we expected. And then I think the guidance for the full year has come down. So I just want to understand what's happening under the hood around that mix shift you described."}, {"role": "assistant", "content": "I just think in the Underground, when we look at it, I think the way we see capital spend at our customers, you can see some pull in from gas LDC into maybe Electric or Electric to Underground more so another half of the year. The total portfolio rises, you may have some impacts on a little overhead here or there. On your gas, your industrial business on the back half, we need to watch it. We have good visibility for six months and then you can't see the back half. So you're hesitant on putting something forward that is not there at this point. So we'll watch the underground business. That said, I do think that mix shift happens and maybe some portfolio adjustments year-over-year all the time because -- the difference between electric and electric [Indecipherable] renewables or electric [Indecipherable] electric it's nothing. It's the same. You just -- it's the work type, who you're working for primarily or what you're doing with the work. So that said, I mean, they can -- we could grow the electric side of the business faster than the renewable side at times and the renewable side faster than the electric at times I just -- that was going to blend in and the underground business is the same thing. We can be doing telecom one day and gas the next, that's the beauty of the portfolio. And I think if you -- if we get operating leverage, if what the company is doing right, we'll continue to see some work mix shifts in the underground, but you're going to higher margins in electric and telecom. It's a good thing."}, {"role": "user", "content": "Okay, interesting. Thanks, I'll turn over."}]}, {"messages": [{"role": "system", "content": "Our next question is from the line of Michael Dudas with Vertical Research. Please proceed with your question."}, {"role": "user", "content": "Good morning. Kip, Duke and Jayshree. Following up on, you mentioned telecom. Maybe you could share it seems like your revenue expectations remain what they have been. What are some of the trends you're seeing, anything that's been more beneficial, the Quanta? And could you -- is any visibility into, say, 2024 on some of the programs and where you guys can get involved?"}, {"role": "assistant", "content": "Yes, Mike, we're starting to see more and more programs from your nontraditional customers. So I think that the RDOF money is starting to hit a little bit. And we were close to a $1 billion this year, double digits which is what we are trying to accomplish and we are very very close. Wouldn't surprise me if we surpassed it. I think we paced the growth right. I think we have grown purposefully there. And we'll continue to take advantage of the market. That said, we're not investing a lot in that from acquisitions or things like that, it's primarily around organic growth at this point. So it allows us to really expand our -- other things against that market. So we're pacing our growth. I do big opportunities in 2024 really and beyond. '23 is nice, but we'll continue to watch it. It does get tickle at times."}, {"role": "user", "content": "Thanks team."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Brent Thielman with D.A. Davidson. Please proceed with your question."}, {"role": "user", "content": "Hey, thanks for taking my question. Duke, curious the outlook for sort of other new wind bookings opportunities. It seems like solar is kind of in the hot market last few years. wondering if you're seeing RFP is picking up and wind and maybe that's another significant lever, I guess, beyond SunZia from bookings in the coming quarters and years. And I guess, of that, too, are the economics of those projects more attractive than solar? Because it seems like it would be a less saturated sort of competitive environment given the technical necessities there."}, {"role": "assistant", "content": "Yes. I mean we're seeing more opportunities in the outer years. And when I mean the curves -- the way the curves work and why you need solar -- your battery projects are going to pick up significantly to handle some of the intermittence fees as well as the wind in certain areas. You have to have transmission interconnects and things of that nature. So a lot of it's the transmission cues as you get these larger lines built, you'll start to see more wind behind them. But they're not going to build the wind if they don't have anywhere to put it. And repowering certainly is a big business that we'll continue to see that repowering market is nice. And I'll let Jayshree comment on this."}, {"role": "user", "content": "And the only thing I'd add to Duke's comment is -- it is -- wind is starting to get some momentum. I still think -- and we're still seeing that it's more back-half weighted as projects have to get through the permitting and interconnection cues. And for all the reasons Duke mentioned about the complexities of moving that wind power to where the load is, it just -- it's harder and it takes more time. And you have the IRA coming in as well, which will allow for more wind and have wind be as competitive as solar. But again, the projects have to move through the development cycle to be ready to be built. But in terms of economics, no, I think we are comfortable with both. Blattner especially has a strong history in building wind and now solar and they've proven themselves to be successful in both."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Our final question this morning will be from the line of Marc Bianchi with TD Cowen. Please proceed with your question."}, {"role": "user", "content": "Hi, sir. I wanted to ask on the back half renewable margins here. You mentioned the, I think, 120 basis point burden in the first quarter. I'm curious what that Canadian project would be burdening the back half by just so we could get a sense of what it would look like once that's out of the backlog."}, {"role": "assistant", "content": "Yes, I think it's not material, if anything, on the back half. It's in the '22 a bit. So I think when you look at '22, it's down a bit and it won't -- Canadian has been an impact in that segment. So there's not as much Canadian content in the back half of our year. And so we're confident in the historical performance of both sides of the business to be able to perform double digits in the back side of this -- of the year."}, {"role": "user", "content": "Okay, super. Thanks so much."}]}, {"messages": [{"role": "system", "content": "At this time, we've reached the end of our question-and-answer session. And I'll turn the floor over to management for closing remarks."}, {"role": "assistant", "content": "Yes. I want to mainly thank our people in the field. We had a really, really nice quarter through tough winter, 50 foot of snow in places, these guys, women, and they perform in northern climes better than anyone in the world and what they do every day is remarkable. They're building the nation's grid. And I'm real proud of where they're at from a safety standpoint and where we're at. And I'd like to thank them and you for participating in our conference call. We appreciate your questions and ongoing interest in Quanta Services. Thank you. This concludes our call."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Meyer Shields with KBW. Your line is open."}, {"role": "user", "content": "Thanks. Good morning. Peter, I wanted to address one aspect of growth. And you covered, I think, a ton of detail, which is helpful. But the net-to-gross ratio didn't change. And I would have thought that based on the current dynamics in the property cat market and much improved performance on a lot of casualty lines that have been heavily reinsured, that we would see AIG retaining more of its gross premium. I was hoping you could talk through that."}, {"role": "user", "content": "Meyer, this is Quentin. I think we're having a little audio technical difficulties. So if you can bear with us for just one moment, we'll be back in just one second. [Technical Issues]"}, {"role": "assistant", "content": "Can you hear me now?"}, {"role": "user", "content": "Yes. You're coming through loud and clear, Peter. Meyer, do you want to just repeat your question?"}, {"role": "assistant", "content": "I heard the questions, Quentin. Sorry, I actually had a good answer too. I just was on -- not a microphone that worked. So Meyer, back to your question is that we had -- you have to look at the portfolio composition to be able to answer the question. And Validus Re obviously had meaningful growth on gross and net during the quarter. And so, therefore, it's hard to look at the cessions year-over-year when you're having a retro program that fits the portfolio that you're underwriting."}, {"role": "assistant", "content": "We've never had a strategy that we're going to time the market with our reinsurance partners. They've always been strategic. They've always been supportive. They've always deployed the capital in support of AIG. And so we were not going to do anything, other than to try to get the appropriate terms and conditions with them and have not really changed much of our risk appetite in terms of taking that. And I think that has generated a terrific result for us on net premium written, but also on the combined ratios."}, {"role": "assistant", "content": "So I think I wouldn't look into just one quarter in terms of discussions. And as I said, we have a lot in terms of the guidance I've given on PCG, which we will still assume a lot of risk. And I guess -- let's just play it out for the full year. We're not looking to do anything materially different."}, {"role": "user", "content": "Okay. Perfect. That's helpful. And I don't know if this is even a good question. But does the changing approach to North American Personal Lines have any implications for the International Personal segment?"}, {"role": "assistant", "content": "It really doesn't, Meyer. I mean they're really distinct businesses. I mean, certainly, our Travel and Warranty have platforms that are global and that give us capabilities across the world. But as you know, Private Client Group, in particular in the U.S., is a unique asset. Again, the guidance I gave in the prepared remarks, it's one that we believe we will grow the net premium written because we don't believe we need the quota shares anymore after the excellent job the team has done in repositioning and re-underwriting that portfolio. We have substantially less cat in aggregates that we once did. So I think that's something that will be a little different in terms of -- if you look at International."}, {"role": "assistant", "content": "While International, we have a terrific Personal Insurance business. Some of it was affected by COVID. It's growing back, between Japan's Personal Insurance, our Global Accident & Health, which is predominantly International as well as our Travel and Warranty, which are rebounding in terms of growth. So I don't think that there's a lot of correlation between International and North America. But both we believe in and we're investing in, and you'll continue to see improvement. It will just be at a different pace because of the anomaly of the high net worth business."}, {"role": "user", "content": "Okay. Perfect. Thank you so much."}, {"role": "assistant", "content": "Thank you, Meyer."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Paul Newsome with Piper Sandler. Your line is open."}, {"role": "user", "content": "Good morning. I also had a couple of questions on the Personal Lines business, sort of micro and macro. My understanding, and tell me if I'm wrong, is that much of the change to the MGA is scale related. And does that mean that we should expect the expense ratio to fall over time as the MGA gain speed? And maybe just correct me if I'm wrong, does that shift around how we think about sort of the relationship between expenses and losses in that business over time, not necessarily next quarter, but over time?"}, {"role": "assistant", "content": "Paul, let me make sure I understand the question. I mean are you asking in terms of what's going to happen to the expense ratios over time as we start to reposition and grow the business?"}, {"role": "user", "content": "Yes, I am."}, {"role": "assistant", "content": "Okay, thank you. This year, as I said in my prepared remarks, we are going to see a lot more net premium written. The reason for that is as we were repositioning the business over the last two years, we bought very low excess of loss catastrophe reinsurance. We bought a substantial quota share. We ceded a significant amount of Syndicate 2019, which also had retrocession behind that in a variety of forms. And so the net premium written was not that large as you've seen. And so part of the repositioning with Stone Point and having an MGA, one is that we think there's tremendous growth opportunities that exist in the business with other capital providers and believe that how we have repositioned the business through rate increases and disciplined underwriting on the admitted side, and then also the non-admitted became an option for us to have flexibility in form and rate. And so that was very positive for us in terms of repositioning the business."}, {"role": "assistant", "content": "As we look to 2023 and beyond, we believe that the business is going to perform much better, much more profitable. And we don't need to cede off as much on the quota share. So as a result, in this particular calendar year, what you'll see is a lot of net premium written growth, improved loss ratios and both the expense ratio on an acquisition basis as well as the general operating expenses will improve. And so the overall combined ratio will improve dramatically. We're not going to be where we want to be in 2023, but believe by the time we hit 2024, those results will continue to improve."}, {"role": "user", "content": "That's great. And maybe a big picture talking about a little bit more of the big picture cat exposures. I mean it looks like -- I'm just looking at the General Insurance overall, the cat load has pretty much stabilized, but that's been a huge part of the improvement over time. Do you think we're pretty much done? And again, I'm not talking about next quarter. I'm talking about years to come, from making this portfolio of businesses have the cat load that you want. I mean is this sort of the run rate we should be thinking about in the long term?"}, {"role": "assistant", "content": "The team has done an incredible job of underwriting the Property line of business across all of AIG over multiple years. Our ability to reposition that portfolio, we talk a lot about aggregates, we talk a lot about reductions and we talked a lot about where we want to grow. I think we were in a terrific place as we enter 2023 from that hard work. And when I look at where we decided to grow, we constantly talk about where the best risk-adjusted returns available in the marketplace, where is our capacity most valued and where we value for clients."}, {"role": "assistant", "content": "So when I look at where we've grown, Validus Re certainly was a big part of that. Lexington has been hitting it out of the park on just about every aspect, whether it's top line growth, retention, new business, rate, like how they actually are more relevant in the marketplace. Working with Dave McElroy and the team, we've taken back some of the Retail Property. But then in other parts of the world, we've taken it back up. So like we've repositioned the portfolio and then have coupled that with the reinsurance to reflect the portfolio it is today."}, {"role": "assistant", "content": "So if I summarize what happened at one-one is that we saw terrific opportunities for Validus Re to grow. So we took the PMLs up there a little bit. We dramatically took the PMLs down in the Private Client Group substantially. Again, I gave the return period, that every return period from 1 in 20 to 1 in 1,000 was substantially reduced on all peril and, in particular, on wildfire. And we actually took the commercial book. Despite our growth in Lexington and Global Specialty, we took those PMLs down as well. So overall, when you look at the increased PMLs in the first quarter of Validus Re and the reductions that we had in the Commercial business and the Personal business, our overall PMLs are down year-over-year."}, {"role": "assistant", "content": "I think that's a tremendous outcome when you look at where we're growing, how we're driving risk-adjusted returns, how we couple that with reinsurance and our overall net PMLs are down at all the critical return periods. So I think all of that's been purposeful. The team has done an unbelievable job executing."}, {"role": "user", "content": "Great. Thanks. We always appreciate the help."}, {"role": "assistant", "content": "Thanks, Paul."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Michael Ward with Citi. Your line is open."}, {"role": "user", "content": "Thanks, guys. Good morning. I was hoping you could discuss how you think about your excess capital just given the macro volatility. You raised some debt, it sounds like, for some prudent liquidity and for buybacks. I guess given the share price, I guess, the buyback could have been a little bit higher. So just wondering from here, should we expect that you'll sort of hold a bit more capital against uncertainty?"}, {"role": "assistant", "content": "Thank you, and good morning. We were very disciplined in terms of the $750 million debt raise. Again, I'm going to let Sabra comment a little bit more on liquidity and capital. But when I look at all the different components of our capital strategy, I think we executed incredibly well in the first quarter. I mean our primary focus is to make sure that we have the appropriate capital levels in the insurance company subsidiaries for growth, and so it gave us tremendous opportunities at one-one as it will give us for the entire year."}, {"role": "assistant", "content": "Very focused on our leverage ratios and being at the lower end just to give us financial flexibility. And of course, I've been leading everybody every quarter saying, we're looking at the dividend and to have a 12.5% dividend increase not only helps complete some of the capital management strategy we've been talking about, but also shows the confidence that we have on our earnings and how we're managing liquidity. But I'll have Sabra comment a little bit on the parent liquidity and our approach to capital. And it is proven to be conservative at this time. Sabra?"}, {"role": "user", "content": "Thank you, Peter. Yes. And I would just comment that, first of all, we look at our capitalization, both in base and stress scenarios. I mean this is just what I would call basic risk management procedures that we do. And we're very comfortable with our balance sheet even in the current environment where, obviously, there's a lot of stress on the system with the debt ceiling and the rest."}, {"role": "user", "content": "From where we sit today, we have very strong robust capital and liquidity. And as Peter noted, the Board was comfortable raising the dividend for the first time in many, many years because of the significant turnaround of GI underwriting results over the past five years. So as we sit here today, yes, we'll continue to evaluate our financial flexibility for additional share repurchases, keeping in mind that our first goal is to maintain a strong balance sheet that can withstand turbulent times."}, {"role": "user", "content": "Very helpful. Thank you. I guess maybe on the Crop deal, I guess, I was just wondering are there -- if you could maybe point to any other sort of targeted units where you could do sort of similar value unlocking deals there as you sort of work towards margin improvement and simplification. Thanks."}, {"role": "assistant", "content": "Great. Thank you. We're always looking at the portfolio and looking at areas where we can add, where we can improve the overall structure of AIG and looking at the different parts of the world that we compete in. I think Crop is a little bit anomalous just because we really do believe it's a very good business, but you know how it works, which is driven by commodity prices and yields. And I think that having scale is really important. While the top line that we publish on a gross and net basis is significant, that's gone up 40%, 50%, if not more, over the past several years based on those components."}, {"role": "assistant", "content": "And we believe that Crop Risk Services, in order for it to achieve its ultimate potential that being part of a bigger enterprise and one that valued it like Great American, was the prudent approach for us at this time. And so that was something that was specific to that business. It was specific to how we look to strategically position AIG for the future and also making certain that with Crop Risk Services, it had a great opportunity to scale and realize this potential. So I feel like we really found a very good partner and that's really what drove the outcome for CRS."}, {"role": "user", "content": "Thanks very much."}, {"role": "assistant", "content": "Yes. Have a good day."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Alex Scott with Goldman Sachs. Your line is open."}, {"role": "user", "content": "Hi. First one I had for you is on the separation at Corebridge. I know you mentioned the base case is still secondaries, but I think you also mentioned that you were considering some alternatives. So I just wanted to see if you could extrapolate on that a bit at all. What kind of alternatives could you look towards? And how could some of those things potentially improve things for shareholders?"}, {"role": "assistant", "content": "Yes. Thanks, Alex. I'll try to expand a bit on it. Because as you can imagine, there's not a lot of more detail that I can really share beyond my prepared remarks. We do believe the secondary is the preferred path. But obviously, it's subject to market conditions as we saw in the first quarter, but we're prepared to go in the second quarter."}, {"role": "assistant", "content": "Our objective has not changed, which is for AIG to reduce its ownership stake in Corebridge over time. And so I think it's prudent, looking at a variety of different options to make sure that we're driving value for shareholders and provide a path that will recognize the value of Corebridge. Corebridge has done a terrific job since we've announced that we were going to commence upon doing an IPO, getting themselves positioned to be an independent public company and the stock was trading at a deep discount in the first quarter."}, {"role": "assistant", "content": "I mean one of the alternatives, I don't think we're going to go much beyond this, was what we announced on Laya Healthcare. And so making sure we're sticking to the core business of Corebridge. And we'll just give you updates as the weeks and over the next month progresses. But we're prepared and are very excited about hopefully getting the secondary done in the second quarter."}, {"role": "user", "content": "Got it. Follow-up I had is on corporate expenses. I think it was the first time you guys gave a bit more explicit guidance around where corporate expenses for RemainCo could shake out at that 1% to 1.5% premiums. And I just wanted to make sure I understood some of the mechanics. I mean when I think about that level, I mean, is that what I should expect in sort of Corporate GOE, overall Corporate costs? I mean how do I think about that? And then just a technical kind of question. The investment that I think you mentioned leading up to that, will that go through operating and also be reflected in Corporate?"}, {"role": "assistant", "content": "Yes. So we try to provide as much detail as we could on the expense savings. Certainly, let me start with AIG 200 because we still have more to earn through on AIG 200 savings in 2023 and 2024. So over 50% of that will be earned in mostly through the second and through fourth quarter of 2023. We have begun to separate Corebridge. But upon deconsolidation, approximately $300 million of the AIG Corporate expenses will move to Life and Retirement. So that's another variable that you need to consider."}, {"role": "assistant", "content": "We also gave guidance as we're working through our future state business model, $250 million to $350 million of parent expenses. And then the remaining will be worked through to fit the business model in terms of what we're designing for the future of AIG. We want to make sure that we have a lean model that's not synonymous with expense cutting, but it is how we're going to be in each market, how we face off with our clients and our distribution partners to maximize growth and all the opportunities that present them themselves to AIG and making sure that we have a structure that supports that."}, {"role": "assistant", "content": "Sequencing is important. We've been working on a variety of different initiatives that are substantial, and we're performing out all of them, making certain that General Insurance has the capital and support it needs to grow in this market; repositioning some of our businesses, which we covered in my prepared remarks; making sure we complete AIG 200, the operational separation; preparing to do the secondary; advancing Corebridge capital structure; and then making sure that we're working to get this future state business model implemented, but it has to be in that order. And we've given you the guidance. We've done the work. We know that's the savings that we'll achieve."}, {"role": "assistant", "content": "Some of that's going to go into the business. And so the business has to get rationalized and leaner in order to be able to absorb more expenses. But our commitment is the $500 million in addition to the guidance that we've given in the other components. And we're highly confident we'll execute on that at the right time, meaning we've got to get these other things further along. And then when we have clear line of sight in terms of separation, we'll be able to execute on the target operating model."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Brian Meredith with UBS. Your line is open."}, {"role": "user", "content": "Hey. Thanks. Peter, you gave us a lot of detail on the growth in the Commercial Lines. There's, obviously, very strong growth. I'm trying to just dumb it down a little bit here. If we look at what the growth is X, let's call it, Validus Re crop, what would have looked like? And what was the tailwind from Validus Re crop just from the Commercial Lines growth on a year-over-year basis? And the reason I'm asking is, those are obviously very big first quarter premium numbers. So I just want to make sure I'm not extrapolating that for the remainder of the year."}, {"role": "assistant", "content": "Thanks, Brian. Certainly, Validus contributed a meaningful amount to the growth. But look, we bought a lot of retro. It's the first quarter. It's not all property. So each quarter is a bit different in terms of not being able to straight line it."}, {"role": "assistant", "content": "Crop Risk Services had low single-digit growth. So that was not a contributor at all in terms of net premium written. We had very strong, as I said, growth in our Specialty business, in Lexington, in our Property, offset a little bit by Financial Lines. But I put the guidance in there because I feel very confident that we're going to have strong growth throughout the year. Even though the quarters are a little bit different, businesses like Europe is heavy one-one. And we start to have sort of different mix of business over the second, third and fourth. But I feel seeing the pipeline, looking at how you grow, I mean, the first thing I would look at is what's the client retention and how is the new business, what's happening with rate and are we growing in the businesses that we want to. And I think we are checking all the boxes here and see that those businesses have more opportunity in the future, not less. And so I think the growth that you saw in the first quarter, obviously, there's a mix of business, but I would expect to see similar growth throughout the rest of the year."}, {"role": "user", "content": "Okay. Very helpful. And then second question, just curious, some other companies are talking about how the Commercial Property markets are even further firming up in the second quarter. There's more business available. Are you seeing the same kind of dynamics or things actually continuing to improve here in the Commercial Property markets?"}, {"role": "assistant", "content": "Yes. Thanks, Brian. Yes, we are seeing that. I mean, again, it's early in the second quarter, but views on April. And as we look to the rest of the second quarter, we're seeing Property continue to firm up and getting stronger than it was in the first quarter. So that's something that we're trying to be focused on clients, making sure we're driving value and we have a lot of capital to deploy. So we expect to be trading actively in the second quarter."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Okay. Well, thank you, everybody. Sorry for the one-minute hiccup on the microphone, but greatly appreciate you dialing in, and I wish everybody a great day. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question today comes from Cecilia Furlong from Morgan Stanley. Cecilia, your line is open. Please go ahead."}, {"role": "user", "content": "Great. Good morning and thank you for taking the questions. Liam, I wanted to start with some of your comments on what you're seeing from a recovery standpoint, hospital versus ASC and office-based setting. But specific to UroLift, can you just speak to what you've seen where you are from a recovery standpoint in the hospital setting versus ASC office based. And then as you look through the balance of the year or two relative to that 8% to 9% longer-term CAGR for the business, how do you look at where you are today and tracking relative to that growth rate?"}, {"role": "assistant", "content": "Thanks for the questions, Cecilia. So I will start at the macro-level for overall procedures. Obviously delivering 13.2% growth in Q1 was ahead of our expectation, extra days that came in over 7%, we're really pleased with the first quarter when our guide at the midpoint was approximately 6%, overall procedure volume within the hospital has continued to move forward and to progress. We're seeing that in particular in the Americas and in EMEA. And what we see overseas in APAC is a strong environment and we see especially as you got through March we saw China start to pickup."}, {"role": "assistant", "content": "For UroLift specifically, we saw growth again in the hospital side of service, which is encouraging. This is now sequential quarters of growth in the hospital side of service. In the office side of service, it did show some modest improvement, but it is still challenging due to staffing issues and obviously due to patient flow. Investors familiar with Teleflex will realize that the patient flow dynamic really started to have an impact as you went into the latter half of the year, it began as you went through Q2 into Q3. So we would still anticipate an improving environment for UroLift as we go through the year. Within the quarter, UroLift came in as expected in the first quarter of this year and we feel that we're building good momentum. We already had a really strong presence at AUA and we're encouraged by the enthusiasm we see from urologists."}]}, {"messages": [{"role": "system", "content": "The next question comes from Shagun Singh from RBC. Shagun, your line is open. Please go ahead."}, {"role": "user", "content": "Great. Thank you so much for taking the question. So your 2023 revenue guidance, it implies a step down in growth for the balance of the year. So what is driving that outlook? Is it conservatism or is there anything else to call out? And how should we think about the cadence for the balance of the year? Also as we look at EPS, you held EPS despite the Q1 beat, I'm just wondering if there are any P&L offsets to consider due to which you didn't narrow the EPS range?"}, {"role": "assistant", "content": "Okay, I'll ask Tom to comment on the EPS in a moment. I'll answer your question regarding the revenue. Shagun, we were very clear in the first quarter that our plan is front-end loaded. And if I'm an investor I would want to have a front-end loaded plan from a company rather than a back-end loaded plan for a company."}, {"role": "assistant", "content": "There are a few dynamics that play into that in certain parts of our businesses. Obviously, as we go through the year, we have some tougher comparables as you get into the back half of the year. Obviously, this is a days' impact. You've got five additional days in the first quarter, you got five less days in quarter four. But we feel really good about the full year."}, {"role": "assistant", "content": "Starting off strong gives us increased confidence in our ability to deliver on our guidance as we go through the year. And also it's one quarter, it's the first quarter of the year. It's great to have a good solid start. We'd like to get another couple of quarters tucked under our belt, and then we'll see where we land. But we do feel that there is an increased momentum behind Teleflex and our momentum within the marketplace just based on the procedure dynamic, based on some of our key business units and regions performing exceptionally well."}, {"role": "assistant", "content": "Businesses like OEM, interventional access had really strong margins in the month of March. It's really good to see vascular get back to growth. As expected, we told investors that vascular will get back to growth. It's great to see its getting back to growth. The high growth portfolio had a really solid first quarter and durable core as expected outperformed in the first quarter just due to that whole procedure volume."}, {"role": "assistant", "content": "I'll ask Tom to discuss briefly the other part of your question around EPS."}, {"role": "user", "content": "Okay. Just as it relates to EPS. So keep in mind that, first of all, we didn't provide quarterly EPS guidance for the first quarter. And in the quarter, our EPS results came in very much in line with our internal expectations. So we remain very confident in the full year EPS guidance outlook and are very pleased with how the first quarter turned out. So I would say that as Liam mentioned, stay tuned and we'll continue to monitor the situation. But I feel very, very good about how the quarter played out."}]}, {"messages": [{"role": "system", "content": "The next question comes from Chris Campbell from Jefferies. Chris, your line is open. Please go ahead."}, {"role": "user", "content": "Hey, how you are doing? This is Chris on for Matt Taylor. You touched a little bit on UroLift growth. I was wondering if you could dig a little bit deeper on the high growth portfolio and some of the trends you're seeing there, including the Standard Bariatrics acquisition?"}, {"role": "assistant", "content": "Yeah, absolutely. Chris, thanks for the question. So I will tell you that Titan had a really strong start to the year, we still expect it to do $30 million, $35 million. MANTA came in online, is on track for the full year. Hemostat did really, really well in the first quarter. Came out of the blocks perhaps and intraosseous did in line and PICCs, great to See PICCs come back to growth. As we told investors, once the Tyvek situation started to get better, we would expect PICCs to return to growth and that's exactly what happened within the quarter. PICCs came back with a very solid performance and we would expect that to continue as we go through the year."}, {"role": "assistant", "content": "I would anticipate many of the parts of the high-growth portfolio to continue to accelerate as we go through the year. That would speak to UroLift, MANTA, Titan, the PICCs and also some of the intraosseous portfolios. So that would be our expectation and that's what's contemplated within our guide."}, {"role": "user", "content": "Awesome. Appreciate it. Thanks for taking the question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Mike Matson from Needham & Co. Mike, your line is open. Please go ahead."}, {"role": "user", "content": "Yeah. Good morning. Thanks for taking my questions. So I wanted to ask one on UroLift. Did you see the same degree of selling day impact there that you saw in the rest of the business? If you did that would sort of imply fairly decent decline again there kind of mid-single digits, I think? Or is there some reason that didn't benefit UroLift?"}, {"role": "assistant", "content": "Yeah. So, Mike, the days' impact for UroLift is similar to the rest of the business. So that would -- you're absolutely correct, that would show some modest decline. But, Mike, that's what we were expecting in the first quarter and it came in exactly as we would have anticipated. We did get some analysis on the days' impact. We have it through January and February -- pardon me, on the patient flow impact and we have it through January and February. And through the first two months of the quarter patient flow declined by another 3.7%."}, {"role": "assistant", "content": "As we go through the year, Mike, what we will anticipate seeing is getting over the tough comparable on patient flow. As I said a little earlier, the patient flow dynamic really started to get notably worst in 2022 as you went through the year beginning in Q2 and Q3 where we had double digit declines in patient flow. Once we get through that comparable, we would anticipate as we go through the year an improving environment for UroLift."}, {"role": "user", "content": "Okay, understand. And then just the MSA headwind. Can you just quantify that for us, again, just as a reminder, so we can make sure we incorporate that correctly into our models?"}, {"role": "assistant", "content": "Oh, yeah, the MSA headwind as you go from 2023 into 2024 is approximately $70 million, Mike. But that's lower margin revenue going away. So you lose the $70 million in revenue, but as you go down through the income statement, you will pick up approximately 100 basis points on gross margin as a result of that MSA going away. And of course, that was the whole idea of Teleflex pruning in order to grow. The respiratory assets were lower growth assets, they were lower margin assets. Now investors will see the benefit of that in 2024 as that complete low growth area has gone out of our portfolio, the MSAs gone out of our portfolio and you'll see an impact on gross margins and a chunk of that dropping through to op margins in 2024 as well."}]}, {"messages": [{"role": "system", "content": "The next question comes from Jayson Bedford from Raymond James. Jason, your line is open. Please go ahead."}, {"role": "user", "content": "Good morning. Just a couple questions here. OEM and interventional were quite strong with outsized growth. I just want to make sure there is no, kind of, one-timers in there. And then just secondly on OEM. You mentioned pretty good visibility through '23. What kind of growth are you looking at from this segment? Thanks."}, {"role": "assistant", "content": "So our OEM business had a stellar start, 34.5%, obviously you got to take the days' impact out of that. It was across the board. We were really strong on catheters. We were really strong on extrusion, sutures performed very well. The acquisition we did a couple of years ago, HPC continues to perform exceptionally well and allow us to sell some of our products through to other customers."}, {"role": "assistant", "content": "We would still expect the OEM business to be a high single, low double-digit grower, probably now leaning more to the low double digits given this really strong start to the year. They had a really nice March. Performance came in a little bit better than we were expecting. And they did have a prior-year easier comp in Q1, which helped them, but the momentum that they carried in from Q4 continued into Q1 and is performing exceptionally well. And candidly, OEM has been performing exceptionally well for the last three years. Now, this isn't just a one-quarter phenomenon, even though it's a little bit better this quarter."}, {"role": "assistant", "content": "Within interventional access, again a very strong performance over 23% growth. The return of Langston really helps, complex catheters the GuideLiner, TrapLiner, Turnpike performed well, lot of procedure volume bring us through there. As we go through the year they -- in Q3, they'll comp, the Langston returned to the markets, but notwithstanding that, this is going to be a nice solid growth driver, really good margins."}, {"role": "assistant", "content": "And as we went through in our prepared remarks, a really nice set up with new products coming through with the GuideLiner Coast, with the Wattson with the Ringer and with the Triumph now coming to market. So, the lifeblood of this business in the past has been new products and we -- some of the changes we made in our R&D processes have really started now beginning to show -- bear fruit as you heard during my prepared comments. So OEM and IA, you're right, Jayson, are the ones that kind of really drove the upside from the expected 6% to 7% within Q1."}, {"role": "user", "content": "And visibility on OEM?"}, {"role": "assistant", "content": "Visibility in OEM is excellent. Sorry. Thanks, Larry. Visibility on OEM, it's one of the businesses, it's always the longest visibility. So I see a very stable environment for that business over the next period of time."}]}, {"messages": [{"role": "system", "content": "The next question comes from Anthony Petrone from Mizuho. Anthony, your line is open. Please go ahead."}, {"role": "user", "content": "Thanks. Good morning, everyone. Maybe Liam or Tom, just high level comments on procedure volumes. Certainly we saw it in vascular and interventional. A lot of data points in the quarter that we certainly gotten to a new level for procedure volumes in particular. Not necessarily that staffing issues have improved to normal, but that workflow at hospitals has improved. So maybe just a little bit on the sustainability of procedure volumes, broadly as it relates to the other businesses in the hospital, not specifically outpatient. And then I'll have a follow-up as well. Thanks."}, {"role": "assistant", "content": "Yeah, Anthony. I mean, obviously within the quarter growing 7% coming off a Q4 at 4.3% and a full year last year adjusted at 4.3%, you can see the progress. I mean, it's more than just procedural volumes. A lot of the new products that we're talking about are building momentum within the business. Obviously having Standard Bariatrics and the Titan product is helping us. But I've been saying this for many quarters now."}, {"role": "assistant", "content": "If you're in the hospital over the last period of time and I think it's going to be sustainable for sure over a number of quarters, procedural volume is really strong. There's a lot of impetus to get procedures done. We're seeing it broadly within EMEA and within the Americas. And as I said a little earlier, with China coming back on stream, we would anticipate getting additional growth. I would have procedure volume coming through from that lockdown practice within APAC and specifically within China."}, {"role": "assistant", "content": "Regarding staffing, it's not back to where it was. It would be my observation. But it is getting better and better and better every quarter. And I think to your comment about the other sides of service, once it gets better in the hospital we will see that go through to the ASC and the office in the near term. And I think it's very encouraging what we're seeing in the hospital side of service."}, {"role": "assistant", "content": "So I see it as pretty sustainable over a multi-quarter period, Anthony. But I wouldn't want you to go away thinking it's just procedural volume. There are some things that we're doing uniquely within Teleflex that's driving a lot of our momentum as well."}, {"role": "user", "content": "That's great. And then the follow-up would be, maybe just your views here most recently on the M&A environment. We're seeing transactions come through within the space. Maybe just updated thoughts on valuations. And then just also the cost of funding. I mean, how does that change the equation now just where the debt markets are when Teleflex thinks about M&A? Thanks."}, {"role": "assistant", "content": "Yeah, Anthony. So we're very active within the markets. Our leverage is now 1.7 times. So we have the most important thing you need when you're doing M&A, we have firepower. So right now we would have the potential, not saying we're going to do this, but we would have the potential to put up to about $2 billion worth of capital to work. We are really active in all areas of M&A. Really happy with Standard Bariatrics having brought that in and I think that we are looking at tuck-ins, we're looking at scale, we're looking at late-stage technologies across the board. I'll talk a little bit about the cost of funds, but maybe I'll ask Tom to add a comment as well."}, {"role": "assistant", "content": "But I think what we're seeing is the cost of funds is improving somewhat. So the environment we think is a little bit better than it was even a number of months ago. And with regard to valuations, I think valuations are where they were over the last number of quarters. They've come back from the heady days halfway through 2021. And I think it's an environment that's very attractive to Teleflex. But Anthony, we will continue to be disciplined."}, {"role": "assistant", "content": "Investors should know that when we do announce a deal and we bring something into Teleflex, we've done our appropriate work and it's the right deal for Teleflex. Anything you want to add on the cost of funds, Tom?"}, {"role": "user", "content": "Well, I was just going to say that, yes, while certainly the cost of funds are up from where they were a couple of years ago or just a year ago, they are still at fairly reasonable levels overall, based on where we're currently looking at the cost of funds relative to where it's been over the past 10 or 20 years."}, {"role": "user", "content": "So I don't believe right now that that will be an inhibitor to our ability to identify assets. So right now our focus really is, as Liam put, on finding the right strategic fit that makes sense for us and the cost of funds will certainly be a component, but not a limiting component."}]}, {"messages": [{"role": "system", "content": "The next question comes from Craig Bijou from Bank of America. Craig, your line is open. Please go ahead."}, {"role": "user", "content": "Good morning, guys. Thanks for taking the question. Wanted to touch on margins. Obviously, you raised revenue guidance but margin guidance didn't change. So, wanted to see if you could walk through the cadence of gross margin, operating margin throughout the year."}, {"role": "user", "content": "And then given the Q1 performance in both gross margin and operating margin, it seems to be better than the prior year, which is trending ahead of your overall guidance for 2023. So why couldn't we potentially see upside to your margin guidance? What are some of the things that we should be considering with margins for the rest of the year?"}, {"role": "assistant", "content": "Yeah. Craig, thanks for the question. I think one thing, I would just like to point out is, it's May. So it's very early in the year, we're really happy with the start that we had to the year, both on revenue, on margins and on earnings."}, {"role": "assistant", "content": "My mother got rest, used to say, a good start is half the battle and we've had a good start. But I'll let Tom give you a little bit more details on some of the margin impacts if you don't mind, Tom."}, {"role": "user", "content": "Sure. So on the gross margin front, you should expect to see a pretty stable gross margin throughout the remainder of the year. It will move-up and down, but not significantly from where it is right now. On the op margin what you should expect to see is sequentially improving operating margin as we go throughout the year."}, {"role": "user", "content": "A couple of things you probably want to keep in mind is that as you look at the kind of comparison to prior year or for the gross margin, we had a more favorable comp in the first quarter than we're going to have for the balance of the year. So when looking at year-over-year comparisons that certainly comes into play."}, {"role": "user", "content": "We also are expecting foreign exchange headwinds on gross margin as we go throughout the year. In the first quarter, we actually had a nice benefit, but if you recall last year the dollar moved significantly beginning in the second and third quarters and as a result that's going to prove to have a more difficult comparison."}, {"role": "user", "content": "So those are some of the factors I think about. But again, gross margin is pretty stable throughout the year and operating margin show sequential improvement."}]}, {"messages": [{"role": "system", "content": "The next question comes from George Sellers from Stephens. George, your line is open. Please go ahead."}, {"role": "user", "content": "Hey. Good morning. Congrats on the quarter and thanks for taking the question. I guess maybe a smaller question on the Titan Stapler. I know it's still a relatively small piece of the business, but with the GORE buttress material, what are some of the implications on the gross margin for that device? And also for the manufacturing of that, is there an opportunity to over time bring that in-house? Thanks for the question."}, {"role": "assistant", "content": "Yeah, George, thank you very much. So first of all, I'd say, we're really pleased with the performance of Titan in the first quarter. It drove a lot of the positivity on the Surgical business and saw our Surgical business performed really, really well as a result of coming in at 14% growth."}, {"role": "assistant", "content": "The buttress material will have no impact on the margin expectations for this business. We still expect this business as we go through '24 to become accretive to Teleflex's gross margin and then to really leverage thereafter. Our expectation is to continue to have this product manufactured in the -- as we have right now and we have no plans to make any changes to that at this stage."}, {"role": "assistant", "content": "Obviously, it's ramping pretty rapidly. We don't want to disrupt this and the third-party that we're working with is incredibly reliable and really doing a solid job. So that will continue and we will continue to ramp this product through this year and we still expect it to do $30 million, $35 million in revenue this year and that volume will help us obviously leverage the gross margin as we go into 2024, George. And thanks for the question."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And the next question comes from Mike Polark from Wolfe Research. Mike, your line is open. Please go ahead."}, {"role": "user", "content": "Hey. Good morning. Thank you. Maybe follow-up there on Standard Bariatrics and if you said it, I missed it. But can you quantify revenue contribution in the quarter? I know what the full year outlook is for 2023. But I just want to understand where 1Q started so we can have a better sense for the ramp through the rest of the year."}, {"role": "assistant", "content": "Yeah, Mike, we don't break it out specifically in revenue terms. Obviously, we are confident on the $30 million to $35 million for the product. And I will tell you, as I said a little earlier, it is one of those products that will continue to ramp as you go through the year. But again, we had a really nice start in quarter one. So therefore, it reinforces our confidence on the $30 million, $35 million for the full year and the product is performing very well."}, {"role": "assistant", "content": "We actually showed it at SAGES, and we had a lot of really, really positive feedback from the product at SAGES. It is addressing a lot of the unmet needs the bariatric surgeons has and the buttress that we're adding to it just overcomes one of those hurdles."}, {"role": "assistant", "content": "Some surgeons just like to use buttress when they're ceiling. And it's probably not as much needed with the Titan as it is with the other technologies. But if that's the process they want to use then we're going to support them in doing that. So I think that it all bodes well for the Titan over a multi-year period."}, {"role": "user", "content": "Thank you. If I can follow-up, my other topic was Tyvek. If memory serves, I thought maybe the second half of the year is when that situation might get a little bit better for the industry. It sounds like it's improving in real-time. So what's driving that? Are you just seeing kind of more supply come online? And how -- was it kind of -- how does it trended? And are you back to normal there or pretty darn close? Any kind of framework for where we are. And then the related question is, can you just remind us the revenue, the segment lines that are most impact -- have been most impacted by the situation and so the comps are -- where the comps are easiest as that -- as supply improves? Thank you."}, {"role": "assistant", "content": "Yeah, I'll use your expression, it's pretty darn close to getting back to normal. It's not quite back to normal yet, Mike, but it is moving positively in the right direction and it is better than we had anticipated in the first quarter. You are correct. Once we get to the back half of the year new supply comes on from the provider of Tyvek and that will eliminate the issue."}, {"role": "assistant", "content": "The two lines that are impacted, it's really in our vascular business. To a lesser extent our CVCs because we prioritize the supply we had to keep our market share position in CVCs. What it has done it has prevented us from converting PICC accounts. And as you heard in my prepared comments, it was nice to see PICCs getting back to double-digit growth in the quarter as we were able to go back out and start converting those accounts."}, {"role": "assistant", "content": "Just to remind investors, our PICC portfolio is unique in so-far is that it has antimicrobial and anti-thrombogenic coating. So therefore, that's why we're getting broad adoption for that portfolio globally. And in particular in the United States where we're not the market leader, we see a great opportunity to continue to take share."}]}, {"messages": [{"role": "system", "content": "The next question comes from Richard Newitter from Truist. Richard, your line is open. Please go ahead."}, {"role": "user", "content": "Hi. Thanks for taking the question. Just one from me. On UroLift, I guess, the comments about still some lag on patient flow. I guess even some of the other sub-categories in med-tech that improve but are lagging things like elective procedures like knees and hips, even though it's kind of -- you saw some of the patients coming back into the channel for doctor visits and things of that sort. I'm just curious, is there anything specific about UroLift that contrast to some of those other procedures, not UroLift, sorry, but the doctor visit and patient flow?"}, {"role": "user", "content": "Just trying to get a sense for why maybe certain urological procedures like this would be still lagging to such an extent versus the rest of the kind of the med-tech environment? Thanks."}, {"role": "assistant", "content": "Well, there's a couple of things I'd point out, Rich. First of all, when you're doing hips and knees, you're not doing them to urology patients. So it is unique to the urology specialty. There's a few things with urologists. The average age of urologists within the United States is 55. So it's an aging demographic for the delivery of care. And we're probably more exposed to the office side of service, than any of the hips and knees guys or any other -- or even any of our peers in the urology call point. As investors familiar with Teleflex will know about 30% of our UroLift revenue is generated within the office."}, {"role": "assistant", "content": "And I can tell you that the data that we have will tell us that patient flow declined 3.7% through January and February. Now the good news, Rich, is that once we get into the latter half of the year and we progress the toughest comp on patient flow will be behind us as we go through the year. So we do anticipate an improving environment from that perspective."}, {"role": "assistant", "content": "And it was almost palpable. The enthusiasm for UroLift with urologists at AUA, I was there in Chicago in late April and compared to a year ago there was way more attendees. It really felt good, it was buoyant. We had a lot of education seminars with a lot of podium presence at that. And it was almost back to the good old days of UroLift I would say at that conference. So we do anticipate somewhat of a balance from that and we do anticipate the back half of the year being better."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] As we have no further questions, I'll hand the call back to Lawrence Keusch for any concluding remarks."}, {"role": "user", "content": "Thank you, Adam and thank you to everyone that joined us on the call today. This concludes the Teleflex Incorporated first quarter 2023 earnings conference call."}]}, {"messages": [{"role": "system", "content": "Thank you. Our first question comes from Neil Mehta from Goldman Sachs. Neil, please go ahead."}, {"role": "user", "content": "Yeah, thank you so much and I appreciate the time. Rick, you alluded in your comments that you might be tracking towards the lower end of the guide, as it relates to capex and cost. Can you talk about that and is that a function of -- any early signs cost -- service cost deflation as well?"}, {"role": "assistant", "content": "Well, Neal. I think, is -- we're watching a lot of things. We have seen a softening in the market, but. I think as we've laid out in our guidance, it's really no change. We'll see how it plays out through the year. But as I alluded to and in Clay had in his prepared remarks, we are seeing some softening and we'll just see on -- how that plays out, but [Indecipherable] right now no change."}, {"role": "user", "content": "And then the follow-up is just around the Q2 guide, obviously strong Q1 results. Q2 oil guide was a little bit below consensus is -- is that just timing of completion and inactivity and just anything you can say around the cadence of volumes over the course of the year?"}, {"role": "assistant", "content": "Yeah, it is strictly time. I'll have Clay weigh in also more color, Neil."}, {"role": "assistant", "content": "Yeah, just think of our band as we try and pursue flat production somewhere in that 320 millions barrels per day, maybe 330 million barrels per day -- excuse me 320 million barrels per day to 330 million barrels per day that band and there, and I think the second quarter is going to be on the low-end, as we expect that third quarter to be on the high-end of that range. But no, our original guide, that's still very much intact and feel-good about it. As you start really dialing-in. I mean the plus or minus 1% of our numbers. It's definitely affected by timing, you bring a big pad on early in the quarter or later in the quarter, we've got some other things going on, were a little front-end loaded on the capital with that fourth frac crew. So you'll see that kind of peel off that affects kind of the very tail-end of the year, but we'll see the biggest quarter of the year in the third quarter."}, {"role": "user", "content": "Makes a lot of sense. Thanks guys."}, {"role": "assistant", "content": "Thanks, Neil."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Arun Jayaram from JP Morgan, Arun, please go ahead."}, {"role": "user", "content": "Yeah. Good morning. Clay, maybe for you. I was wondering if you could provide some thoughts on the integration of the Rimrock and Validus assets. We've seen production -- maybe it down a little bit since on a premier former basis versus when you announced the deals, I was wondering if you could talk about how those assets are performing relative to your expectations?"}, {"role": "assistant", "content": "Sure, Arun. No. Good question. I appreciate it and -- look our P&L, just a little bit because we didn't Rimrock and Validus kind of back-to-back. I would say from an integration standpoint, they both gone exceptionally well, we certainly learned some things on Rimrock, we immediately applied to Validus and always looking to continue to get better. Specifically on the Validus side, we're certainly learning things alluded to in some of my remarks, additional upside that we didn't even contemplate in that acquisition. On the Rimrock side, the Williston, really the Northern U.S. has been plagued by some pretty cold-weather that has not -- we've definitely been affected by that. And then, digging out from everyone's reason for those workover rigs, kind of all region for the same equipment was a little bit of a backlog associated with that. And then, honestly, we've seen a little bit of more offset frac activity that we shut wells in for, so that impacts things, but one of the things we're learning about the late innings in Williston, some of these wells that have kind of complicated depletion metrics tool. So you have might have -- maybe had a cross-cut well that has a lower -- little bit more depletion and part of that lateral that's causing some interesting things around how do we clean these wells out, how do we provide the right artificial lift, We've made some really good strides there. Really excited about the latest group of wells that are coming online, but. I think all three of those factors have caused us to probably underperformed a little bit in the second quarter relative to expectations, first and second quarter. But I see that already in the second quarter things are starting to pickup. And I'm really excited about that asset and it to be such a critical piece of Devon's portfolio."}, {"role": "user", "content": "Great. And my follow-up, Clay, sounds like the team is working on some R&D efforts to unlock inventories, so I was wondering during -- if you can maybe detail what exactly you're testing and perhaps some opportunities to grow your inventory base?"}, {"role": "assistant", "content": "Yeah, there's a lot of going around the company and a lot of stuff that -- it's pretty early innings, we're not talking a whole lot just yet. But one that we are talking about is in South Texas, the ZGABAY project, in particular, Department of Energy funded, something that we've shared pretty broadly with the industry and a number of forums and the real win so far have been from completion design refracking and then the earliest knowledge we're getting around some EORs. Some enhanced oil recovery. So that's all very exciting until you already put some of that information to work the refracking activity is very encouraging. Some of that is pretty unique to the Eagle Ford, talked about some of the reservoir characteristics there. It has an ability to stay really, the original completion tends to say very near wellbore. And so it gives you that opportunity to surther[Phonetic] in a few more wells or other basins that just really doesn't work very well. And then the [Indecipherable] figuring out the techniques, how to go about this, how to prosecute this and we've seen tremendous upside. So all of that is great inventory and most of it, to be honest is upside from what we underwrote with Validus acquisition."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you. Our next question comes from Neal Dingmann from Truist, Neal, please go ahead."}, {"role": "user", "content": "Good morning, guys. Thanks for the time. My first question is just on shareholder returns, specifically. Rick, you were one of the guys just are there certain levels where you continue to materially lean into the buybacks based under assume sort of mid cycle prices and then if you continue to have some nice divestitures, like you had with those continue to go to incremental variable depths."}, {"role": "user", "content": "Yeah, Neal this is Jeff. Yeah, thanks for the question. What you're going to see from us is more of the same on the model and you described it well, which was certainly to the extent where we see opportunities to buy-back our shares, when we see that that valuation dislocate if you will, from our view of the intrinsic value, which certainly happened in the first quarter, post our February call. We saw the trade -- the stock trade on a relative basis to the peers in a negative way and we jumped in with both feet and bought back shares in a big way. We think that's the beauty and and the balance of our -- the flexibility of our model, which is, it provides us the cash and the wherewithal to go take advantage of those opportunities. So moving forward, that's absolutely our expectation, if we see the the stock trade-off relative to the Group or dislocate from our view of intrinsic value over the longer-term, you should expect for us to lean-in on the share repurchase program. All the while, our first priority is to sustain and grow the fixed dividend which we plan to continue to do and then further in the variable dividend, up to 50% on of our free cash flow in any given quarter is going to go to the variable dividend. So that flexibility and balance that we have in the model, we think has served us really well over the last three years, and you should expect that to continue going-forward."}, {"role": "user", "content": "Yeah. That's great. You are stepping into that. And then secondly, my question probably Clay for you or Rick. Just on the Delaware infrastructure, Rick. It sounds like you were confident you all have the needed infrastructure now in-place to handle the growth, the remainder of the year. I'm just wondering if you all can talk about now, maybe what the build-outs look like or what type of growth that infrastructure now can handle in the coming quarters. it looks like it sounds like it's where you want it to be?"}, {"role": "assistant", "content": "Yes, thanks. so. I mean is, I mentioned Clay and drove home the point -- we're really confident in our infrastructure. Actually, the recovery and downtime and more importantly, we are staying ahead of it. We have a great team that on the build-out is working really well. And then we have third-party providers that we have great relationships with and we have a tenancy to try to work a year and two and three years down the road. And when you've got the inventory, we do, the execution you do, you can sit out with people and plan that out because that's what that's Permian is going to continue to need year, after year, after year is continued infrastructure growth and I'd say it's going really well."}, {"role": "user", "content": "No. I appreciate that. Thank you, Rick. Thanks, Jeff."}, {"role": "assistant", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from John Freeman from Raymond James. John, please go ahead."}, {"role": "user", "content": "Good morning. Nice Slide. Looking at the the successful growth of three mile -- three milers you did on the six Wolfcamp wells. Do you have a sense of how much of your of your acreage, what percent maybe of those undeveloped locations would be candidates for those three mile developments in the Delaware?"}, {"role": "assistant", "content": "John i'm winging a little bit. I think it's about 20%. This year that we're going to be -- that we're going to be drilling the three mile laterals, it's always a little bit in flux. We're always trying to trade the opportunities, I can tell you our -- we feel very confident in the returns of the two mile laterals that's kind of our go to with most of our acreage is set-up. I think it's just really where we see those opportunities. The turn of one mile into a two or turn a few ones into a three, those turn into really phenomenal economics. So what I would say is operationally, we're very comfortable drilling three mile laterals today. I think we've got that recipe down. So operationally, it's not a challenge, it's strictly just looking at the land and where is it set up for twos and where does it set up for threes."}, {"role": "user", "content": "Great. And then just follow-up questions to make sure that in the filings, I'm kind of interpreting this correctly. So the the contingency payments the remaining $130 million you've got from the Barnett at the current strip, should I assume you can't save the remaining $65 million in 1Q 24, the other $65 million 1Q 25 at the current strip."}, {"role": "assistant", "content": "Yeah, John, you're exactly right. As it relates to the contingency payments it varies obviously by commodity price, both oil and gas and at a $65 oil price, which above a $65 oil price, where we are today, we would expect to receive around $20 million and then from a gas price standpoint it's tiered from $275 all the way up to $350 and the variability there is anywhere from $20 million to $45 million. So where the current strip sits today. I haven't looked at, you're probably somewhere in the mid-threes. I would guess. So be another $25 million or $35 million, that you could expect to receive on-top of that oil payment."}, {"role": "user", "content": "That's great, thanks a lot guys. Appreciate it."}, {"role": "assistant", "content": "Thank you, John."}, {"role": "assistant", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from David Deckelbaum from Cowen. David, please go ahead."}, {"role": "user", "content": "Thanks for taking my questions today guys. I just wanted to follow-up on some of the thoughts around the buybacks in the first quarter and using the cash balance opportunistically. Does that in any way sort of informed your view on how you're looking at further consolidation this year? Obviously, Devon was a pretty active participant last year, but are the opportunities that you're seeing in the A&D market is just sort of less robust than what you would have seen last year relative to the on-value of your own stock."}, {"role": "assistant", "content": "David, good question. I think for us, when we did the two transactions, last year we talked about the metrics that we bought those packages add and you've heard Clay, talk about some of the, especially -- particularly down in the Eagle Ford, some additional upside that we've seen. We feel very,very good about those. I think the market is has pulled back up to expectations are little higher. some of the packages in the market today. I think we -- we'll probably take -- we'll look at them, but once again, we have a high bar and I don't want [Indecipherable] see us being that active in some of the -- some of the packages that are out in the market today. So was see all plays out. But once again, a takeaway is high bar and if it fits us makes sense for our strategy, then some, we may consider."}, {"role": "user", "content": "I appreciate that and then. Clay if. I could just ask a little bit more ZGABAY. Just more around the scope of the project, how long the DOE grant last four in this partnership and then. In terms of EOR. Are you looking at gas re-injection or is it all CO2, is it mostly refracs. I guess just the total scope and duration and how this might be applied to some of your other active basins?"}, {"role": "assistant", "content": "Yeah, excellent question. Love talking about it. This was a project and. I think it was originally conceived in West Texas that project and it have fallen through and through some great work of our team here being very heads-up that, \"so hey, we've got an opportunity where we can do some of those same things in the Eagle Ford, we've got the right set-out the geology, operations\" and it was taken-up. So we did a lot of very interesting work. We took a horizontal core to really understand that fracture network, I talked about these fractures healing up and what that means to that stimulated rock volume and ultimately our depletion zone that we're seeing on any individual wellbore. So we were able to see where do those fractures kind of breakthrough, where do we actually have proppant and therefore where do we think we're actually seeing some of the depletion. We've used that information in our stimulation design, knowing what the original recipe was kind of how do we altered of that and then as we go back into these refracs, as you can imagine, it's a mechanical complicated activity, you have to go in and run liner and then ultimately you're trying to stimulate new rock. And so, with this information we've been able to leverage that science and go in and really we believe stimulate new and incremental rock and really up the reserves, the recoveries from these original wellbores. That's all been not just scientifically exciting, in practice seeing the returns and seeing that value come through."}, {"role": "assistant", "content": "When we look at EOR, this project is really about. Injecting natural gas and a huff and puff kind of model, that's still in early project. Understanding how that works. We have a lot of monitoring subsurface from gauges to fiber-optics and really watching for, what are we influencing from that injection and how ultimately we are recovering more rock. So there's a lot of good information out there. The team has done a phenomenal job at presenting a very various technical conferences. So [Indecipherable], there's lots of great intel out there to dig further into."}, {"role": "user", "content": "Thanks, Clay. Thanks for the time guys."}, {"role": "assistant", "content": "Thank you, David."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from Matthew Portillo from TPH. Matthew, please go ahead."}, {"role": "user", "content": "Good morning all."}, {"role": "user", "content": "[Indecipherable]"}, {"role": "user", "content": "To start out, as we look across the portfolio, it's nice-to-have a diversified asset. Curious as you guys look at the returns by basin and with the volatility in the commodity strip. How you're thinking about capital allocation to some of the basins like the Anadarko in particular given low natural gas and NGL prices as well as some downside volatility to crude oil, as we progressed through the year? Hey, Matt, this is Clay, great question. In the last 12 months, we've kind of tested every flavor of commodity price high oil price, low oil price, high relative gas price. [Indecipherable] to one there was 80 and 8 at one point. And so we've run the sophisticated model that we have in a number of scenarios is really looking for wind is our portfolio really command that we shift the capital allocation materially. And what was interesting is, in all of those scenarios that we ran, even some of the gas levered opportunities. It's still said, keep pushing towards oil. Keep pushing towards the Permian, the Delaware Basin. We're still always commanding Capital first. As we've matured our understanding of places like the Eagle Ford, certainly it's risen up and with the acquisition acquisition of Validus it's commanding more capital as I mentioned earlier. As we stress test the gas side, certainly, things like the gas prone areas of the Anadarko become more stressed. But remember, the preponderance of our investment is on the Dow JV, which is the gas condensate areas. So you get a high significant amount of condensate in those wells. And then also that carry really helps us support pretty phenomenal economics even in this commodity price environment. Now, look, we're always watching, were always rerunning this, this isn't a single once a year scenario. This is a monthly exercise, we're always stress-testing and you can bet, we're making changes on the margins. We will pull a few wells out-of-the -- out-of-the system for this year, replace a few as opportunities come our way, maybe it's a trade that just came to us or a new opportunity that the team has discovered we're always evolving on the margins. But what I can tell you is, our program is very consistent and very robust certainly even in today's commodity price and service costs because we believe the service costs are still decoupled from today's commodity price. Great. may be Clay, maybe as a follow-up for one of the longer-dated resource basins in your portfolio. Just curious your updated thoughts on the Powder. I know it's not overly active this year, but you will continue to progress the Niobrara in particular kind of curious how you've seen results so far and how maybe the costs or staffing up there as well?"}, {"role": "assistant", "content": "Matt, great question, love talking about the Powder, because it is kind of behind the scenes. It is something that I'm really-really proud of the work that the team has done. On the front-end of the challenge is, de-risking their productivity, making sure that when we drill a well, wherever we are in the basin that we have a good understanding of what it can deliver. The second order is, how do we get the cost structure down so that we generate the right competitive return. I tell you on the former, we've made tremendous progress and that's really exciting to me that's the -- that's the -- if you don't have good rock you can't do anything about that. We've got good rock, we've been able to improve the productivity, proved that up-time and time again on the well cost to me that surface considerations that we can always improve on, have a tremendous confidence in the team to be able to drive those costs down in time. And so that is something we're now working on to ultimately get to a place of more competitive and sustainable returns. But you know we got to a ton of inventory there. It is very oil-prone and that will certainly have its day-in the sun in the coming years. So really great progress from the team there."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks sir."}, {"role": "user", "content": "Thank you. Our next question comes from Scott Hanold from RBC. Scott. Please go ahead."}, {"role": "user", "content": "Yeah, thanks. Hey, Jeff. I was just kind of curious, when you step-back and look at the balance sheet. I mean, you've got $800 million and $900 million of cash. I know you talked about the debt coming, due you want to take-down later this year. But you know it, as you start thinking about the quantum of incremental buybacks do you all just really focus on what is left and free cash flow or is there some optionality to utilize the cash balance, and any color on kind of working cap -- cash needs for working capital too would be helpful?"}, {"role": "user", "content": "Yeah, you bet. Scott, it's a good question and one we've been thinking a lot about. If you think about our cash balance, what you've heard me say historically of somewhere between $500 million to $1 billion cash balance on the balance sheet is kind of what we try to optimize for and work towards. You've seen us kind of hover around that level, certainly over the last several quarters."}, {"role": "user", "content": "Moving forward, we're going to stay focused on the financial model that we've been pursuing for the last three years with the 50% going into the variable and then 50% accruing back to the balance sheet, we feel really comfortable with our leverage position, where it is today. Obviously, we've got a target out there of kind of one times net-debt to EBITDA were significantly below that. Currently, we certainly would flex up and back-and-forth depending on the market conditions and that again is what we think is the real beauty of our model, which it provides us the flexibility as we did this last quarter to utilize free cash flow generated, whether it's the current quarter or previous quarters and then push that back into a buyback program. right. So obviously over this last quarter, we chose to pull-down the cash balance, that's certainly something we might do in the future as well depending on the market conditions that we see and really it's the real benefit of the flexibility of the model that we've rolled-out, which allows us along with the strength of our balance sheet to really step-in and take advantage of opportunities, whether it be acquisitions that we saw obviously last year or the stock buyback opportunity that we saw here in the first quarter."}, {"role": "user", "content": "Thanks. That's good answer. And maybe this one is for Clay, when you think about the tighter spacing in the Eagle Ford. I know we've -- the industry has gone from tightening and widening and tightening and whether it's the Permian, the Eagle Ford before and it seems like there's always and aptitude to eventually go back to wider spacing in oil price has come down, but can you kind of speak to the resiliency this tighter spacing. If we do see lower oil prices, do you guys think you'll stick with it, or is that just work, given the current context around oil prices in the strip."}, {"role": "assistant", "content": "Yeah, it's an excellent point, because it -- we certainly as an industry have lived all of those spectrums and myself included so. While we generally believe up-spacing is the right move in most basins. We would rather have more robust returns and be able to withstand a fall in commodity price. I think that is generally served us better time-and-time again. As we look at the Eagle Ford and certainly, the maturity of that basin, we're really looking at how do you get those remaining resources most effectively. depleted. And so the work that we did at ZGABAY is part of the -- a significant part of the highlight when you're really kind of sampling that rock really understanding how that wellbore drainage is really happening downhole that gives you great insight into not just blindly downspacing and hoping for the best or statistically hoping for the best. This gives you a very good kind of tangible evidence of what we're doing there. We're going to be real cautious about it. Certainly we have -- we've been very-very pleased with the results so far, but we will continue to watch service costs continue to watch commodity price and always reserve the right to get smarter."}, {"role": "user", "content": "Fair enough. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Doug Leggate from Bank of America, Doug, please go ahead."}, {"role": "user", "content": "Well, thanks, good morning everyone. Thanks for taking my questions. Rick."}, {"role": "assistant", "content": "Hey Doug."}, {"role": "user", "content": "Good morning, it's not so long ago that Devon, was not only the best performing stock in the sector over an extended period. But, the best-performing stock in the S&P 500. I think it was most of 2021, if I recollect. I'm wondering, given that one could argue that the market has therefore recognized the value of what the combined company is and benchmark in the free cash flow capacity with some additional tax headwinds perhaps going ahead. I'm wondering how you would characterize your value proposition today, what do you think you need to do to breakout beyond just the call in the commodity?"}, {"role": "assistant", "content": "Yeah, I think, Doug, it's just -- it's incumbent upon this management team, we seem to execute, we seem to stay confident in our our plan or strategy, we got -- we got great assets and I do think we've seen some volatility, speak to the outperformance that we saw a couple of years ago, that's real very well-documented. And. So when you -- when you have a period of softness or what appears to be softness in execution, whether it's the weather or not, not whether but weather or not we saw, we saw a pullback and because it impacted our numbers and. I think in my mind, maybe a little bit too much so. And but at the end of the day, that sets us up for the share repurchase programs that we just think that our shares are under way too much pressure that provides a great opportunity for us and ultimately for shareholders, So that's how we're addressing it. Bottom-line is, we have got as I mentioned the assets, we've got the inventory. We're doing some great things. I think person examples from play around. So on the technological advancements that we're making. I think in some cases leading the industry and that's going to continue as part of our genetic makeup. And so. I think we just have to stay afar and stay confident with our plan and keep executing. I think things will work-out for us."}, {"role": "user", "content": "Okay. I know it's a tricky one to answer and. I appreciate your perspective. My follow-up is on the 0% to 5% growth. So the target -- not target necessarily by outcome that you laid out at the time of the merger. Obviously, the incremental bolt-ons have got you there this year. What about the go-forward and I'm thinking, what would the capital budget have to look like to support that and do you think 12 years of inventory is enough to support that kind of go forward visibility."}, {"role": "assistant", "content": "Yeah, well, first-off, when we talk about the 12 years of inventory that's -- make sure you we're honest with each other and we realize that's what's, that's not contemplate any the additional inventory that we see out there that will move over into the the near-term bucket. And so the way I look at it is we have cultured a 20-year inventory when you start looking across our entire asset-base. Some of the ideas that we have, some of the assessment work that we're doing. I think, you and I've talked about that before of making sure we continue to work for the future. So. I think we've got an extended runway on inventory, so. The 5% -- 0% to 5%, that's what we laid out at the time of the merger we stuck. We stuck to that gun, the way -- the way we've looked at it is really there has not been a huge call on getting up that 5% growth. Our focus has been, let's say -- let's continue to to implement on a per share basis. And so when you start looking at some of the transactions that we did, the accretion there, you start looking at the buybacks. I think that's that's what we hear continually from our largest shareholders, Doug is let's focus on those per share growth metrics. This continue to build this thing for the long-haul."}, {"role": "user", "content": "I like the per share comment. Thanks so much."}, {"role": "assistant", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Paul Cheng from Scotia Bank. Paul, please go ahead."}, {"role": "user", "content": "Hi, good morning, everyone. I have to apologize first because we wanted to go back into the variable dividend buy Back. Rick, you just mentioned that we should focus on the per share Matrix from their Pound, we would buy back a more people[Phonetic] way to return cash to the shareholders, then variable dividend and also then after more than two years. Have we look at dividend, do you believe that stock or that the Company has been rewarded for the variable dividend given that your use is so high already. That's the first question."}, {"role": "user", "content": "Yeah, Paul, this is -- go head Rick,"}, {"role": "assistant", "content": "Go ahead Jeff and I'll follow-up."}, {"role": "user", "content": "Yeah. I was just going to say again, Paul. And we've talked about this a lot with you in the past. With us, it's all the above. So we've delivered on a sustainable fixed dividend which we're growing over-time. We've got the framework, which allows for the variable dividend up to 50% and then stock buybacks on-top of that. We're not biased to one or the other, maybe over the long-term, we think that balanced approach makes the most sense. Certainly, as Rick mentioned earlier, to the extent that we see an opportunity to jump-in and buy-back our shares, when we see a dislocation versus intrinsic value, we're going to do that and that has the opportunity to create per share growth for us over-time, but at the end-of-the day, it's about total shareholder return. Right. It's not just -- it's not just the dividend, it's not just the buyback. It's not just the stock price. It's that total shareholder return and we think over the longer-term, this model and this balanced approach will deliver the best results and I'll point out over the last two years we're the number one company as it relates to total shareholder return. And that includes the last several quarters, so we feel pretty confident in our game plan. We're going to keep our head-down and execute and deliver on that game plan, and we think when we -- we will wake-up many-many many years from now, we will have delivered a great result for shareholders."}, {"role": "user", "content": "Okay. Second question, yes. Probably for Clay. I think you mentioned -- you answered the earlier question saying that 20% Delaware basin well to be drilled this year will be three miles. If we look at your risked inventory of 45 injured, do you have a rough estimate what percentage of that number, is on the three mines? Thank you."}, {"role": "assistant", "content": "Hey Paul, I'm going to fuzz you that number on the 20% reminder that's a rough number for this year and I'm probably a little bit rougher but. I would say directionally is probably about the same, maybe a little bit lighter to that number as I think forward on the inventory. And remember, a lot of this happens kind of evolves in our land shop as they make trades and kind of extend that runway a little bit. So it's a pretty healthy number, our standard is two miles. Again, the the returns on two mile laterals in the Delaware Basin, are phenomenal and so we don't need that three mile to make the numbers work. But when it comes our way, it sure is a nice thing, and once again, feel very confident in our operational ability to execute on three mile laterals that's become fairly standard fair for the the team in the Delaware."}, {"role": "user", "content": "And can you just, curious that the opportunity of trade-up in and make the well from say 2 miles to three miles or even one mile to three mile, just that focusing primarily in Delaware or that you not the base and then you also see the opportunity there."}, {"role": "assistant", "content": "Yeah, we, we've drilled three mile wells in multiple basins. and certainly the Niobrara and the Powder is kind of built on a three mile concept. We've drilled at least 20 years, 30 wells, three mile wells in the Williston. So this is something we feel very confident in our ability to execute on. And again, most of our performance, most of our wells, we execute on are actually about two mile laterals in general. And that's become kind of our standard, but where the opportunity presents, we feel very comfortable in executing three mile laterals."}, {"role": "assistant", "content": "Right. Thank you."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, Paul."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Roger Read from Wells Fargo. Roger, please go ahead."}, {"role": "user", "content": "Yeah, thanks, good morning. Let's come back"}, {"role": "assistant", "content": "Roger."}, {"role": "user", "content": "To couple, maybe the more operational questions, your comments earlier about what you're seeing inflation maybe get an idea of how some of the let's call it disinflation making at this point would flow through where you're seeing it, where we should expect to see maybe the bigger benefits."}, {"role": "assistant", "content": "Yeah, Roger this Clay over the last couple of -- excuse me, the last couple of earnings calls, I've talked more about the tone of the conversation and I think that's your best, in my view, best leading indicator where prices have gone and it's gone from a very aggressive you will take our prices or you're not going to get our equipment circa two or three quarter ago to something a little more along the lines of, hey, we love you guys your favorite customer. We really want to work with you, but we're not competing on price. I would say state-of-the art today is lots of inbound phone calls, lots of equipment available their really-really trying to hang on to pricing, but some areas are starting to slip. And so we're starting to see some deflation in a couple of categories. The headline, of course, is pipe, we're seeing that kind of materially start to move through in the second half of the year."}, {"role": "assistant", "content": "And then we're starting to see some smaller categories as well starting to come down. Again, I'll remind you for us, in particular, we took our fourth quarter numbers put about a single-digit inflation, on top of that, and that's kind of how we plan for '23, I think we're still kind of in-line with that. We still have contracts, two and three year old contracts that are maturing this year that will be going up to offset some of the wins that we're seeing in the deflationary category. I would say state-of-the art today things have leveled out. We're seeing a few wins in a couple of categories. But the availability is a material change and our ability to-high grade equipment, high-grade crews has really continue to translate into better operations, in fact moving the wells quicker through the drilling and completion space."}, {"role": "user", "content": "Okay, so we should expect not just the decline in cost than you would expect, also an improvement in productivity as you high-grade across the board."}, {"role": "assistant", "content": "Yeah, we're definitely seeing some of that -- we see some of that in the second quarter already activity kind of being pulled forward and these are just kind of a few days at a time, but that's one of the things we're seeing from a capital standpoint in the second quarter."}, {"role": "user", "content": "Okay, great. And then my follow-up question is on the refrac wells. I know it's early days in this, but. I was just curious. Is there a type of well or vintage of well that works fast and then going back to a question earlier about kind of where you should put your money in terms of the returns. I'm guessing oil over gas. But just as a broad comment, how does the return on our refrac compared to the returns on new drilling, your capital program has currently laid out?"}, {"role": "assistant", "content": "Yeah. I think you're in the right categories. When you're thinking about what is the ideal candidate. Ideally really good rock that was really under stimulated maybe a and ancient design. That had a larger final string like a 5.5 inch casing string that you can run inside of and seal that back-off and kind of re-perforate and re-stimulate that's kind of our ideal scenario. But we've tested beyond that. We've said, what about a more modern completion. What about, and not the most ideal rock, but kind of the medium rock and we've seen favorable results there as you can imagine it stacks up like any portfolio, you have some of your best candidates that compete head-to-head with new wells and then you have lots of kind of middle grade contact -- middle grade opportunities and those are the ones we're continuing to evaluate, there's little tweak on the stimulation design that we can push those into the very best category like some of those ones we've seen upfront, so still relatively early days, but very pleased with the progress. And again, this is -- the beautiful thing is the land is already paid-for the surface facilities already paid-for, the infrastructure is already in-place and that can really help these returns from a an immediacy and a capital efficiency standpoint."}, {"role": "user", "content": "Appreciate it. Thank you."}, {"role": "assistant", "content": "Thanks, Roger."}, {"role": "user", "content": "Well, it looks like we're at the end of our time slot for today. We appreciate everyone's interest in Devon, and if you have any further questions please don't hesitate to reach-out to the Investor Relations team at any time. Have a good day."}]}, {"messages": [{"role": "system", "content": "Thank you. And at this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question comes from Julien Dumoulin-Smith with Bank of America."}, {"role": "assistant", "content": "Hey good morning team. Thank you guys very much for the time. Appreciate it. Nicely done here."}, {"role": "assistant", "content": "Hey good morning, Julien."}, {"role": "assistant", "content": "Good morning, Mauricio. Pleasure. Just wanted to follow up on the synergy scorecard here and just thinking through Vivint here. I mean you're laying out -- you've got the $300 million and $100 million in revenue and cost synergies, respectively. How do you think about that translating back to consolidated EBITDA for Vivint here again? And/or, how does that fit with the 12% to 15% FCF target as well? Just want to try to tie it out at least $225 million as best you can today, if we can be a little bit more specific."}, {"role": "assistant", "content": "Yes. So Julien, I'm assuming that you're talking about the target that we provide on our free cash flow per share that support 15% or 20% growth. And when you look at the EBITDA and free cash flow generation capability of NRG and then you lay on top of that, the $400 million of cost synergies and revenue synergies, we feel very confident that we're going to be on path to achieve that 15% to 20% free cash flow per share return. As a matter of fact, the acquisition of Vivint now gives us a little bit more control on achieving that. Remember, before we have tremendous financial flexibility, and we generate excess cash will be on what the traditional NRG needed, that we have used to reduce the denominator. The one variable that we cannot control there is at the price that we can buy back our stock. Now with the Vivint engine and the opportunity to create this $400 million of incremental value, we just increased the tools that we have to increase the numerator. And put more in control the achievement of this $12.50 that we have laid out for 2025. So I feel very comfortable that with what we laid out today and in previous calls that we are on track to achieving that $12.50 a share by 2025."}, {"role": "assistant", "content": "Right. So -- yeah, clearly 15% to 20%. And more to the point, as you think about layering on additional assumptions rolling out potentially updated guidance with this Analyst Day. Any initial thoughts on what else can be done with the Vivint platform to continue to grow it. I'll note that the commentary here at the outset is really focused on synergies. You talked about revenue and growth here in the first couple of years, how do you think about compounding that beyond the 2025 period that you're providing here today? Maybe any initial thoughts on how far you can go at this prospective Analyst Day."}, {"role": "assistant", "content": "Right. Well, the first thing that I will say is when I think about the Vivint business, there are three big leverages that we're going to be focused on, the Vivint business was high, had high leverage. It has a high acquisition cost and there was also an opportunity on the consumer financing. So these are three specific buckets that we're focused on optimizing. And for me, it creates an opportunity for value creation. Now right now, we're focused on optimizing the 7.5 million net worth customers that we have. We have opened the lines of communication across our sales channels we're going to continue to optimize them. We're going to -- we have introduced bundling. We now are doing cross-sell between our call centers and our digital assets. We are testing in the market bundle. So that is the focus right now. When I think about 2025 and beyond, it's really about how do we bring the energy experience that we currently have with the smart home experience that we have and we create a best-in-class product for customers that is going to drive the growth on 2025 and beyond. This is something that we're going to be talking more about on our Investor Day on how this vision comes together with the two offerings that we have one in energy, one in a smart home. So we will make it more tangible and real for all our investors at the upcoming investor."}, {"role": "assistant", "content": "Wonderful. All right. I'll leave it there. Thank you guys very much. Have a great day."}, {"role": "assistant", "content": "Thank you, Julie."}]}, {"messages": [{"role": "system", "content": "At this time, I would like to turn it back to Mauricio for closing comments."}, {"role": "assistant", "content": "Okay. Well, thank you. Thank you for your interest in NRG. I look forward to hosting all of you in our upcoming Investor Day that we should have in early summer where we're going to be talking about the smart home strategy. We're going to provide additional details on our growth plan and provide you more transparency on our key performance indicators that will help you better model the business. So with that, I want to thank you for your interest and look forward to speaking with you soon. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And our first question comes from Jim Duffy from Stifel. Your line is now open."}, {"role": "user", "content": "Thank you. Good morning, everyone. Welcome, Stephanie. I want to start on brand and product in the U.S. Stephanie, you referenced inconsistencies in the U.S. market, how do you fix the inconsistencies in real wake and engagement? I'm curious is the wholesale distribution appropriate, and we appreciate you lot more product depth in the best categories. Do you need to abdicate some of the good product offering representation to elevate the brand and reawaken engagement?"}, {"role": "user", "content": "Well, thank you, Jim, and I'm happy to be with all of you today. As it relates to the product inconsistency challenge or the inconsistency challenge overall. First of all, you're right, it's not something that can happen overnight, but we are already starting to move on this. One of the first things that we're doing is positioning some of our existing products in a more premium way. We do have some products in that better or best part of the pyramid. And we're repositioning those products right away through better storytelling and better merchandising primarily through our own stores and on our website. So that's really step one and what we can do in the near term. From a broader perspective, it really does get to building out the better and best part of the product pyramid what I am most excited about in terms of driving consistency and driving growth is what we're going to do with Sportstyle. As I mentioned in my prepared remarks, that triples the size of Under Armour's total addressable market to $300 billion. A big part of Sportstyle is going to be footwear and women, not exclusively, but those are big areas of growth for us, and there again, it's going to be a 2-step process. It's not going to be done overnight. Phase 1, we'll start with that repositioning of our existing products. I mean we have some great stuff to be more specific around unstoppable joggers or Fleece graphic tees, the summit, knit, sweat shirts to name just a couple of things. So we're going to -- we have some great stuff we're going to merchandise and market in a different way, as I mentioned. But Phase two is, again, where you're going to see new products that are consistently delivered, and it's also not just about the products, it's about the marketing and where we distribute them. So we've got a lot of new efforts underway about how we're going to market in a different way and particularly to new consumers. And then on the distribution front, it's -- we are going to continue to, of course, work with our existing wholesale partners. But I think we're going to open up new doors of distribution too in the mall, new department stores, etc.. And of course, our own channels will always be a focus. But to just step back and summarize the answer to your question around consistency is it's really going to be a two-step Phase one, Phase two approach."}, {"role": "user", "content": "Okay. Great. And then you have big ambitions for product newness and increasing the frequency of newness. I'm curious, are there KPI targets to benchmark Q2, or do you have any specific objectives for penetration of new products as a percent of the mix?"}, {"role": "user", "content": "Yes. So we are great question. We are putting together KPIs and metrics around the percentage of products and that better and best bucket, their growth trajectory, we'll continue to do voice of the customer work to understand how consumers are relating to that better and best part of the pyramid and of course, talking to our customers. So we are putting together that scorecard of KPIs as we march forward. I've been here 2.5 months, so we're just getting started and pulling that together, but we're hard at work at it. So Kevin, anything to add from your lens?"}, {"role": "user", "content": "Yes. Thank you, Stephanie. And before I answer that, Jim, let me just say what -- how great it's been having Stephanie here. In 70 days, she has gotten completely at a level of depth of the company. That's pretty remarkable, to be honest with you, and bringing a world-class executive experience, and that's not something shared by me. I think if you polled our team, it would be universal across the brand. And so welcome, Stephanie. And so what you're hearing is -- what you see is what you get, very exciting for us. I think as one of the things we're Stephanie has asked me to lean in, in my role is on the product side of the business. And as you know, Jim, innovation has always mattered at Under Armour SlipSpeed is a great example about of something fresh and new coming out most recently, but we also have great innovations like our 7-pocket pants and our new Meridian line that we have out in full force. A steady cadence of new product is probably the right way to think about it. And one thing that I use the example of SlipSpeed, we launched it on October 31 of last year on Halloween with a soft launch. We then came back on Valentine's Day. I think making those holidays famous for the consumer to start expecting innovation and newness from Under Armour is one of the things you'll see. But that, of course, is echoed by a consistent cadence of product coming out that, as we say, like to blow consumers' minds. We've been around long enough to actually have legacy products as well. So in addition to new innovation coming from our teams, you're also going to see some of these reinventions of previous Under Armour greatest hits, as I mentioned in some of my comments that we've had."}, {"role": "user", "content": "From footwear, which I think what Stephanie emphasizes us moving from a footwear culture to a real sneaker culture here at Under Armour is critical and that will come through with things like performance-wise, where this brand actually won the New York City Marathon last year with Sharon Lokedi. all the way to Stephen Curry, what he's doing on court. And don't forget about Joel Embiid, who just won the MVP as well. And so our shoes absolutely play, but there's an emphasis for us of getting ourselves beyond the courts, fields and pitches and into the two and from situations, especially being credible enough to work in that tunnel walk type of scenario. And then from an apparel standpoint, we think we've got the ability to leverage a great, great force of Under Armour being sort of the chalk when it comes to apparel innovation and what we're doing to blow consumers' minds there. So we feel like we've got a great opportunity. And as Stephanie mentioned, we're also working with a few outside experts as well in both apparel and footwear to make sure that we're leaving no stone unturned with the ability for us to own what we own, which is things like the T-shirt that people expect from us as well as looking at colab opportunities and with a real focus on things that matter or relevant to the UA brand."}, {"role": "user", "content": "Thank you, Stephanie. We look-forward your influence on the business. Thanks."}, {"role": "user", "content": "Thank you,."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Simeon Siegel from BMO Capital Markets. Your line is now open."}, {"role": "user", "content": "Thank you, everyone, good morning and welcome, Stephanie, look forward to meeting you in person soon. So your excitement for growth from here is really coming across, it's nice to year. Recognizing that Under Armour has always been about growth. Can you just elaborate a little bit more? And apologies if some of this gets repetitive, but it'd be interesting to hear what gives you comfort and the opportunity for growth now, maybe why it's different than the past? And then how you're thinking about the balance of growth versus the focus on improving profit dollars into '24 as you talk about the turnaround there and then into '25 as well and beyond."}, {"role": "user", "content": "Sure, of course. What gives me so much confidence about our opportunity to grow the company significantly is the strong base we have in performance. I mean, it's -- I've been really lucky in my first 2.5 months to meet with some of our athletes and coaches and athletic directors, people like Justin Jefferson and coach Freeman from Notre Dame. I knew it before I came here, but it's even more apparent to me that athletes absolutely love Under Armour. They believe in the performance of our products. So we're coming from that place of strength as we lean into things like Sportstyle, which again triples our total addressable market. So that gets me excited. I went through the key elements of our strategy, which are really all about product, marketing and distribution at the end of the day and doing that in different ways, better product, marketing in different ways, distribution, growing the doors we're in from a wholesale perspective, being a better partner to our existing wholesale accounts, improving our own retail stores, improving our website, but why -- the devil is always in the details when you're running a company. And to me, why I know we can pull this off is three things. And I mentioned this in my prepared remarks, but let me explain a little bit more, it's about focused execution and accountability. When I got here, there was a long, long list of projects and efforts that the company was trying to tackle. And a lot of what you've heard today, I recognize some of it isn't new. But what we've done is we've really narrowed down the list of projects and efforts for the next three years, so we can be laser-focused. Focus like leads to results. The second thing is about execution. It's all about making sure that we're breaking down silos across teams, the product teams, the marketing teams, the teams out in the regions running our business day in, day out. So I'm spending a lot of time and effort on how we work together as a team to drive the business. And then third, accountability,"}, {"role": "user", "content": "I am holding myself, my executive team, the entire team accountable for business results. and it's all about results at the end of the day. I very much recognize the time for action is now. We need to deliver, and that's what I'm holding myself and the team accountable to. So it's not always the most glamorous part, but it's is the tactical things that have you pull off a strategy at the end of the day, focus, execution and accountability, and as we do that, we are laser-focused on driving the top line, but equally focused on driving bottom line and profitable growth. So I'm spending a lot of time understanding where the profit comes from an Under Armour and diving in deep to understand that side of the business, too. So at the end of the day, it's about driving profitable growth, and that is how we'll be measuring ourselves not only in fiscal year '24, of course, but in '25 and beyond where we think our efforts will really start to take off."}, {"role": "user", "content": "That's great. And maybe just following up on that and maybe for you or for Dave. Just thinking about the composition of the moving pieces embedded in the gross margin guide for the full year? Any way to help think through those puts and takes?"}, {"role": "user", "content": "Yes. I mean there's a couple of things that are going on there. Absolutely, we're excited about some of the tailwinds that we're seeing on the freight cost side, whether it be the ocean carrier rates that have normalized a lot, but also just a lot less utilization of air freight now that supply chain is more caught up and we're in a better spot there as well. But on the flip side, we're also being real relative to what's out in the market. There's some fairly heavy inventory levels out there, not just in North America, but a little bit in other parts of the world as well. And we want to make sure that we're planned to be able to move through that. And so that includes a little bit more sales to off-price channel, even though we're going to keep it within that 3% to 4% range of revenue. It also means that we will utilize our outlets more for even a higher percentage of excess product, which has a little bit of an impact on gross margin as well. So there's a couple of different things that are really going on there that kind of come into play. But what I'm more excited about, and Stephanie alluded to this a little bit, is stepping into fiscal '25. We do believe that the inventory situations out there are going to be much, much more normalized as we get into the back half of our fiscal year and certainly into fiscal '25. And we're doing a lot of different initiatives right now on our overall product costing structure, which we believe are going to have some real nice benefits in fiscal '25 and beyond as well."}, {"role": "user", "content": "Great, thanks so much guys. That's not the year end. Well, look, Board meetings happening. Thank you."}, {"role": "user", "content": "Likewise. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Jay Sole from UBS. Your line is now open"}, {"role": "user", "content": "Great, thank you so much. A couple of questions. Is it possible to sort of to give us like a high-level vision of sort of what your financial objectives are? I mean how big do you think Under Armour can be in terms of sales? What kind of operating profit margin should it have in your vision? And then maybe, Dave, for you, just on China, can you just talk about how the China business progressed in the quarter, and what you're expecting for China growth and fiscal '24. And at the same time, on the inventory, you mentioned some pack and hold. Can you just tell us how much pack and hold you're holding when you plan to sell that inventory? And how much confidence you have that inventory is going to stay fresh until the time you sell it?"}, {"role": "user", "content": "Sure. Well, I'll start, and then I'll flip it to Dave. But on your question about growth, I'm not ready to put a figure out there quite yet, but I am absolutely confident that we can grow this company significantly over the years ahead. Just a couple of statistics that I think about in that context, when our footwear business is only $1.5 billion today, that's great, but it's only 25%. So that's an area of exponential growth. I mentioned the women's business, relatively small. That's another area of exponential growth. So again, we have a lot of work to do over the coming weeks and months to flesh out the details of our plan in terms of our medium- to long-term growth targets, including our profit targets, which would incorporate our growth. The way we're thinking about gross margin. But again, not prepared to call the number today but absolutely prepared to call that we have significant growth ahead of us in the years ahead. But Dave, I'll flip it over to you for the questions on China, etc.."}, {"role": "user", "content": "Yes. So China, again, I don't -- we couldn't be more proud of how the team navigated through fiscal '23. I mean if you think about the impacts from COVID early on in and then the lockdowns and then fighting our way back out of that. So really strong Q4 quarter for China and for APAC as an overall region. So very proud of the team there. Q4 did get a little extra benefit there from comping bigger COVID challenges the year prior and a little bit of a rebound coming out of the lockdown. So we're not anticipating that level of growth for APAC in fiscal '24, but definitely a very healthy growth rate for us, and we believe that we're well positioned to keep driving. And that's an opportunity that's going to continue to be there for long term. I mean, we are still so small. So the opportunity to continue to expand doors expand even more relative to better and best product. There's just a lot of different options that we're going to continue to pursue out there. And relative to inventory, yes, we finished with a fairly high growth rate of inventory. But our inventory turns were still at about a three as we ended fiscal '23, which isn't a bad spot and inventory for us right now is very healthy. There's not a lot of aged inventory at all. And in the pack and hold comment, we're sitting on probably about $175 million worth of inventory that we specifically are packing away and holding that we know we have demand for in fiscal '24 as opposed to kind of blowing it out at really low prices in the back half of fiscal '23. So that's a decision that we made, and we're comfortable with it based on being able to utilize our outlet stores to a bigger capacity in fiscal '23. And so for us, we see inventory across the market being a little bit higher kind of in this Q1 and Q2 of our fiscal year, Q3 normalizing a little bit. And then by Q4, really in a good spot, and we're expecting actually to be down probably in the 13% to 14% range year-over-year inventory by the time we get to the end of our fiscal year. So that, again, should set us up very well to be able to run in a pretty clean way for fiscal '25."}, {"role": "user", "content": "Got it, thank you so much. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Bob Drbul from Guggenheim. Your line is now open."}, {"role": "user", "content": "Stephanie, welcome. Best of luck. I just had a question for you, and then I have a follow-up for Kevin, a few still there. Besides the Chief Commercial Officer, can you just talk about any hiring priorities that you're focused on hiring targets, the needs in terms of the team that you really see besides the Chief Commercial Officer?"}, {"role": "user", "content": "Sure. Absolutely. And good morning, Bob. Great to be with you. So the number one job we're looking for right now or one of two is the chief commercial office job, consumer officer, pardon me. And where we've got a great slate of candidates lined up and hope to have that filled in the coming months. Another position that we are -- have out for search is a Chief Communications Officer. As I've mentioned, marketing and communications is going to be both together or going to be a critical part of how we tell our story to our athletes, our consumers and to you or other stakeholders. So those are two jobs that I'm currently looking for on my leadership team. And then I'm digging in deep to figure out the rest. Again, I've only been here 2.5 months. So I'm one of the reasons I'm so excited to have all of these direct reports to me in the interim, meaning I mentioned this in my prepared remarks, the head of brand marketing, sports marketing digital data and analytics is in this area, having an all report directly to me allows me to roll up my sleeves and get into the details and figure out what additional talents and capabilities we need, in particular in that area is just one example. And then the last point I'd make on talent because it's such an absolutely critical question that you've asked is we're also supplementing with bringing in outside talent to work with us on collaborations and things of that nature. So it's early days for me in terms of getting my arms around our needs in this space, but it is a very, very big area of focus for me, for sure."}, {"role": "user", "content": "Great. And Kevin, just an MVP question for you, if I could. The warriors are down 3:1, I think, and I just wonder if you feel like that can bring these guys back."}, {"role": "user", "content": "Yes. We're actually making Stephen a new superpower T-shirt to wear underneath of this uniform right now as well as dropping some of that into a sneaker too. I mean, it's cool between -- we now have two MVPs and the Rose between Joel and Stephen, watching both of them play. It's extraordinary. And so I think we're all waiting for those heroics again, with the things you can't believe will happen, but it should be pretty exciting, so both the Waters and the 76ers [Phonetic] fans, we're with you."}, {"role": "user", "content": "Thank you. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Brian Nagel from Oppenheimer. Your line is now open."}, {"role": "user", "content": "Now. Stephanie, welcome. The first question I have is we're learning now to you about the new operating plan, the PTH 3. And obviously, we have your guidance. You talked about maybe in the response to the last question, some of the new hires you're looking for. But as we think about this and the repositioning, if you will, of the business, is there -- do you expect much investment there? Is there a need to continue to enhance sort of say, the core? Or is it more of a process type change more process type change in Under Armour?"}, {"role": "user", "content": "Well, I think we need both over time, both investment and then anything is always about people, process and systems, right? And so there is a talent element to what we're going to be pulling off with PTH 3. There is a system and process piece of it, and that will require investment over time. As Dave mentioned in his prepared remarks, we're laser-focused on expense control and simplifying and optimizing our cost structure. And as we do that and particularly in the short term, what it's going to allow us to do is redeploy resources against our top priorities, which links back to my plan on focus. So keeping our costs very much in line with where they should be. But I do think a lot of the things that we're going to do over the years ahead will require investment. I mean I'll use a real-life example. We have a lot of work to do on our website and our app. I have a real vision for where we're going to take our website and our app. We've made some progress, improve things like site speed and product spec pages, more kind of the way the site works from a more tactical standpoint, but I have a much bigger vision of where we can take it. And it should be the -- one of the most premium ways we can bring our brand to the world. So things like investing in our digital assets will be a focus for us. So again, there's many more examples, but that's the one that comes to mind right away. But again, it is about -- it's about talent, it's about investment in systems and it's about process."}, {"role": "user", "content": "And Brian, this is Dave. I would maybe just tack on a little bit there, just relative to cost structure and investments, I think we've proven that we've done a lot of work to be able to be more nimble from how we spend and where we invest and the leverage that we showed in fiscal '23. And you can see with the outlook for fiscal '24 that we're actually not showing really much leverage for fiscal '24. And that's primarily because of a few reasons. We do need to invest in a few of these areas, that Stephanie mentioned. And absolutely, we're going to be pressuring certain areas. And with that nimbleness, we're able to do so better than we have before. But we're also going to be pouring more into the areas that Stephanie mentioned or PTH three initiatives. So that's really one of the aspects that goes into the outlook that we've provided."}, {"role": "user", "content": "That's very helpful. And then a follow-up, just with regard to inventories, so as we're hearing, again, a big component of this that the PTH three plant is a new product, better product. So is there really thought then with inventory still being elevated to more aggressively clearing out the product you have now in the near term before this new product is introduced?"}, {"role": "user", "content": "Yes, to a degree, Brian. I mean we started that in Q4. You saw us overdrive on revenue and at the detriment of gross margin because we took some of those opportunities in Q4. And as you think about our outlook for gross margin for fiscal '24, especially the first half, it has some of that expectation built in there as well. So -- but at the end of the day, I think as a reminder, even though our inventory growth rate seems fairly high, it's off of a very lean base. And therefore, when you look at the actual composition of our inventory right now, it is very healthy. There's not very much old or inactive SKUs. So our ability to be able to move through that fairly well and stay in that 3% to 4% mix range of off-price to normal sales, we feel very comfortable with that. So again, we will work through, and we'll get into an even better place than we are now. But we're very confident in the process and the tools we have laid out to be able to do that and then really be able to run into fiscal '25 with higher growth and also with kind of a smarter inventory build."}, {"role": "user", "content": "I appreciate it. Thank you."}, {"role": "user", "content": "Thank you. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Laurent Vasilescu with BNB Barbas. Your line is now open."}, {"role": "user", "content": "Good morning, thank you very much for taking my question and thank you, Stephanie. For opening remarks. Dave, I wanted to ask about your comments regarding first quarter revenues down low- to mid-singles, noting the challenged U.S. marketplace. Can you maybe parse out a little bit more how much North America should be down for the first quarter? And then I think you mentioned for the overall revenues, sequential improvement for each quarter as the year progresses. Should we assume -- I know it's early on, but should we assume 2Q is the inflection point or is it going to be more 2H-waived?"}, {"role": "user", "content": "Yes. I guess a couple of things there. Yes, Q1 is going to be our most pressured revenue quarter. And when we think about that, that is going to be driven primarily by North America and primarily by wholesale within North America. And a lot of that has to do with a fairly cautious order book coming in from wholesale partners based on the levels of inventory that they were carrying towards the back half of our fiscal '23 and as we go into this year. So that's a big piece that's at play. We do see that or anticipate that, that is going to start to work its way out as we get further into our Q2 and then even more so by Q3. So we do see that Q1 is going to be the most challenged quarter for North America and as the biggest region, therefore, the most challenged quarter for global Under Armour. And then we do see Q2 being the turning point back to growth, and we're excited to be able to keep driving forward from there. I think also, you'll see that with some of the pressures with wholesale buildup of inventory, you're going to see our direct-to-consumer outperform a little bit versus wholesale as we go through this year as well, which is something that we're completely fine with. We control the brand very well there, great display of all the different products and breadth and a place that we can start to shine relative to more and more curation around Sportstyle as we move forward."}, {"role": "user", "content": "That's very helpful, David. And then maybe as a follow-up, I think you called out for international to grow mid-single-digit rate for this year. APAC is about 40% of your international business. Obviously, China is reopening, can you just maybe unpack a little bit more why international is sequentially slow? And then just a quick follow-up as well. capex spend is meaningfully up for this year $250 million to $270 million. Is that driven by the new HQ? Or you also anticipating new store growth for this year?"}, {"role": "user", "content": "Yes. I think when we think about APAC, again, excited about what the team was able to drive through in fiscal '23. Keep in mind, Q4 of fiscal '23 for APAC, had some over-index benefits from comping the China COVID bigger issues a year prior, but also kind of the rebound out of the lockdowns in Q4. So we wouldn't necessarily expect that level of growth to continue into fiscal '24, but definitely healthy growth, especially in China, but really in all parts, Southern APAC, South Korea, etc.. For us, though, we do look at the overall picture there. And there are still some heavy levels of inventory there as well. There's a lot of brands that have been closing doors. There's a lot of brands that have been really pushing through a lot of excess inventory more so than we have. And so we've got to be a little bit careful with what that looks like and how that impacts Under Armour. So obviously, we hope that we can be able to overdrive that, but we think we're planning prudently in this outlook. But when you think about capex, you are right. There is a larger increase in capex in fiscal '24 planned. Some of that is store growth around the world on an operated store growth. Some of that is also investing in e-com as Stephanie had mentioned, whether it be in the loyalty program, whether it be in further site speed, etc.. But then, yes, there is a portion of that, that is the build-out of our headquarters, our new headquarters here in Baltimore, which is just going to be a magnificent place to show the brand and feel the energy of Under Armour with the track and field and the new teammate headquarter building. So that is a piece of it. However, we still plan and will manage capex within that 3% to 5% range of revenue, even including the headquarter build-out. So I think we're doing a great job of prioritizing there. We're certainly not holding back on driving into the revenue-generating aspects even on the IT front as we're investing in end-to-end planning. We're investing in retail POS, PLM system, transportation management, so a lot of great things that will continue to enable us more so in fiscal '25 as they're actually live and really working to our benefit. So a lot of exciting things that we're jumping into there."}, {"role": "user", "content": "Very helpful. Dave, thanks for all the color. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Matthew Boss from JPMorgan. And this is our last question. Again, this is our last question from Matthew Boss."}, {"role": "user", "content": "Great, thanks. So Stephanie, you cited fiscal '24 as a year of building the brand. And then fiscal '25 is the opportunity to return to growth in North America. So maybe two questions. How do you view overall health of the brand today? And then as you've sized up the opportunities, what provides confidence in sustainable North American growth from here, or what is the material change in structure that you're really putting in place?"}, {"role": "user", "content": "So I'll start with the first part, what is the health of the brand today. I think as we noted in our prepared remarks and Kevin in some of his answers, we are very, very strong in the performance space, very strong there. And we have a very solid base business in the good part of the product pyramid where we're not as strong and where the brand needs to get healthier is in the better and best part of the product pyramid. And we also need to consistently execute across marketing and distribution. And I use the word in consistency, the way -- some of the challenges that Under Armour has faced very purposely because there are places where we really have done some great things. Heat gear, cold gear, compression would be an example. And more recently, Kevin talked about SlipSpeed. And when we execute well across the four Ps, product, price, place and promotion like we did with SlipSpeed, we win. So I'd say the health of the brand is strong from a performance perspective, but needs to get healthier and grow in the better and best part of the product pyramid. And then the second part of your question was about my confidence that we can grow in fiscal year '25. And again, I have tremendous confidence that we can grow in fiscal year end '25 because we have all the basics, all the core basics and building blocks for growth in place. We have this strong base in terms of performance. I'd much rather be a performance brand leaning into Sportstyle than the other way around, right, to be a Sportstyle or dare I say, athleisure brand trying to get into performance. It's 2.5 decades of hard work to get that credibility on the performance side. So I have tremendous confidence. Again, I'd go back to the relatively low numbers we have in footwear and women's as two examples of where we can really see exponential growth. And then a lot of it is putting the additional building blocks in place as it relates to talent, Dave just articulated some of the investments we're making on the systems side. I'm very bullish on our future in 2024 fiscal year 2024 is going to be the year where we get the building blocks in place even further."}]}, {"messages": [{"role": "system", "content": "And I am showing no further questions."}, {"role": "user", "content": "Great. Thank you, everyone."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] We'll go first to Steven Wieczynski, Stifel."}, {"role": "user", "content": "Hi guys. Good morning. So first off, congratulations on a strong quarter. Jason, in the release, you mentioned that for 2023, you're expecting 2023 EBITDA to significantly exceed 2019 levels, which is a change in wording relative to where you were back in February. And look, I understand I'm probably knit taking here a little bit, but I just want to understand maybe how we should think about EBITDA trajectory now for the year and the progression you guys are on now to get north of $5 billion in EBITDA by 2025 according to your Trifecta program?"}, {"role": "user", "content": "Steve, it's Naftali. So as you can see, we are very pleased with the results. And as we think about EBITDA and how this translates to the progression throughout the year, you can see that we are increasing yields, and we expect the EBITDA growth to be higher than our yield growth. And that's because a lot of the revenue is dropping to the bottom line, because we are very much focused on costs and enhancing margins. So if we look at what we kind of look at the guidance that we provided, we're going to -- we expect to be an eyelash away from our previous EBITDA per APCD record in 2019. And a lot of the things that we're doing and a lot of the strategies that we're employing should benefit to us as we continue to execute towards our Trifecta goal."}, {"role": "assistant", "content": "And I mean, just to add on to it, Steve, as we think about it on the Trifecta side. Obviously, this year -- the performance of this year is better than we -- it's much better than we had expected. And I think the commentary we talked about Icon. Obviously, we have Nova coming online, which is a high-yielding ship. We have Ascent coming online, which is high-yielding. You have Hideaway coming online. And of course, the commentary that we've been talking about that we've seen acceleration in price in volumes is also what we're seeing for like-for-like for 2024, though it's early. And for us to get to the marks for Trifecta, we really just need moderate yield growth in good cost control, which you continue to show. And so that's kind of very much on our path. And as Naf mentioned, it's great to see that really almost every penny of the outperformance on revenue is dropping right down to the bottom line, which would be dropping right down to EBITDA."}, {"role": "user", "content": "That''s great color. And then second question, as we think about the back half of the year, obviously, we can back into your yield guidance. But if we kind of break down those yields a little bit, are you assuming your customer from an onboard, onboard has obviously been extremely, extremely healthy. And are you assuming that your customer kind of stays in the same ballpark that they are now? Do you have them slowing a little bit in terms of spend levels? And then second part of this question, which is a little bit different, but we get a lot of questions from investors about demand and demand into 2024. And can the demand levels that are there right now persist into next year? Or is '23 being -- is '23 benefiting from just still kind of reopening and COVID bookings and stuff like that? So hopefully, all that makes sense. Yes, sure. Well, I think, obviously, we don't have a crystal ball. What we know is what we see happening basically every minute of every day. We're taking tens and tens of thousands of bookings a day. We've got 160,000, 170,000 people spending on our ships. And so we have a very good idea of the customer in terms of what's happening today. We also obviously do a lot of surveying of our customers in terms of what they're looking to do in the future. And it's obviously clear to us that they are very focused on gathering experiences and creating memories with their friends and family. So the other point I'll just add is, and this is more on the pre-cruise side and what they're booking on the ship for the future. That number continues to rise, which also just shows their appetite to spend more and more on non-ticket related spend. So I think for us, when we think about the back half of this year, our expectation is that we're going to continue to see what we're seeing. However, the mix changes a little bit. Q3, we have a little bit more Europe. We have a little bit less Caribbean. And of course, you've heard our commentary on the Caribbean is exceptionally strong, which is really what's driving the overall outperformance. While Europe is now very much coming in as we expected for the year. So I think that probably talks a little bit about how we think about the back half of next year. Now again, going to demand level for 2024, what we have, again, is what we're seeing day in and day out. And at this point in the year, the customer now and of course, we began to position ourselves and orient ourselves to 2024 more and more. Certainly, the majority of the bookings we're now taking are focused on 2024. And we see very similar strength and acceleration from what we've been seeing close in as well as what we've been seeing for the bookings for 2023."}, {"role": "user", "content": "Steve, I just have to add one comment because it's -- I have to talk about Icon of Seas. I think -- if you think about '24 and the comments we made earlier about Icon. Icon is literally the best-performing new product launch we've ever had in the history of our business, and we're delighted with volume and rate, and that really is a full '24 product. So you can see if you wanted to use Icon as a proxy, I know it's a brand-new product, and it's stunning, but it's really driving a huge amount of demand and great rate."}, {"role": "assistant", "content": "That probably won't be the first time you hear about Icon from Michael -- just to..."}, {"role": "user", "content": "Thanks guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Brandt Montour, Barclays."}, {"role": "user", "content": "Hi. Good morning everybody. Obviously, an exceptional quarter, congratulations. A question about load factors. I know you guys are going to hit historical load here in the spring. But curious, looking past that, what the new normal for load looks like given maybe you have some regional mix shift, which could affect it, but more so, you have obviously a lot of new capacity that's different and has more onboard and more space. So any comments about what the new normal looks like for you guys for loads?"}, {"role": "assistant", "content": "So on an expectation standpoint, I mean, just mathematically, our load factor -- our normalized load factor will begin to rise. And that's really leading with Icon coming on, which will have a higher load factor profile. Now we're also taking on Nova, which has a lower load factor than the Royal Caribbean brand and the Celebrity brand, and we're also taking on Ascent, which has lower load factors than Royal. But with Icon coming on next year, Utopia coming on next year, you would expect our load factors to be up one point or two when we look into 2024 and beyond."}, {"role": "user", "content": "That's super helpful. And then my second question is just on China. Back in 2019, if I recall, you guys had something like mid-single digits of your global demand coming from China traveling outside of China. And I know there's outbound international flight constraints limiting China outbound travel, but you're probably engaged with your database over there. I'm just curious what you're seeing from them now that they're starting to travel again? And if it's even showing up sort of on the radar in terms of what's booked for this -- for later this year?"}, {"role": "user", "content": "Yes. It's Michael. Yes, outbound has always been a relatively small percentage of our China business. I think we're now more encouraged by all of the signals that we've had for our reopening in China in '24. And we still got some work to do, but we've now started to rebuild our sales organization in China, and we expect, hopefully, by late spring, early summer to be back operating out of China.."}, {"role": "assistant", "content": "'24."}, {"role": "user", "content": "'24."}, {"role": "user", "content": "And then sorry, that's in terms of actual capacity in China? The question was more about China outbound to other areas."}, {"role": "user", "content": "Right. Yes, that's correct. That's in actual capacity operating out of China in '24. As it relates to outbound, outbound started to return, but it's obviously coming now from a smaller base."}, {"role": "user", "content": "Great. Thank you so much."}]}, {"messages": [{"role": "system", "content": "Next, we'll hear from Robin Farley, UBS."}, {"role": "user", "content": "Hi. Great. Thanks. With that yeild guidance increase, I don't even have a question on demand, because that was kind of a mic drop if that increased. I actually have a question kind of -- just looking at -- related to balance sheet issues, another cruise line has talked about getting ECA funding for a significant amount of money that's not related directly to a ship order, but that's for owners extras. And I'm just wondering, is there potentially opportunity, because obviously, those would be at sort of 1% and 2% interest rate. Is there opportunity for Royal? I know you guys aren't doing any big change orders that we know of at the moment, but is there an opportunity for you to get some ECA funding for things not directly related to a ship delivery?"}, {"role": "user", "content": "Yes. Robin, it's Naftali. The ECAs have been fantastic partners to us. We're obviously very committed to our new build program, and they provide us very attractive financing. There's always puts and takes, but we don't expect any material changes from our financing arrangements at this point."}, {"role": "assistant", "content": "Yes. The only point I would just add, Robin, what you're describing is not a new concept. We've actually probably been doing that for about a decade. So if we have change orders or we have owners extras that the same concept of the 80-20, 20% down, 80% financed is how those ships have been financed, whether it is for the contract price or other elements that we're adding on to the ship."}, {"role": "user", "content": "I guess it was really more, I was thinking that it's the first time we've seen sort of like incremental ECA funding that wasn't tied to ships ordered before the pandemic, which -- and again, I know it's tied to a very big change order. So not your situation. And then just one other quick clarification on the expense side of things. When you look at your expenses for the full year, obviously, some of it you mentioned structural, because you have a full year of CocoCay and Galveston. But you said some of it's transitional. And I don't know if I heard you say, I'm just wondering what amount because, obviously, some of the structural that will be recurring next year. But some of the transition costs would, as they fall away, create an expense decline next year. So I just -- I don't know if you can quantify how many basis points of your full year increase is onetime?"}, {"role": "user", "content": "Yes. So it's predominantly structural. Some of the two examples that you mentioned are there. And obviously, there will be now in our base as we go forward. As we get to our full -- our historical load factors, those transitional costs are very minimal, and we are expecting them to go away. So it's predominantly the structural costs."}, {"role": "user", "content": "And I mean, for the transition costs, is there -- is it 100 basis points or 200 basis points of the full year expense this year that..."}, {"role": "user", "content": "It's roughly -- it's even less than -- yes, it's even less than 100 basis points. And with some of the COVID protocols that we had a little bit in Q1 and some of our crew movements that we need to finish up, but that's generally the ballpark."}, {"role": "assistant", "content": "Yes. And in reality on the cost side, if you take out the transition that Naf just talked about and you take out the structural, our costs for the year were basically up around 3%. So just to kind of give you the sense of the level of all the actions we took over through COVID to get our cost structure and operating model align has effectively absorbed a tremendous amount of inflation. So our costs in the assets are really just up 2% to 3%."}, {"role": "user", "content": "And would you say that inflation is sort of now moderating if we think about 2024, that like the rate of increase in 2024? Or is that 3% something that you would expect to recur?"}, {"role": "assistant", "content": "No. I mean it's definitely moderating. I mean it's -- all -- but it's still a pain and it's still coming at you in different ways. But we have -- I mean, our teams are really exceptional and trying their very best to combat it and come up with great solutions. Sometimes it's around how do we get goods from point A to point B. And in some cases, how do we just leverage more of our buy across our brands, but it is painful."}, {"role": "user", "content": "Yes. And the way -- the word I would say is just persistent right, which it's not unique to us. You see it everywhere. It's definitely moderating. I think the other thing just to point out that our focus is also what you saw in the first quarter, which is as our revenue accelerates, how do we keep the costs down and really try to get that revenue all the way to the bottom line."}, {"role": "user", "content": "Great. Rhank you very much. Thanks."}]}, {"messages": [{"role": "system", "content": "We'll go next to Vince Ciepiel, Cleveland Research Company."}, {"role": "user", "content": "Great. Thanks. I wanted to dig a little bit more into pricing. Obviously, with the net yield guidance, it looks like net for DMs for this year, to be up high singles, maybe even approaching 10% versus '19? I'm curious kind of how you might break out or talk directionally about how much of that is like-for-like versus new hardware versus CocoCay lift? And then maybe just zeroing in on the like-for-like, your ability to continue to move that up in years ahead when you consider the value gap versus land?"}, {"role": "user", "content": "Yes. So first, you're right. If you kind of look at the pricing. It is an eyelash away from double digits. We do have some structural costs, especially on the back end of the year. We eliminated some of the lag -- reporting lag for Silversea. If you take that out, we are double digits. So we're very pleased with that. And it comes from different things. Yes, we have eight new ships that we did not have in 2019. That's a great yield driver and price driver. We have a lot of these ships going to CocoCay that continues to track yield premiums, we have the onboard strength that we are -- that we continue to execute on. So all of these are driving the pricing increase and the pricing strength. And we also see like-for-like pricing increase as well. So it's a demand environment. It's all these actions that we have taken that we think are going to continue to benefit us beyond 2023."}, {"role": "assistant", "content": "Yes. I just want to add, what's also just very encouraging when you see -- which is effectively a double-digit price increase for us. That also does not include -- I mean -- or the negative side of this is we don't have China, obviously, here in 2023, which had a substantial APD differential to the average. We also sold Azamara, which was a higher-yielding versus the average. And so to be at a double-digit price increase and which has been accelerating, I think, really just shows the strength of leisure, the strength of cruise and the strength for our brands."}, {"role": "user", "content": "Great. And then a little bit longer-term question. Your 1Q margin looks like it was basically back in line with pre-COVID levels if you ex out fuel and the guide suggest that, that builds further as you move through '23. So I think that's really reflective of gains in the core operations of the business. And in light of that, curious how you're feeling about the ROIC target long term? I think you said teens, which feels like a pretty broad range. But in light of the progress you're making in '23 on the margin front, just how you're feeling about longer-term ROIC?"}, {"role": "assistant", "content": "Yes. Well, I think first off, we are -- based off of this latest guide, we are now in double digits on an ROIC basis. And so our focus here is to have a business model that during good times and bad times stays within the teens on an ROIC basis. The focus on margin and also the capital discipline that you're seeing us employ each and every day, we think very much gets us there with moderate yield growth and good cost control.. So we feel very good about our Trifecta goals. We talked about that as that's really us just getting to base camp, which is your kind of pre-COVID levels scaled up for the additional capacity on our business. And really, if you just think about 2023 in itself, if it wasn't for the crisis actions we had to take, we will be well north of our 2019 earnings and well north of our '19 ROIC. So that's how I think we think about the business and the organic growth we have with the ships coming online and the activities we have on the destination side is really well positioning us."}, {"role": "user", "content": "Great. Thanks."}]}, {"messages": [{"role": "system", "content": "Next, we'll go to Benjamin Chaiken, Credit Suisse."}, {"role": "user", "content": "Hi. Just one for me. On CocoCay, are you still seeing the same pricing premiums to those itineraries as you did to the rest of the portfolio as you did in '19? And I asked that in the context of there just being much more capacity at the island today than a few years ago. And then part 2, I think Hideaway Beach is a 4Q opening. Any color on demand or pricing there?"}, {"role": "user", "content": "Benjamin, yes, I mean I think we're truly delighted with Perfect Day, and I think the comments earlier, we spoke about the volume that we're attracting to Perfect Day. This year, we'll take around 2.5 million of our guests to Perfect Day and the pricing premiums continue to be really robust, and the spend on the island continues to be really robust as well. So we've seen -- as we've increased the volume, we've seen no decline in the power of the pricing. And in fact, it continues to accelerate. With Hideaway Beach, that will accommodate approximately 2,500 more gas. So today, we're -- I think in March, we had close to 250,000 guests in Perfect Day. And on average now, we're having around 11,000 guests a day in CocoCay. With Hideaway, we can add another 2,000, 3,000 guests. And that's really for design to be open in time for Icon of Seas. And of course, Icon will visit at the end of January, and Icon will be going to Perfect Day every single week. We've also got Utopia coming online in June. We haven't announced the deployment, but Utopia will also be going to Perfect Day. And the demand is just very strong. I mean we've seen -- there's a lot of demand for that particular product in any of our ships that have Perfect Day on their itinerary demanded, and there's strong pricing premium that we see there."}, {"role": "assistant", "content": "Ben, just one point on Hideaway for modeling purposes. Just keep in mind that it's coming online at the very end of this year. But its ramp-up of operations and so forth, as Michael said, is kind of in line when Icon comes online, which will be towards the end of January. So just as you're thinking about yielding costs, just keep that in mind."}, {"role": "user", "content": "Also, Benjamin, just to add a quick comment, not on Perfect Day, but we did receive the kind of the greenlight approval from the Bahamian government to proceed through the environmental and permitting and planning process now in the Bahamas. So our intention is to have the Royal Beach Club open in -- towards the end of the spring, summer of '25. And that new addition to the portfolio is also going to really produce an incredible experience for -- certainly for the short product and the short product is doing exceptionally well at the moment. We continue to increase our short product and put really great ships into that market. So the combination of Perfect Day on one day and the Beach Club on the second day really is a winning combination."}, {"role": "user", "content": "And forgive me, is the expectations around the Royal Beach Club, is that a similar size to Hideaway or large -- smaller or larger, just from a capacity standpoint?"}, {"role": "user", "content": "Actually, from a capacity perspective, it's very similar to Hideaway. Remember, Hideaway is part of the Perfect Day experience. So the Perfect Day experience capacity will be around 13,000 a day. But the Beach Club's capacity will be around 2,500 to 2,750 a day."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Conor Cunningham from Melius Research."}, {"role": "user", "content": "Everyone, thank you for the time. Just on the $5.3 billion in customer deposits that you have. I was curious if you could parse out what percentage of the bookings are people that are new to cruise versus historical levels? It just seems like that you're gaining a lot of momentum there. Just curious on where that sits?"}, {"role": "user", "content": "Yes. So as we -- I think Jason said this in his prepared remarks, this quarter, and it's been consistent in the last several quarters, the combination of new to our brands and new to our cruise significantly exceeded 2019 levels. So we're very pleased with seeing this quality demands and our brands attracting new people to our ecosystem. And at the same time, we also focused on making sure that they stay there, right, then increase repeat rates. This is all in line with our strategies. So some of the benefit you see in the first quarter in these customer deposits is just more people booking with us, new to our brands and new to cruise."}, {"role": "user", "content": "Okay. That's helpful. And then just I was hoping if you could unpack a little bit just on this close-in pricing momentum that you saw in the quarter. What did you assume originally? And then first, how it played out? And just how you're thinking about that trend through the remainder of the year? I realize load factors are stepping up. So there's probably less to fill. But just curious on how you're thinking about that going forward?"}, {"role": "assistant", "content": "Yes. Well, I think first, what I would say is it was a -- it was an incredible surprise at the differential between our Wave expectations close-in versus the realities of what occurred. There was a substantial difference versus '19 levels, which were already at a record high. And so we built another three or four load factor points. As you pointed out, Conor, we are -- our expectations for the balance of the year was to be at normal load factors. So those book positions were higher, so there is less inventory. But certainly, there is the opportunity. And of course, we've we recognize a lot of that opportunity in terms of the expectation that those volumes will continue and at higher rates. I think the thing that was of a great, I wouldn't say a surprise, but delight to us was while the volumes were building at those large volumes, we were also able to continue to raise pricing during that period of time, which is not always what you see as you -- times in which you're looking to fill certain volume gaps."}, {"role": "user", "content": "Yes. And just as I think I said it in my prepared remarks, 2/3 of our yield outperformance in the quarter were just load factors. We built 200 basis points more, and the remaining was just higher pricing, both on ticket and exceptional strength on onboard revenue."}, {"role": "user", "content": "Okay. Appreciate the time. Thank you."}]}, {"messages": [{"role": "system", "content": "Matthew Boss from JPMorgan is up next."}, {"role": "user", "content": "Great. Thanks. Congrats on a really nice print. Maybe to follow up on demand. As we think about the drivers and the magnitude of the top line upside relative to where we stood three months back, I guess maybe if you could help to maybe rank order the upside? And then could you elaborate on your most recent momentum that you cited in bookings that you've seen? And finally, maybe just relative to the Trifecta plan that you laid out in November '22, what's your confidence today? Or just help us to think about puts and takes to consider relative to when you initially laid this out?"}, {"role": "assistant", "content": "Okay. Well, I'll take a stab at it and for my teammates here to add in. I think, first, just starting off on Trifecta. We feel very good about our Trifecta program. Obviously, the results of what we're talking about today in terms of the acceleration, the higher pricing, our continued ability to manage our costs, is all very encouraging as we kind of think through what 2025 is going to look at or look like. There's always headwinds that you're dealing with. But we do really believe that by just continuing to moderately grow our yields and managing our costs and managing our capital allocation, we see kind of clear skies towards those goals. There's obviously things in which when we think about negative carry, we think about and how to manage that and get that down to the levels to get our earnings power back from there, that's also kind of top of mind for us. As it relates to on the demand side, just to be -- I think, which we kind of laid out in our remarks, there are several things."}, {"role": "assistant", "content": "First is the Caribbean has been exceptionally strong, especially ships that are touching a Perfect Day we saw a huge strength from. Onboard spend has been very, very strong. It's not one area of onboard. It's really across the board. So that's really -- that's been very encouraging. Our North American products have all been booking well, Alaska, Northeast and so forth. And for Europe, I think we were a little bit concerned going into the year. But because of our global and nimble sourcing model, we really have seen a surge in European bookings, and we feel very good on how Europe is going to play out this year, but not to the level that we saw in the Caribbean. And so that just broader combination is what's driving acceleration and demand acceleration and pricing, and while we doubled our yield and increased our earnings by 40%."}, {"role": "user", "content": "Yes. Just to add, it's Naftali, I think first on the latest points around the demand, I think if you kind of zoom out a little bit, we did talk about and we've been talking about the value proposition of cruise being very attractive, and you see that played out. So our goal is to close the gap and we do that with the ships that we have, the experiences we deliver, Perfect Day at CocoCay, some of the itineraries we designed. But those are things that if you the consumer are, obviously, it's very attractive. On the Trifecta, I just want to make one comment, which is, as we were designing it, we weren't designing it for a perfect environment, right? So as Jason said, there's puts and takes, there's headwinds, tailwinds. And as we were designing those coordinates, we're confident we can get there."}, {"role": "user", "content": "And Matthew, you just to add, when just using the Royal Caribbean International as a proxy for the company. When I think about 2024 and 2025, we've got Icon of the Seas coming online. We've got Utopia of Seas. We've got Hideaway Beach and Perfect Day coming online in late this year. We've got expectations that China will be up and operating in '24, and we've got the Beach Club coming online in '25. So just from the Royal brands perspective, we've got an incredible lineup of really new and exciting products. And we've seen that these products really to ignite the market and generate significant demand. So we feel pretty optimistic about the future."}, {"role": "user", "content": "Great color. Congrats again. And good luck."}]}, {"messages": [{"role": "system", "content": "Next up, we'll hear from Daniel Politzer, Wells Fargo."}, {"role": "user", "content": "Hi. Good morning everyone. Congrats on the quarter. Just a quick one for me. The Caribbean itineraries, I mean it sounds like pricing is tracking -- pricing and demand is tracking well above your expectations. And you've talked about this shift to short-term product. Could you see a prolonged shift there? And how do you think about your capacity allocation over the next kind of year or two as it relates to Europe and some of the more premium itineraries relative to kind of the lift you're probably getting now from CocoCay?"}, {"role": "assistant", "content": "I think we feel pretty good about the balance of our deployment. We have been -- I think we have shown that having great assets like Perfect Day, putting great assets in the short product, which connects very well to millennials and Gen X and so forth that are looking for more volume vacation experiences and they do that over shorter periods of time. And so that really kind of zones in to that clientele. But I think when we look -- and of course, our deployment will shift a little bit in our expectations as we look forward as we expect China to come online and Asia Pac to kind of light back up here in '24 and 2025. But Caribbean is going to continue to be where the majority of our capacity is. And I think our broader portfolio of deployment will more or less look like it does this year with a little bit more indexing into short and play a little bit more indexing into China."}, {"role": "user", "content": "Got it. And just for my follow-up, I wanted a little bit more color on China and maybe that cruise customer, if you can maybe put a little bit more color around what looked like historically in terms of mix of pre-board spend versus onboard, the EBITDA relative to the rest of your portfolio per APCD yields, kind of any additional color as we think about the reopening and take that into account given the strong and robust demand from the travel and leisure customer there?"}, {"role": "user", "content": "So then, pre-pandemic, we built a significant business for cruise in the China market. I think Royal was the number one cruise brand in China by volume, and we had a few of our ships that were operating there. And in fact, before the pandemic, we had Wonder of the Seas originally planned to deploy into the China market, which, of course, subsequently changed. Our expectation is that this market will return to how it was pre-pandemic. The value of a Chinese customer is very high. When you look at the net revenue from a Chinese consumer, it's typically around the same level as an American and slightly higher. So we see that returning. The spend changes somewhat in terms of onboard spend. They skew differently in different areas. But overall, the aggregate of their spend is very high. So we believe that, that market will return, and we're hoping in '24, we'll see that."}, {"role": "user", "content": "Got it. Thank you so much."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Fred Wightman, Wolfe Research."}, {"role": "user", "content": "Hi guys. Good morning. I was hoping you could just talk a bit more about -- if you think about the really strong demand you're seeing for the Caribbean and sort of in-line European demand, what is driving sort of that divergence? Is it just that CocoCay is that attractive? Are you hearing pushback on European airfare? Like where is the biggest difference?"}, {"role": "assistant", "content": "Well, I think in the earlier part of the year, we were a little bit concerned about the airlift for Europe, but that has kind of normalized, at least for our guests. And also don't forget, we source as well in Europe for our European product. And that just goes back to our business model of having this kind of global nimble sourcing model. So I think that's how we kind of think about that. As it relates to the Caribbean, I think it's a combination of things. And as Naf pointed out, there's still a significant value gap between land-based vacation and cruise. I think we've closed some of that gap this year, which is encouraging. And we saw pre-pandemic that ships that touched Perfect Day, as an example, had really kind of closed the gap to land based, especially Orlando and Vegas. And what we're doing is -- what we're seeing is that is starting to kind of get back to '19 levels. So the gap still exists as that -- as those businesses got stronger during the period. And so I don't think it's one thing, but I think the value gap, I think that the demand to spend time with people's friends and family and gather experiences and buy less stuff, all these secular and demographic trends are just huge tailwinds for the demand environment."}, {"role": "user", "content": "Makes sense. And then on the expense side, you guys called out some benefits from expense timing in the quarter. I think that was sized at 180 basis points. Is that all showing up in the 2Q guide? Does some of that get punted into 3Q and 4Q. How should we think about that?"}, {"role": "user", "content": "Yes. It's -- I mean, majority of it, almost all of it is in -- should be expected in Q2."}, {"role": "user", "content": "Perfect. Thank you."}]}, {"messages": [{"role": "system", "content": "And we'll go to Paul Golding, Macquarie Capital."}, {"role": "user", "content": "Just one for me, a longer-term question here. I know you're still building load factor. But as you think about Q1 and the strength in close-in bookings, does this change the way you think about Wave and how you manage the booking curve and inventory as you go into the next wave cycle, the next booking cycle and just in the context of what we had through the pandemic, which was a bit protracted booking curve?"}, {"role": "assistant", "content": "Yes. Well, we actually -- through the COVID period had kind of shifted how we go to market with our inventory. We used to kind of put everything out there and all the suites would be sold basically right off the bat, and then you would kind of work your way down to the inside cabins. While now we hold back inventory, and we release it based off of our much more sophisticated revenue management models that we have today. And so all of that takes into account the demand environment we're seeing. And that's why I think sometimes when we get into conversations around what percent booked are you, how does it relate to this period versus that period. What we're really focused on is optimizing yield. And so there might be periods where quarter-over-quarter or year-over-year, we want to be in a stronger book position or less than what we were booked in a previous period, because what we're focused on is maximizing yield, which sometimes you come with us having more inventory to sell. Thank you. We thank everyone for their participation and interest in the company. Michael McCarthy will be available for any follow-up. So we wish you all a great day. Thank you."}]}, {"messages": [{"role": "system", "content": "We will now begin the question-and-answer session. [Operator Instructions]. And our first question today comes from Anthony Pettinari from Citi. Anthony, please go ahead."}, {"role": "user", "content": "Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Just following up --- Hey just following up on the North Charles closure. Is there any detail you can give us on potential cash cost of the closure maybe EBITDA impact? And then I guess on the benefit side, any kind of fixed cost reduction estimate or way to think about that?"}, {"role": "assistant", "content": "Yeah. Anthony, I'll just give you a quick overview and I'm going to have Alex walk you through some of the financials. It's -- we're not really in a position to tell you the EBITDA impact because we're going to be transferring the linerboard and the uncoated craft paper board to other facilities in our network. If you break out the 550,000 tons, about 280,000 tons were linerboard, the remaining were really split between uncoated craft and saturating craft. So, we think it's really immaterial to look at it from an EBITDA standpoint. And DuraSorb was really a low margin volatile segment for us."}, {"role": "assistant", "content": "But as you get into the financials, I'll turn over to Alex to talk about the cash costs."}, {"role": "assistant", "content": "Yeah. Sure. Thanks for the question, Anthony. So, as David mentioned in the quarter, it was $450 million -- $415 million that would all be non-cash. Then in the sort of out periods we anticipate about $25 million for the balance of this year. And then an incremental $75 million between 2024 and 2027. The majority of those out year, our payments would be cash, and they'd be related to ongoing caring costs for the facility. The resolution of some employee matters, ongoing utilities, those sorts of things. So, that should help you with the cash cost. So, in aggregate, you're looking at about $550 million of total cost. About a third of that's cash, and about two-thirds of that is non-cash."}, {"role": "user", "content": "Okay. That's very helpful. And then maybe just switching to Global Paper, I mean that performed above our expectations despite the volume weakness and we global markets. Is there any kind of further detail you can give us on Global Paper in terms of how containerboard versus box board external sales played out, or maybe regions that are still quite weak or maybe others that have maybe looked like they're bottoming or just customer inventories? Or just wondering if you can walk us through the market conditions in Global Paper as you see them right now?"}, {"role": "assistant", "content": "Sure. Happy to do so, Anthony. If you look at the Global Paper segment, obviously, a majority of that is in containerboard versus paperboard. And if you break down our containerboard, the biggest drop has been in export. We probably saw about a 50% drop-in our containerboard export business. Domestic was less than that, but still down double-digits, Kraft Paper much more resilient in domestic markets. And if you look at containerboard moving forward. We believe, we are at a point where we've reached the bottom and you'll start to see sequential improvement quarter-over-quarter, still down year-over-year, especially driven also with the PPW pricing. But we feel good that we've kind of are at the bottom of the trough of the containerboard domestic and export market and see sequential improvement moving forward, but still down year-over-year."}, {"role": "assistant", "content": "If you move over to paperboard, mostly domestic market, smaller percentage in the export market probably about 10% to 12% of our paperboard sales go into the export market. And the export market was down and paperboard and the domestic market was softer, but in the single-digit range. So nothing nearly as material as we've seen in containerboard."}, {"role": "assistant", "content": "So if you break it down, that's kind of how we see our Global Paper business. And just as a Alex mentioned in his notes, despite really unprecedented drop In volumes that we've seen. EBITDA is still up from two years ago 17% margins held at the 16% range, while down over 400 basis-points. The team has done a really good job managing really an unprecedented downturn in this segment that we now fully believe will sequentially improve as we move forward."}, {"role": "user", "content": "Okay. That's very helpful. I'll turn it over. Thanks, Anthony."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Gabe Hajde from Wells Fargo. Gabe, please go ahead."}, {"role": "user", "content": "Good morning, David, Alex."}, {"role": "assistant", "content": "Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "I had a question about just the -- I guess what we've heard from several of our companies was that January started off pretty good and then sort of deteriorated as the quarter progressed. I'm curious if you guys had the same experience. And then your comment, Alex, about corrugated volumes kind of being down, or excuse me -- mid single digit up from March. I guess that still implies down mid single digit year-over-year. So, maybe just a little bit of context around, how the quarter progressed and then what exactly you're seeing on a year-over-year basis in April."}, {"role": "assistant", "content": "Sure. Gabe and I engage just for clarification, I'm assuming you're talking about the Corrugated trends?"}, {"role": "user", "content": "Yes."}, {"role": "assistant", "content": "Yeah. Okay. So, if you look at our quarter, January was definitely our strongest month. We saw it get softer February and March. In February and March, it was pretty stable. We didn't see a drop from March -- from February, it was pretty similar February - March in the softness. And then, as Alex alluded to in April, as we exited March, we saw mid single digits growth in April. And everything customers are telling us, everything we're seeing in our backlogs is -- we'll continue to see that sequential improvement quarter-over-quarter and then of course, down year-over-year."}, {"role": "assistant", "content": "And then one thing to remember in your modeling, and it goes into our forecast for Q3, is we see about a three month to six month lag in our contracts on the Corrugated side. So, with the PPW pricing decline, we'll start to see that here, as we go through the quarter and then the third quarter. But volumes we see sequentially improving. So that'll be the balance as we move forward."}, {"role": "user", "content": "Okay. And I guess, to make sure that I'm interpreting this correctly, the -- on slide five here, effectively, I think you're telling us the prior $1.5 billion of targeted savings that you guys had communicated, I know a portion of that was sort of capital contingent, and it doesn't look like you're kind of spending that $300 million to $500 million of capital this year. I don't know what next year looks like, but that's the piece that you're kind of taking off the table in terms of the bridge to get you to $1.5 billion. So think about $1 billion as if today. And I guess if that is in fact the case, I think Alex said maybe the $4 billion might be achievable still. So, how do you -- I guess, what's the incremental bridge item there?"}, {"role": "assistant", "content": "So, about three questions there, Gabe. I'll try to take them and then just dial me in if I don't get everything that you were after. So, first on the $1.5 billion that we mentioned during our Investor Day. I think it's important for everybody to know, we actually never guided to the $1.5 billion of total productivity. We were always clear that we would reserve some of that to reinvest in the business predominantly around growth. So, what we're doing -- the sort of new news here is we are guiding to $1 billion in 2025 through all of the great work that the team's doing and the self-help initiatives that David mentioned. So, we're focused on controlling what we can control and we're confident that we can deliver that $1 billion is 2025. But as slide five suggests, we still see $1.5 billion in self-help opportunity and we will continue to drive to unlock that opportunity in the out years beyond the 2025 time horizon. So that's, I think on the first portion of your question."}, {"role": "assistant", "content": "On the second portion of your question regarding the capital to attain that, in line with what we suggested during Investor Day, our sort of steady state capital diet is in the order of $1 billion a year. We've earmarked $300 million to $500 million for strategic investments. We've pointed to things like the Longview box plant as an example of those strategic investments investing in some mill conversion type efforts to get to more strategic substrates, would be another example. So, obviously, this year we haven't deployed that incremental $300 million to $500 million, but I think it's reasonable to expect as we continue to drive the WestRock of the future. We will look to some of those strategic investments. So, I think that was the second part of your question."}, {"role": "assistant", "content": "And then the third part of your question is regarding the 2025 targets. I think it's really important for everybody to hear that we're focused on controlling what we can control and we're driving strong execution around the cost savings initiatives and the portfolio optimization strategy, and despite the challenging macroeconomic environment, we're really focused on this. Should the market condition stabilize and the relationship between price and inflation return to more normal levels, we do believe that our 2025 goals remain attainable. But as you would expect, and it should be fairly obvious, if the current macroeconomic conditions persist where this price degradation continues and we have significant inflationary effects, those goals would be under significant pressure. And I don't think that should come as a surprise to anybody. So, hopefully I answered your question. But just to underscore, I do think that this quarter's results in an extremely challenging environment, really underscore the progress we're making in driving what we can control."}, {"role": "user", "content": "Thank you, both."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "We proceed with a question from George Staphos from Bank of America. George, please go ahead."}, {"role": "user", "content": "Thanks very much. Hi, everyone. Good morning. Thanks for the details. Piggybacking on that last question. Alex and David, so you're trying to control what you can control. We appreciate that. We realize that you can't control inflation, and other factors. How do you gauge -- how should we gauge your progress on your commercial progress? And what I really mean is your gain of mindshare market share with new products and your ability to maintain your volume and hopefully grow it in this environment that we're going to be in the next couple of years. Relatedly, you -- we appreciate the statistic on the machine installations and the enterprise sales. Can you give us a bit of color in terms of what the comparisons were, and what your goals for growth here are going to be? And then a couple of follow-ons."}, {"role": "assistant", "content": "Yeah. George, I think that's a really important question, because when you're in a downturn environment like this, it's easy to focus on the cost and productivity, which I couldn't be more proud of what the team is doing. But you never want to take your eye off of growth. And we have a tremendous amount of effort in our commercial excellence initiatives. And when you look at our commercial progress, it's the solutions we're providing and are we gaining new wins in the market with our complete solutions. So, you hit on a couple things."}, {"role": "assistant", "content": "So, first, plastics growth. I think if you were to look at a year ago, we were just over $300 million run rate in plastics replacements. This year we're already at $400 million and we continue to expect that to expand. And when you look at our innovation pipeline of new business, it is significant and some really groundbreaking technologies that the team is working on. And that ties also to our machinery, because it's automated. And when you look at the strong backlog and the stickiness of our machinery and automation business, the customization that we're able to do, we're seeing that just continue to expand our commercial growth. So that is organic growth that we really feel strongly that we're winning."}, {"role": "assistant", "content": "And then on enterprise sales, what's been really nice about our growth in Latin America is the number of multinational companies that want us to provide complete solutions globally. So, they're bringing -- they're doing a lot of onshoring. There's significant growth in Mexico. Brazil, we're seeing tremendous growth. Our assets are really world class in Latin-America. So that enterprise piece, whereas a year ago we were at $8 billion of enterprise sales, we're now at $9 billion of enterprise sales. And so, we feel like this complete solutions that we bring in an environment where we've got a strong innovation pipeline of new products."}, {"role": "assistant", "content": "We measure our new products growth as a percent to our sales. Our machinery and automation provides tremendous stickiness. We have a tremendous backlog in that piece of our business, our plastics replacements. And are we growing profitably? To your point, we don't want to be in this transactional situation where it's onesie type transaction efforts. Our customers are ones that are partners with us, we've had long-term relationships. They value what we've brought to them during a really challenging time over the last couple years through COVID and supply chain tightness. And we're with them right now in global expansion, in organic growth, plastics replacement, and complete solution selling. And we will continue to see the results, like what we see, I believe, this year where we have such a broad range of levers to grow and to get through an economic downturn. We just feel great about our portfolio."}, {"role": "user", "content": "Yeah. So, David, I just appreciate you giving the comparison enterprise sales from last year. Do you have a target for that by whatever interval? And then on machinery, if you had a comparison and a target, that would be great."}, {"role": "user", "content": "And then just my last question, I'll turn it over. In the impairment charge that you took for goodwill, where was that largely centered? Which business or which acquisition over the last number of years saw most of that impairment hit? Just -- are there any things that we should take away? So, as we try to gauge your business and its prospects either across end-market or product line. Thank you and good luck in the quarter."}, {"role": "assistant", "content": "So, thank you, George. Appreciate that. I'm going to address your enterprise and machinery question and then I'm going to have Alex go through the details on our impairment charge. So, as we think about our machinery business, our pack log is incredibly strong. And we're looking to accelerate our manufacturing of those assets because customers are looking to obviously, improve their automation with the labor challenges that are happening. So, we are looking to expand our machinery business, we love this piece of the stickiness that it brings us for both consumer and corrugated. So, you're going to look for that to continue to grow and we'll really start providing more detail on the wins that we have and how that looks."}, {"role": "assistant", "content": "From an enterprise, as we work with the Gondi acquisition and we have just such a wonderful leadership team that came with Gondi and the acquisition, we are just scratching the surface on what that could potentially bring from an enterprise standpoint. One thing to remember about Gondi is, they were doing both corrugated and high graphics. So, there was a consumer aspect to them, so they're already there from an enterprise, because they saw the value with their customers, especially in beverage. And now as we look at onshoring and the connectivity we have in North America with large multinationals bringing that in, I think we're just scratching the surface of what that can bring in Latin America. So, we fully expect it to grow mid single digits, is our expectations, where customers want that growth. And again, that's just another value proposition that I think we have to offer."}, {"role": "assistant", "content": "And then on the impairment, I'll have Alex talk about it."}, {"role": "assistant", "content": "Yeah. I'll go through that, George. So, just to state a couple things that are probably obvious to the group, but are worth stating. The impairment is all non-cash. So, it's not a cash charge. And it is related to historical acquisitions as you would probably guess. It's impossible because of re-segmentation efforts that have occurred, it's impossible to attribute it to any one specific acquisition. I think you could make your own assessment on which acquisitions were more or less favorable in our portfolio."}, {"role": "assistant", "content": "In terms of where it fell regarding the segments, it was largely in our Global Paper segment. So, we wrote the goodwill in our Global Paper segment down to zero, which again, I think would be intuitive given the challenging macroeconomic environment that we've been facing. And then it was about a third of the goodwill in the Corrugated segment. So, that's how it broke out through the financials."}, {"role": "user", "content": "Thank you very much."}, {"role": "assistant", "content": "Thanks, George."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Mike Roxland from Truist. Mike, please go ahead."}, {"role": "user", "content": "Thanks David, Alex and Rob. Congrats on a good quarter despite various headwins[Phonetic]."}, {"role": "assistant", "content": "Thanks, Mike. Appreciate it."}, {"role": "user", "content": "Absolutely. David, you mentioned, I think, in some of your opening remarks that you widened the scope of your portfolio optimization and in terms of identifying non-core assets. So, what I get sense from you, what has changed over the last couple of months for you to take another look at this portfolio optimization?"}, {"role": "assistant", "content": "Yeah. That's a good question, Mike. We've always had this, and we've talked about this over the last several years. I think the biggest change has been what we've seen in the market with the really significant turn that happened in demand, it really allowed us to accelerate where we were. You have to remember a year ago we were basically sold out, and now with this environment that we're in, it's allowing us to accelerate some of the opportunities that we saw. And even when you look at the converting plants, that's a really big opportunity for us because of all the acquisitions we've made. We really never fully integrated it from an operational standpoint. And so, now that we're able to breathe a little bit with where demand is, we're recognizing in some areas we might have multiple converting plants within a couple hundred miles with the productivity that we're generating and delivering and with the ability to potentially move from five days of production to seven days. We can be more efficient in our converting sites, while maintaining customer service levels and improving our quality, improving our flow through."}, {"role": "assistant", "content": "So, I think, Michael, what's changed is, we're able to allocate resources to drive some of these productivity efforts and the success that we're seeing, and this goes back to kind of Alex's comments, we may invest more because we're seeing the return on these investments really deliver for the bottom line."}, {"role": "assistant", "content": "Yeah. So just to build off David's comments, just -- we closed four facilities as we mentioned, I think in the prepared remarks. So, within one of those facilities we had six other sites within 200 miles, another one of those facilities had four other sites within 200 miles. So, a lot of the great work that the team's doing around unlocking that hidden factory is enabling us to consolidate facilities where just by nature of the inquisitive history of the company, we've inherited a bit of a congested footprint So, I think that's really the benefit of the productivity work that we're driving internally."}, {"role": "assistant", "content": "I also think, and this gets back to Gabe's question around CapEx and David touched on it, we learned a lot from the Florence investment that we made. We've learned a lot from the Longview box plant on how do we deploy our capital to build the next-generation of facilities and really fundamentally shift our cost position. And so, as we talk about the $300 million to $500 million of incremental capital, a lot of that is really going to enable us to optimize our portfolio in just a fundamentally different way."}, {"role": "user", "content": "Got it. Very helpful color. Appreciate. Just one quick last question, Alex. You also -- you mentioned some unplanned downtime at several mills and that you're working to improve overall, I guess mill reliability. Can you just provide some more color on what happened at those mills? If you can share which mills they were? And if the impact is ongoing and impacting fiscal 3Q and beyond?"}, {"role": "assistant", "content": "Yeah. So, I'll start and David can pile on. I'm reluctant to sort of call out specific mills just because unplanned downtime is sort of the nature of the beast in any asset intensive manufacturing operations. Some of the examples of that include basically issues in the head end. It includes tears and breaks. It includes issues with the winders. So, in the quarter, what we pointed to specifically were some unplanned downtime events predominantly in the mills that serve our Global Paper business. This is one of the reasons when you look at the productivity bridges, you'll see a pretty big negative productivity impact in the Global Paper business. And again, if you know our mill network, you can kind of deduce where a number of those mills were."}, {"role": "assistant", "content": "Again, pointing back to focusing on what we can control, what we can control is recapitalizing our assets and driving productivity through the deployment of that capital. And so, we're really looking hard at what are the root causes of these unplanned downtime events and how do we address those through the strategic deployment of capital."}, {"role": "assistant", "content": "And in cases where the deployment of that capital is not going to meet our return thresholds, then we'll look at closures just like we did in Panama City and Charleston. But an example that we've talked about a lot is our ongoing winder investment program. We're really upgrading our winders across the entire fleet that drives better reliability of the mills and brings us to a different position on the cost curve. So that's how we're -- that's what the issues are and where it manifests in the network, and then how we're thinking about addressing those issues as we drive towards the $1 billion in 2025 and beyond."}, {"role": "assistant", "content": "And David, what would you add?"}, {"role": "assistant", "content": "Yeah. The only other thing I would add on that is, what we're really interested in investing in is looking at predictive analytics. This is an opportunity for us to ensure that we understand if there is heavy vibrations on a machine, we can capture it early, fix it before there's any unplanned downtime as a result of that. So, we're also -- as we look at capital investments, we're also looking at digital investments and we're piloting some pretty neat technologies that are giving us really good insights into our equipment and into our reliability. And I think you can expect us to continue down that pathway."}, {"role": "user", "content": "Great. Thanks very much. Good luck in the quarter."}, {"role": "assistant", "content": "Thanks Mike. Appreciate it. And our next question comes from Mark Weintraub from Seaport. Mark, please go ahead."}, {"role": "user", "content": "Thank you. Wanted to ask, as you're going through this process of identifying the assets to be reinvesting in and obviously in Panama City, Charleston, the decision to close, are you seeing that there's a real wide discrepancy in the choice set that there are mills and assets in your system that are well capitalized and highly profitable, and then there are mills in your system that are at the very far end of the scale? And so, then you have to kind of choose among that subset, or is it more that it's sort of more even across and you've got to make decisions on, this is the best places in difficult decision to make -- these are the ones that we choose to go forward with? And are there -- and maybe just start with that, please."}, {"role": "assistant", "content": "Yeah. No, that's -- it's a good question, Mark. And I think it goes to the inquisitive nature that the company history has. And when you make these acquisitions, you do get a variety of assets that maybe have been under capitalized versus over capitalized in the strategy of the company that made those acquisitions."}, {"role": "assistant", "content": "And so, to answer your question directly, I would say we do see a wider range of assets that are well capitalized versus maybe underinvested. And they sit differently on our cost curve as we look at it from a cost per ton basis. So, what we want to make sure we do is, we never want to make sure we underinvest in our strategic high quality assets. So, we make sure we keep those at a great level and maybe some of those -- the other end of the spectrum. We -- that's the decisions that we make. This is the investment we need to get to the asset quality that we want. Does it give us the return that we expect from that investment? And if it does, we'll always look to invest. And if it doesn't, we have to make the hard decisions like we made in Panama City or in North Charleston."}, {"role": "user", "content": "And..."}, {"role": "assistant", "content": "Does that help answer your question, Mark?"}, {"role": "user", "content": "It does. Obviously, a more precision over time just as would be incredibly helpful. And for instance, just understanding. With North Charleston, what is the finance -- how do you see the financial impact in -- presumably you have a sense of the cost takeout and much of that -- as you've mentioned, much of that production, you think you're going to be able to shift. So that's really a cost takeout, but we are going to lose whatever EBITDA might have been affiliated with DuraSorb. So, presumably that would be something we could get something of a sense of as we try to figure out the kind of the thought process behind making that move."}, {"role": "assistant", "content": "Sure. So, let me take a run at it, Mark. And I think the challenge with answering your question, just to be very candid is, is obviously we're not going to talk about specific mills before any decision has been made for a lot of reasons that I think should be obvious."}, {"role": "assistant", "content": "But as David mentioned, there's a very sort of balanced scorecard that we look at in terms of what are the grades that the mill produces and how strategic are those grades and substrates, what is the source of fiber and the fiber supply and is that competitive when you start thinking about recycle mills, about a third -- the ongoing capital diet as a virgin mill. And so that's obviously something that we evaluate. And then what markets does the mill serve and what's the EBITDA less CapEx contribution of those mills? And so that's really the criteria, and we tier each one of the mills in a tier one, tier two, tier three, tier four framework, which I've described for this group before. And we're always looking at -- if a mill can't move between those tiers, how do we adjust our capital accordingly?"}, {"role": "assistant", "content": "As it relates to the Charleston question, which was your specific question. It's an interesting case because we're able, and I think David mentioned this in a prior question, we're able to basically move a lot of the production of that mill to other mills in the system, again, through the great work that the team's doing and unlocking the hidden factory. And then for the non-strategic highly volatile doors or product that's a product line that were not strategic for us and we'll exit that and work with our customers to exit that over time. But in aggregate there is essentially no EBITDA impact from the closure of that mill. And there's a significant benefit in terms of our capital efficiency because we can redeploy that capital into our higher performing assets. And so that's how we thought about it, and that's the same -- candidly the same framework we use for Panama City, and it's the same framework we'll use for ongoing decisions."}, {"role": "user", "content": "Okay. That is helpful. Well, shifting gears, one thing I noticed is, you have a lot less maintenance downtime in the fourth quarter, your fourth fiscal quarter. How big a benefit all else equal would that typically provide as we're thinking sequentially from the fiscal two to the fourth quarter -- fiscal third to the fourth quarter."}, {"role": "assistant", "content": "Yeah. So, fourth quarter -- yeah. Mark, fourth quarter is usually always our lowest maintenance downtime scheduled. As we look at it this year, it is -- I think we have about 19,000 tons scheduled for impact. We'll look -- and then we did this last year. We'll look as we look to balance, should we -- can we pull in some Q1 depending on where the market conditions are for 2024 into fourth quarter? But that's just typically how it happens. And historically it's always been that way. But we'll continue to balance it. And if market conditions continue with the way they are, we can maybe pull some scheduled maintenance in Q1 2024 into Q4. But as we've mentioned, we do believe sequentially we'll continue to see volume improvements. And that's going right into our planning as how we see the market."}, {"role": "assistant", "content": "And maybe Mark, just to help with the math a little bit, I think we mentioned on the call, we did take 265,000 tons of economic downtime and slow back that cost the company about $58 million. So, you can sort of do the math to figure out how much the downtime costs us when we take it. And that's obviously -- economic downtime, not maintenance downtime, but I think it's a relatively good heuristic."}, {"role": "user", "content": "Okay. Because sometimes maintenance downtime is often a lot more expensive than economic because you're actually spending money in the course of the maintenance. So that's sort of what I was just trying to get a bit more clarity if there was -- help you could give us."}, {"role": "assistant", "content": "Yeah. Okay, yeah. I mean, it's a fair, it's a fair point. Although. There is incremental cost associated with the economic downtime, as well as relates to the inefficient usage of machinery inefficient usage of labor and that sort of thing, a lot of the incremental costs associated with maintenance downtime is capitalized overtime. So again. I think it's a fair juristic to use without getting into specifics of what the maintenance downtime cost us."}, {"role": "assistant", "content": "Yeah. Maybe one last comment I'd add on that is we also have the ability, can we get the equipment that we ordered that we may have scheduled for our maintenance downtime. Backlogs are coming down on equipment, but they really got stretched out over the last year or two. So, some -- we've got to make sure we plan our scheduled maintenance as we can get the equipment in, so we can do the proper work."}, {"role": "user", "content": "Okay. Super. And one -- excuse me -- one last one, just on Nat -- on the energy. If I look at the delta you're expecting for the full year, and I think you buy like 85, 90 MMBtu of Nat Gas, and so that's a pretty low number. Do you have a fairly significant hedging program in place that is kind of minimizing the benefit for this year that we potentially can be seeing next year if Nat Gas has stayed where they are?"}, {"role": "assistant", "content": "Yes, A couple things for me to sort of clarify on the bridge. To your specific question on hedging, about 50% of our natural gas is tied to NYMEX. And we do hedge a portion of that through basically a dollar cost averaging approach over time. And so, our realized NYMEX prices is slightly above what you'll see in the -- if you were to look at the NYMEX strips currently. But then we're reaping a benefit of that over time as natural gas comes back to more normal levels."}, {"role": "assistant", "content": "The remaining 50% is tied to local contracts. And so, there -- that tends to be pretty variable depending on transportation premium, local market dynamics, contract structure, all of those sorts of things. So that's why our natural gas -- delivered natural gas is not directly comparable to NYMEX spot."}, {"role": "assistant", "content": "The other thing in the number that we provided that includes -- it's not just natural gas, it includes electricity and coal as well, as well as other things like diesel and fuel. So, it's a bit of a bucket of total energy costs, not just natural gas. So, hopefully that helps? Okay, super. Thank you."}]}, {"messages": [{"role": "system", "content": "We have a question from Cleve Rueckert from UBS. Cleve, please go ahead."}, {"role": "user", "content": "Hey, good morning, everybody. Thanks for sneaking me in at the end here."}, {"role": "assistant", "content": "Yeah. Morning."}, {"role": "user", "content": "Just a couple -- morning. Just a couple of quick follow ups, because I think there's been a lot of good color. Now, first of all, David, I'm wondering if you could just give us some color on what's giving you confidence in the troughing demand that you're talking about. It has been a subject of debate for the last couple of months. I'm just wondering if you could give us some color on that and what you're seeing?"}, {"role": "assistant", "content": "Yes. I'd start on the containerboard side. I think, just as we look at April orders over March of mid single digits, I think we're -- on the domestic side, I think we're getting through most of the destocking that needs to occur and just how customers talk about the second half of the year, which is just a little bit more -- just a little bit more optimism. The piece that I would also say though is, it's still going to be down year-over-year. And we still have some pricing headwinds with our contracts in the second half of the year. But we do believe volume sequentially will continue to improve. I mean, we're out talking to our customers every day on this. We're working with them every day. But it'll be a slower ramp up. But we do see it sequentially get better quarter-over-quarter."}, {"role": "assistant", "content": "On the consumer side, we -- as we talk to our customers, and again, it's different by segment, our backlogs remain at about six weeks, which is a solid backlog for us where we can continue to provide the service levels we have. We are seeing some segments that have been softer. And then we're seeing some segments like health and beauty, that have been a little bit more resilient. So, as we talk to those customers, I think they're feeling optimistic on the second half of the year. But I think some segments are definitely a little softer and some are a little bit more resilient from this standpoint. And then as we move forward, continuing that trend."}, {"role": "assistant", "content": "On the paperboard side, as we've mentioned, we've seen a little bit more softness domestically. And we'll watch that trend in our Global Paper business, and see how that continues as we move forward sequentially as well. But it's really been for us on the Global Paper side, on the container board side, and we'll continue to hopefully see that sequential improvement that our customers are talking about, and we'll just have to balance the PPW pricing deflation that's occurred."}, {"role": "user", "content": "Got it. Thanks for the color there. And sorry, if I missed it earlier, but I didn't hear any real detail on what drove the outperformance versus guidance in the quarter. I think -- I appreciate natural gas was lower than plan, but could you have any detail on there, what was different than the guidance and then, maybe some sources of variability that we can track into the next quarter?"}, {"role": "assistant", "content": "Yes. So, really, there are two primary drivers. Gondi continues to really perform well. And so, we're again, just highlighting how excited we are about that acquisition, the growth opportunities that it unlocks, and the quality of those assets. And so that was a business that I think exceeded our expectations in the quarter and given the newness of the acquisition, just a little bit trickier for us to forecast. And then, we did have quite a bit of benefit from inflation, that exceeded our expectations. So, those are really the two biggest drivers."}, {"role": "assistant", "content": "And again, all of the actions that we're taking to focus on what we can control, we know it's a challenging market, and so we've been driving a lot of work on the cost side to take cost out. We pointed to run rate savings in SG&A in the order of $200 million this year. We pointed to procurement and supply chain savings for the year on a run rate basis of between $250 million to $275 million. So, again, just really driving towards that $1 billion of cost savings by 2025 with great execution."}, {"role": "assistant", "content": "Yeah. And I would just add, even with the terrific performance in Latin America, which I think is really important as you look at our portfolio, you've got Mexico, which has been estimated to grow at 50% faster than North America. You've got Latin America where we have just wonderful assets, terrific leadership in our Latin America business. So that's really helping drive differentiation."}, {"role": "assistant", "content": "But then if you just look at North America, the performance of the North America team has been really, I think very, very strong. Our EBITDA was basically flat, as you look at just North America. So that just talks to the productivity and cost savings improvement that are going on. Our North America margins actually went up 50 basis points in this challenging environment. Now that'll certainly get pressure with some of the pricing, but it, I think, illustrates, all the efforts are really starting to have an impact on our bottom line."}, {"role": "user", "content": "Yeah. Yeah. I mean, well, I hope you can appreciate from our side, we're trying to gauge whether there's any conservative assumption in the Q3 guidance, and how much of that -- productivity that you're talking about carry through. But we can follow up on that offline."}, {"role": "user", "content": "Alex, just one really quick follow up. I don't want to take up too much more time. Do you have an expectation for OCC prices for next quarter that you can share?"}, {"role": "assistant", "content": "Well, let me get back to your prior question. I know you said we could take it offline. But we -- when we guide, we guide with our best assumptions that we have at the point in time, and we focus on execution. And the fact that we were able to deliver a very strong quarter in the face of a really challenging macroeconomic environment just points to really, really great execution and all the progress that we're making on how we're transforming the company. And we've talked about that at length."}, {"role": "assistant", "content": "As it relates to, and David's mentioned it several times, but as it relates to the back half of the year, we do anticipate that the price impact that we've seen through the Global Paper business will flow through the converting business because of the nature of the contracts. And again, David's mentioned that a number of times, but when you think about our guide for Q3, that is clearly a headwind that we're facing. It's not going to slow down our execution, but it is a headwind that we're facing, which is probably the principle assumption in the outlook and how we're thinking about the second half."}, {"role": "assistant", "content": "As it relates to your question on OCC, we are not really -- we're sort of suspending the practice of giving a specific outlook on OCC pricing, because obviously that it sort of -- it doesn't work in our favor from a commercial standpoint. We did point to total fiber costs impacting the year-over-year comp by around $250 million to $300 million. We do expect OCC to trend higher as we look to the back half of the year. And that's -- as this new capacity comes online and the demand for OCC goes up, we do anticipate it to trend higher. But of course, that could be offset to the extent there's a weaker demand environment for finished product. But we're not going to comment specifically on what we think OCC cost per ton is going to do. PPW probably does or not PPW, but resi probably does as good a job at that as anybody."}, {"role": "user", "content": "Okay. All right. Thanks for that, Alex. Appreciate it."}]}, {"messages": [{"role": "system", "content": "And this concludes our question-and-answer session. I would like to turn the conference back over to Rob Quartaro for closing remarks."}, {"role": "user", "content": "Thank you everybody for joining our call today and your interest in WestRock. As always will be available if you have any additional questions. And we look forward to updating you again next quarter. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your first question for today is coming from Ari Klein at BMO Capital Markets. Ari, your line is live."}, {"role": "user", "content": "Hi. Thanks and good morning. Sorry about that. Just maybe relative to the prior outlook, what's been the biggest surprise to the upside that's giving you the confidence to increase the outlook particularly in the second half of the year."}, {"role": "assistant", "content": "Yes, Ari, I think the fact that all three segments, it's not isolated to any one of our business segments, but all three segments are really firing on all cylinders. We haven't seen any slowdown in the leisure segment, as Sourav mentioned, we're up 5% in RevPAR growth in Q1 in the leisure segment of our business, and we had six resorts that had transient revenues of $1,000 or greater."}, {"role": "assistant", "content": "So it's apparent to us that the well-heeled leisure consumer continues to want experiences. They want experiential experiences. The shift from goods to travel and other experiences has occurred and it's real and it's very sticky. And that's notwithstanding the fact that we anticipated that there was going to be a natural migration out of the resorts as people got more comfortable traveling internationally to the Caribbean, to Europe and to other places and going back to our downtown hotels. Which leads me to the next piece of the business. Our downtown hotels have really seen business return in a material way. And not only business transient but leisure business."}, {"role": "assistant", "content": "So we feel really good about the way the recovery is unfolding and the way things are pacing for the leisure consumer. Group is really firing on all cylinders. Total group revenue pace is now up 2.5% to the same time in 2019. Group rate on the books for 2023 is up nearly 6.4% to the same time last year, and that's a 90 basis point increase since the fourth quarter. We're still seeing, as Sourav mentioned, a significant amount of bookings occurring in the quarter for the quarter. I think last quarter it was 28% compared to 2019. We're up 3.4 million room nights definite on the books now."}, {"role": "assistant", "content": "That's 94% of 2022 actual relative to where we were in last quarter, I think it was about 80%, somewhere in that range. So we saw a significant pickup and business transient continues to evolve as well. We're seeing the recovery in BT led by small- and medium-sized businesses. As well as increased rate being driven by special corporate. So I think it's all of the segments are really firing on all cylinders."}, {"role": "assistant", "content": "And I'll let Sourav add a little more color on BT."}, {"role": "assistant", "content": "I think specifically, when you look at the second half, what really gives us confidence is the group booking activity for the second half, we picked up 237,000 room nights. Just to put that into perspective, that's 35% more than what we picked up in Q1 of '19 for the second half of '19. So real apart from just in the quarter for the quarter group pickup, it was really encouraging to see meaningful activity not only for Q2. Q2, we picked up about 180,000 room nights, that's 13% above '19 but also for the second half of the year."}, {"role": "assistant", "content": "The last thing I would add is that as we thought about Q2 in connection with our fourth quarter call, we were looking at a scenario where we were anticipating flat RevPAR growth for Q2. Now we have given you RevPAR growth of 4% to 6%."}, {"role": "user", "content": "Thanks for the color and if I could just ask on Orlando and the condo development there. If you could just give a little additional context on that decision? Maybe what you expect the total cost to be and whether or not there are similar types of opportunities that you could potentially pursue?"}, {"role": "assistant", "content": "Yes. The thought behind the condo development adjacent to our Four Seasons Resort was an ROI project that we anticipate is going to generate cash-on-cash returns in the mid- to high teens on the development and sell-out as a stand-alone venture, they are going to be Four Seasons branded units, which is a very, very attractive branding to have whenever you're building and selling something of this nature."}, {"role": "assistant", "content": "Additionally, what we have been taken into consideration is the uplift that the hotel is going to received from having these 40 additional units adjacent to it in terms of food and beverage spend, spa spend, golf spend, all the ancillary revenues that are going to be driven, which we believe are real and sustainable at the hotel property. So the total cost is going to be somewhere in the area in $150 million to $170 million. And with respect to whether or not we have other opportunities, as you know, we have an ongoing pipeline of ROI projects that Host. And we are constantly working on additional ways to enhance shareholder value through deploying capital in ROI projects."}, {"role": "assistant", "content": "To remind you of some of the ones that we've done in the past, we built 19 villas at the Andaz Wailea on Maui. We built the AC Kierland on a parking lot at Westin Kierland Resort in Phoenix. We're doing the expansion of the Phoenix of the Canyon Suites at the Phoenician. So we have other projects in the pipeline, but we have always been very thoughtful, I think, with respect to our messaging, and we do not message these projects until we're confident that we have the entitlements and we're confident that we're going to move forward with them."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question for today is coming from Anthony Powell at Barclays."}, {"role": "user", "content": "Hi. Good morning. Question about, I guess, you're growing a bridge loan book. I think you have two loans expiring later this year. Have you started to talk with the borrowers about extending those loans? And just generally, how much capital are you willing to have tied up in these loans going forward?"}, {"role": "assistant", "content": "Well, I think, Anthony, that we expect both of the loans on the share -- both Sheratons to be repaid in the second half of the year. The loans are in compliance with the loan documents, payments are current. Both of the borrowers fully anticipate that they are going to be in a position to pay us back. So we have no concerns with respect to getting repaid on those loans. With respect to the Camby, it was a unique situation."}, {"role": "assistant", "content": "We had acquired the Four Season Jackson Hole in 2022. And we made a decision that Camby wasn't an asset that we needed to own or wanted to own for the long term, given the amount of capex that needed to go into the property and our terrific exposure in the Phoenix metropolitan area with the Phoenician and the Westin Kierland we've got, I think the two best resorts in the market. There is some new supply coming into the Phoenix area. And we made a decision that at $110 million, it made sense to sell that hotel."}, {"role": "assistant", "content": "We wanted to make certain that we could take advantage of the reverse like-kind exchange opportunity by investing by designating the proceeds from that asset as a reverse like-kind exchange into the Four Season Jackson Hole property because we had a very low basis in the asset. So that was one of the reasons that drove us to provide solid financing. I'll just -- I'll make a broader comment. First of all, I don't see us doing this on any broad scale. And it's for a number of reasons."}, {"role": "assistant", "content": "Number one, we don't -- we're -- the portfolio is in a really terrific position right now. Given the capital allocation decisions that we've made over the last six years, from 2018 forward, we have sold $5 billion plus of assets and really have called the assets that we dumped, but we didn't want to own for the long term out of the portfolio. So I don't see us doing many more bridge loans, if any more bridge loans today. But the assets that we have sold, not greater than I think 65% to 70% loan to value. So we've gotten a nice slug of equity in connection with the sale. And if something were to go south, what we do for a living is on hotels. So I wouldn't bother us at all if we had to take a property back."}, {"role": "user", "content": "Thank you for the detail."}]}, {"messages": [{"role": "system", "content": "Your next question for today is coming from Smedes Rose at Citi."}, {"role": "user", "content": "Hi. Thanks. I wanted to ask you just a little bit more on the group side as kind of what you're seeing in terms of kind of the composition of demand? Is it mainly coming from smaller groups? Or are you seeing a return of kind of Fortune 500 bookings and kind of maybe you could talk about that a little bit? And then just with that, could you just touch on what you're seeing in some of the larger relatively recently renovated marquee properties in San Diego, San Francisco and maybe New York."}, {"role": "assistant", "content": "On the group front, it is certainly more so being driven by smaller corporate groups. One thing which came back meaningfully and I talked about this in my prepared remarks, was Association is now down only 2% in terms of group revenue to 2019. Corporate group revenue up 6% to '19 and 26% was driven by rate in the first quarter. So a meaningful pickup in corporate group revenue -- the gap right now, I would say, is really on citywides."}, {"role": "assistant", "content": "We are, for 2023, about 83% of where citywide room nights were back in on 2019. So there's still a long way to go in terms of citywide pickup. But overall, what really is picking up, we saw corporate group continuing in last year and multiple quarters, and we saw the same thing happen in Q1, but the big comeback has really been association, which we are seeing meaningful activity not only into Q2, but as well as the second half."}, {"role": "user", "content": "Okay. Thanks and then just quickly on your Four Seasons, the condo development, would you expect any disruption to the hotel? Or is it far enough away that it won't impact your guests?"}, {"role": "assistant", "content": "Not anticipating any disruption, Smedes."}, {"role": "user", "content": "Thank you, guys."}]}, {"messages": [{"role": "system", "content": "Your next question for today is coming from David Katz at Jefferies."}, {"role": "user", "content": "Hi. Good morning, everyone. Thanks for taking my question. I just wanted to follow on to that commentary, which, Sourav, I know you repeated in terms of the makeup of the group business strength. Is there any commentary or any color with respect to large corporate groups and the citywides, meaning, have they just not gotten around to booking yet. Is there's some expectation or is there some trepidation to it? How should we look into that?"}, {"role": "assistant", "content": "David, if you think about sort of where the big citywide come from? And just to put into perspective for Host for our portfolio, we have about 20% to 25% of our overall group room nights that really come from Citywide. We have done a really good job across the board, bringing in in-house groups which are self-contained. And with a lot of our hotels where we've expanded meeting space, we now have the ability to actually house the groups completely in-house and are less dependent on citywides."}, {"role": "assistant", "content": "But in general, if you think about a lot of the convention centers that were actually closed during the pandemic just in terms of sales staff gearing up and selling those cities, there is more of a ramp-up time, and we were talking about this last year, how you were expecting that citywides would be sort of the last ones to come back in a meaningful way. it certainly is very, very market specific."}, {"role": "assistant", "content": "As you well know, like when you look at San Francisco, that's pretty meaningfully relative to pre-pandemic levels. But other places where we are seeing actually group bookings, which are being driven by citywide and have a good citywide pickup into future years are cities like Boston, like San Antonio, like Chicago. So it is coming back, but it's just a matter of the entire sales staff getting all geared up and selling those cities. But so we do expect that to further ramp up with time."}, {"role": "user", "content": "I see. So we should take it as further upside. And if I can sort of follow up to the strong results and the guidance that you've already given us, by the way. If I can just follow on with respect to San Francisco because it is a city is a matter of debate. My sense is that you've done reasonably well there, can you just talk about what's going on there for you and sort of how you're differentiated than what we've seen in other areas?"}, {"role": "assistant", "content": "Sure. I'll share our broader thoughts, and then Sourav can get into a little more detail on what happened in San Fran in the first quarter and how we're thinking about it for the balance of the year. So the city clearly has its challenges. There's no question about it. I will tell you, we're not writing San Francisco off. I think we have a mayor in that city that is committed to fixing the actual problems and then dealing with the perception as well."}, {"role": "assistant", "content": "From our perspective, we feel very good about the assets we own there. Given their location and many of you on the call have recently visited our Moscone, Marriott Marquis in connection with NAREIT. So you know what type of asset it is. It's in great shape. It's been fully renovated and repositioned and it is Main and Main for any business that is going to book through the Moscone Convention Center. And it is an asset that is extremely well set up to go after and bring in in-house group. So we have that hotel and then we have the Grand Hyatt on Union Square another terrific property."}, {"role": "assistant", "content": "So as we think about the assets we own in that market generally and then the third material asset is the Marriott Fisherman's Wharf, which is a leisure hotel as opposed to group and citywide property. We like the assets we have. We like the condition that they're in. So we're in a pull position to really take market share and be the first to fill as business returns. And we have seen some good results, and I'll let Sourav get into that with you in a moment."}, {"role": "assistant", "content": "Now I don't want you to think that we don't have concerns about San Francisco because we do absolutely. I have concern about how the market is performing relative to 2019 and what happened with the layoffs in the world of tech and the like, and return to office in that market is really lagging the rest of the country. But it is the center of tech and it's going to be the center of artificial intelligence as the world returns."}, {"role": "assistant", "content": "So with that, I'll let Sourav give you some specifics on how our hotels performed in the market."}, {"role": "assistant", "content": "For the San Francisco market, we were around 61% occupancy or so at about $291. While RevPAR overall relative to '19 is down 27.5%. We did actually exceed our expectations by about 1.5% or so. And that was driven by strength of group but in particular, with the return of the JPMorgan Group."}, {"role": "assistant", "content": "Food and beverage did really well. We were actually up almost 10% compared to our forecast. And this is due to just increase in contracted banquet minimums, which frankly, we have been seeing across the board, but really did help San Francisco quite a bit. We do see a lot of in the quarter for the quarter pickup in San Francisco, a lot of the rooms that were actually booked a big piece of it was San Francisco that we picked up in the quarter."}, {"role": "assistant", "content": "Overall, when we are looking out for the rest of the year, there are a few citywides that are there, I think, for 2023, the total number of citywide is about 34. And then another 20 citywides confirmed for 2024. So there is certainly -- I would be cautious and say somewhat of a positive trend. And while it's a lot of it is short term and not necessarily long-term pickup. There's certainly some green shoots in San Francisco."}, {"role": "user", "content": "I really appreciate it. Good quarter. Well done. Thanks."}]}, {"messages": [{"role": "system", "content": "Your next question is coming from Michael Bellisario with Baird."}, {"role": "user", "content": "Thanks. Good morning. Probably for Sourav here on the expense side of the P&L. Are you seeing any easing of the cost pressures or the hiring challenges that you've mentioned previously? And then do you have any updated forecast where you see wages and benefits tracking for the remainder of the year? Thanks."}, {"role": "assistant", "content": "Yes. Our outlook in terms of wages benefit for the year, year-over-year increase is still at the 5%-ish. Don't expect that to change for the year. We are tracking well on that. In terms of just overall staffing, given where our business volumes are right now, we feel pretty good. I would say we are fully staffed across the portfolio and are not seeing any major challenges."}, {"role": "assistant", "content": "I mean it still is in certain markets, difficult to hire a line cook. But apart from that, we are lucky where we are predisposed to primarily Marriott managed and Hyatt managed hotels, brand-managed hotels, which they do a really good job of acquiring talent and retaining talent and really are pushing for hospitality as a career, which has made it much easier to staff-up, not only staff-up, but really get quality talent into our hotels."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question is coming from Bill Crow at Raymond James."}, {"role": "user", "content": "Good morning, everybody. Jim, or maybe this is more of Sourav's question. When you look at BT travel specifically, and you take out the higher rates that we've seen. Where is occupancy or demand depending on how you want to look at it relative to '19. How big is that gap?"}, {"role": "assistant", "content": "Yes, that gap from a volume perspective, depending on the market bill, is still down anywhere from 15% to 20%. We obviously had a meaningful rate pick up, which -- so if you look at sort of March, I said in my prepared remarks, our overall BT revenue is now down only 7% to 2019. but it is really market dependent. Certain markets are ahead. New York, for example, is meaningfully ahead almost close to where we were back in 2019. But I would say, in general, somewhere between down 15% to down 20% in terms of volume."}, {"role": "user", "content": "Thank you for that. Then do you expect that, that gap can be narrowed further this year? Or do you think that given the overall cost of travel, the macro headlines and tech layoffs, all that other stuff that we read about. Is that something maybe is it next year or even 2025."}, {"role": "assistant", "content": "It's a little difficult to tell how that ramp is going to occur just given the macroeconomic uncertainty overall. But we are seeing a positive trend and sequential month-to-month improvement. One other thing to keep in mind, as we sort of talked about in our prepared remarks is, we're getting a lot of demand from small and medium-sized of business transient versus the larger companies. And some of that comes in through retail, which is difficult to classify exactly as business transient. So some of the gap or one could argue is being made up by selling more directly through retail as opposed to being classified business. But in general, we still expect some improvement to occur but probably plateauing until there is more macroeconomic certainly."}, {"role": "user", "content": "Great. Jim, if I could just ask you a quick one. You noted that you're in the hotel ownership business, which I agree, but you're also in the shareholder returns business. I'm wondering if the prospects for acquisitions can be appealing enough to use capital in lieu of share repurchases?"}, {"role": "assistant", "content": "Yes. No, we're actively evaluating potential investment opportunities. I think the gating factor that really distinguish his Host is the fortress balance sheet that we have. Finishing the quarter now back down to 2.2 times leverage, after all the activity that has occurred over the last several years, in particular, including the eight acquisitions that were completed over the course of '21 and '22 as well as the $1.5 billion that we put in our portfolio, all that is leading as well as the capital allocation decisions that happened from '18 forward, that's what's leading to our outperformance today."}, {"role": "assistant", "content": "So I just -- I want to set the table and the transformation of the portfolio with our RevPAR up 9% on a comparable hotel basis to 2017, TRevPAR up 15% and EBITDA per key up 31% and our unblenching and unyielding focus on expenses and margins is a big reason why we were able to flow through our 24% to 27% RevPAR guidance in first quarter and deliver 31% and put in a substantial beat and raise for the entire year. So we will continue to look for acquisitions that will elevate the EBITDA growth profile of the company. Right now, what we're seeing out there is a fairly wide bid-ask spread between dollars, what sellers want and what we're prepared to pay today."}, {"role": "assistant", "content": "Now that can change, and it can change for a number of different reasons on. I'm talking about non-distressed assets right now. But it can change as we see a clearer picture of the macro as we and everyone else draw some conclusions about how the economy is going to perform going forward. And when I say it can change on both sides, right? I mean we can get more bullish on our underwriting and have a different point of view with respect to our cost of capital. If the Fed does get into an interest cutting mode, which the Street seems to be banking on. They're looking for two rate cuts back half of the year. I don't know if that's going to happen or not."}, {"role": "assistant", "content": "On the other hand, if things get tough, then maybe some of the sellers' expectations are going to change regarding value. So we're keeping very close tabs on what's happening in the transaction market. We're also tracking all of the CMBS loans that are going to be maturing later this year and into '24 and '25. So that is one place clearly that we will be prepared to deploy capital. But the great thing about our balance sheet is that it's not mutually exclusive from a Host perspective."}, {"role": "assistant", "content": "We can buy assets. We will continue to invest in our portfolio. We'll continue to do ROI projects to generate shareholder returns. The dividend at $0.12 a share. We'll be talking to our board about what the next quarter's dividend is. And we have the capital available to do share repurchases as well. So it's kind of threading a needle, but we have the ability to do it all."}, {"role": "user", "content": "Very good. Thank you, Jim. We'll report and see you next week."}, {"role": "assistant", "content": "Likewise."}]}, {"messages": [{"role": "system", "content": "Your next question for today is coming from Chris Woronka at Deutsche Bank."}, {"role": "user", "content": "Hi, guys. Good morning. Thanks for all the details so far. So my question will be on kind of group rate. It seems like you're really starting to benefit from some of the rate increases you got on stuff booked post-COVID. Where do you think you are if we want to use the baseball analogy of innings in terms of recapturing or maybe the answer is pushing group rate? I mean, how long of a tail do you think that has? What kind of increases are people agreeing to now for business -- group business out in, say, '24 to '25."}, {"role": "assistant", "content": "Yes, we continue working with our managers to make sure that rate is certainly a priority. And those conversations, frankly, in a high inflation environment are much easier to have than otherwise. And if you look at sort of where we were in terms of our group rate, just for 2023 at the end of the fourth quarter, we were around 5% higher year-over-year, and we improved 90 basis points already by the end of the first quarter."}, {"role": "assistant", "content": "So wherever possible, we keep on pushing those rates, and we feel pretty confident that as their availability starts becoming more challenging as we go out into the future, and we have been seeing lead times really expand. So once those specific date start getting booked up into the future, that leads to real yield management and be able to drive rates even further. So all in all, a really good trend from a rate perspective, and we are seeing continuously rate strength not only into '23, but '24 and beyond."}, {"role": "user", "content": "Okay. Thanks, Sourav."}]}, {"messages": [{"role": "system", "content": "Your next question for today is coming from Stephen Grambling at Morgan Stanley."}, {"role": "user", "content": "Hi. Thanks. This is perhaps a longer-term question. But with some of your brand partners in the midst of large tech investments, how would you characterize the opportunity from a tech overhaul coming from some of your partners? And then zooming out, what are your general thoughts on artificial intelligence on how that could not only approach how you bring or what you bring to the business, but also what are your brand partners fit in?"}, {"role": "assistant", "content": "Given that Sourav was the father of our relationship with IBM Watson, Stephen as much as I'd like to answer this question. I'm going to let him answer it."}, {"role": "assistant", "content": "Thanks, Jim. In terms of what our brand partners are doing with technology, I mean, we have had -- has always been at the forefront of trying out new technology, whether it's proof of concept of piloting new technology to drive not only productivity improvement and just looking at overall sort of expenses, but also what is really going to drive customer satisfaction and what I like to refer to as sort of reduced transaction friction."}, {"role": "assistant", "content": "And those are conversations that we have with our managers is when you think about sort of the front desk of the future, does there really needs to be a front desk period, if you're going to give -- provide the optionality and flexibility to the guests of having access to your room, whether it's through your phone or whether it's through getting a physical key card to a kiosk and then being able to -- if nothing else is there, you can approach a Host or hostess to check you in."}, {"role": "assistant", "content": "So those are the kind of conversations we are having is how do you really leverage technology change the long-term sort of operating model that we have had and drive not only efficiencies but improved customer satisfaction. As it relates to artificial intelligence, as Jim briefly mentioned there, we entered into this partnership with IBM Watson, the back end 2018. And it really -- there was -- it was really with IBM Research to develop a proprietary model for us that will help us identify markets that outperform or underperform and rank them so we can make much better capital allocation decisions, whether that's acquisitions, dispositions or frankly, even investing capital in our existing assets."}, {"role": "assistant", "content": "And I will say this is while certainly IBM Watson couldn't predict the pandemic, it was most accurate in terms of predicting what RevPAR would do relative to every other third-party predictor out there and including our internal predictive analytics. So it's been a really good partnership and it really is a tool that we utilize to help us make capital allocation decisions. But certainly on the forefront of it, we use natural language processing as well as multiple data points that are churned through IBM's computing system to come up with those rankings."}, {"role": "user", "content": "Awesome. Thanks."}]}, {"messages": [{"role": "system", "content": "Our final question for today is coming from Duane Pfennigwerth at Evercore ISI."}, {"role": "user", "content": "Hi. Thanks. Most of my questions have been asked. Just on BI, and I apologize if you've said this, your guidance does not include any business interruption, insurance or reimbursement there. But what do you anticipate that to be this year."}, {"role": "assistant", "content": "Frankly, it's difficult to tell right now because it is something that we agree upon with our insurers. So from a timing perspective and the amount perspective, exactly how much we will get this year is difficult. And that's frankly why we have not put it in our forecast, and it's not in our guidance. But the moment we do collect BI, we'll obviously let you all know and it would flow through down to EBITDA."}, {"role": "user", "content": "Okay. Thanks."}, {"role": "assistant", "content": "Sure."}]}, {"messages": [{"role": "system", "content": "We have reached the end of the question-and-answer session, and I will now turn the call over to Jim for closing remarks."}, {"role": "assistant", "content": "I'd like to thank everyone for joining us today on our first quarter call. We're really excited about the way the year is setting up for us, and we appreciated the opportunity to discuss our results with you and talk about guidance for the balance of the year. As a reminder, we will be hosting an Investor Day on May 22 and 23 in Orlando, Florida. We hope many of you can join us, and we look forward to seeing you there. Thanks again."}]}, {"messages": [{"role": "system", "content": "Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Neal Dingmann from Truist Securities. Please go ahead."}, {"role": "user", "content": "Good morning. Thanks for the time. My question is, it seems like certainly in the Permian and other areas, you're having very nice and remarkable efficiencies and then there's a potential for OFS potential softness we've heard about. I'm just wondering if you get the benefits of both those things. Would you continue with the plan you have -- basically with those savings, would you just take those free cash flow and call that back into the buybacks at all? Or would you continue with maybe more growth?"}, {"role": "assistant", "content": "No, we would -- any incremental cash flow that we can generate from whatever sources would go to share repurchases and, hopefully -- and beyond that, the redemption of the preferred along with it."}, {"role": "user", "content": "Okay. Great to hear. And then just secondly, DJ activity, it sounds like you're going to be really -- you didn't have as many in the first quarter as expected, and that's really going to take off. Maybe could you just comment on as far as well pads, and just I guess the two questions I had in the DJ. On permitting, I think you find there I just wanted to double check that. And then secondly, just on pad size at all, expectations are you doing anything different there on the completion side?"}, {"role": "assistant", "content": "Yes. I'll pass this to Richard."}, {"role": "assistant", "content": "Hey, Neil, appreciate it. Yes, a really good quarter and out looking well for our Rockies team. So I appreciate really the good pieces that they're putting together, maybe just connect a couple of things. I think one thing we saw in the first quarter that is playing through all year is very strong base production performance. A lot of that is really strong wells that they brought on at the end of last year that were new wells or wedge that are now turned into base. But in addition to that, they've been able to continue to optimize their production system. The most meaningful thing they've done. they've introduced gas lift earlier in a lot of these wells and even on some of the legacy base performance, which has really gave us a boost."}, {"role": "assistant", "content": "We did quite a few of those in the first quarter. We'll do less in the second quarter. So we won't see quite as much of that bump. But that's been helpful on the base side. On the new well performance side, I mean, obviously, we're happy to see we included this peak 24-hour record for this narrow sea well. And I'd say that's fundamentally a good thing to see out of our new well performance in the Rockies."}, {"role": "assistant", "content": "We've been able to continue to down space in certain areas, similar to how we do our development in the Permian. So in many areas where there might have been 18 wells per section, we're down to 12. We've been able to increase our profit concentration to couple with that down spacing, and have been able to increase that about 30%. And then just the efficiency of really the frac and then turning that online, we're continuing to reduce, not only the time to market as we traditionally talk about it, but one that the team there has been very focused on, which is a time to peak production."}, {"role": "assistant", "content": "And so being very thoughtful about how we're building this operational ramp in for the rest of the year. But I guess, last couple of points, as you said, we had six wells delivered in the first quarter, that was per plan. Really, the second quarter through the end of the year, we anticipate 20 to 30 wells per quarter kind of fit that total year outlook. So definitely, picking back up on that in terms of well delivery."}, {"role": "assistant", "content": "So bottom line, if you look at the first half and the second half, as we communicated on the last call, we expected some decline just through really the cycle of underinvestment as we picked up activity in the second half of last year. That we'll be able to then turn to growth for the second half of the year, and both of those are looking better than original plan. So very pleased with the team there."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Neil Mehta from Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Thank you. The first question is more of a short-term question and then the second is around low carbon. I just -- in the quarter, it looked like price realizations were a little bit soft. And so some of that, it sounds like, was just around turnarounds on the refining side. But can you just talk about that and clarify as did drive some delta first consensus?"}, {"role": "assistant", "content": "Well, Neil, I think there were three key components of that. First of all, looking at the calendar month average roll in terms of the NYMEX price. We've seen the market switch really from backwardation to contango at the end of March, impacted realizations by about $1.50 per barrel. So starting there across the domestic portfolio. Following that, in terms of the Gulf of Mexico, it had an amazing quarter. But at the same time, there were refineries on the Gulf Coast that had turnarounds going on. And so moving from the fourth quarter to the first quarter, realizations has dropped against WTI by about $3.50 per barrel. Additionally, there was an outage in the DJ Basin as well, third-party outage, which caused realizations there to drop by about $1 a barrel. So as those components altogether, that really impacted oil realizations."}, {"role": "user", "content": "That's really helpful. And then if you could give an update on the low-carbon business as you progress towards DAC1, what is -- what's the latest in terms of the development? And then your thoughts on the voluntary market as well as that can help to bring the project closer to the money?"}, {"role": "assistant", "content": "I'll start with, we had a very exciting groundbreaking -- official groundbreaking finally on the low carbon venture business DAC1, that we'll be building in the Permian Basin. It's already under construction. The work started at the end of the last quarter. We had an official naming at the groundbreaking. It's now called Stratus. And currently moving along very well, and we're really excited about it and excited about where the teams are headed with it. And do you want to talk about the carbon market?"}, {"role": "assistant", "content": "Yes, sure. And maybe just to add broadly on a couple of other updates on kind of the low carbon progress, like Vicki said, obviously, moving with DAC1 and Permian then continue to progress our sequestration hubs in the Gulf Coast, continue to move forward kind of with the subsurface understanding or the work that we're doing there. Really, the big piece of that, we've submitted twp more Class six wells in our hubs there and then two more for -- to support our Permian operations so to continue to do that. In the King Ranch area, we're making plans to drill what we call three stratigraphic kind of test wells that'll go in front of the Class six submissions there."}, {"role": "assistant", "content": "So continue to do really that upfront work to kind of prepare for development, both from the point source side and the DAC side in both those areas. In terms of the market, continue to see the voluntary market strong or growing for our CDR sales. I think we'll anticipate having some updates on that over the next few months, getting close to some meaningful things there. But I think a lot of that is really turning to the compliance market as well as really globally as we've talked about, things around heavy-duty transportation and specifically airlines have continued to sort of form up, I'd say, sustainable aviation fuels. especially in Europe, have continued to recognize kind of these carbon removals as part of that portfolio of solution. So we're seeing some policy form in addition to what we see in the U.S. with the IRA to kind of help support that."}, {"role": "assistant", "content": "So the voluntary market is in front of that. We appreciate working with some strong partners there that understand the role of carbon removals, understand the emergence of these compliance markets. And so they're really doing their part to help us catalyze this technology, bring this cost down, while we fit that long-term compliance market need. So more updates, I think, we hope to give later this year as that makes more progress, but certainly fitting within the ranges and the expectations we have on the revenue side for our DAC projects."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Doug Leggate from Bank of America. Please go ahead."}, {"role": "user", "content": "Thank you. Appreciate you taking my questions. I guess I've got a couple of follow-ups because this -- I mean watching your share price reaction last night to the earnings, the market obviously saw something it didn't like. And it struck me at least that a lot of the people who cover you didn't cover adorable [Phonetic] and perhaps don't remember the seasonality of Gulf of Mexico maintenance. So I wonder if you could just take a minute to explain how you're running that business as it relates to the seasonality of production?"}, {"role": "assistant", "content": "Yeah. Thank you, Doug, for bringing that up. And yes, you're right. I think that, that's not very well understood. What's happened with us now in terms of our forecast for Gulf of Mexico is, I want to make sure everybody realizes. This is pretty typical. What's different for this year is that we had such an incredible first quarter. And the reason that we had such an incredible first quarter is because, first of all, we had the lowest downtime that we've had in a while. It was a very, very, very good performance, operating performance by the teams in the first quarter in Gulf of Mexico."}, {"role": "assistant", "content": "Secondly, we had the Caesar-Tonga Subsea system excellence -- or expansion system come online. So from Caesar-Tonga, we had an incremental increase of a gross 15,000 barrel per day from that project. So our Q1 was really propped up by some good performance, lower downtime and the transfer of what would have been the Horn Mountain maintenance in first quarter to second quarter. The reason we moved that from first quarter to second quarter was just some supply chain issues in getting the materials we needed from the supplier. So this would have looked like any normal year if we had had our -- been able to do the maintenance as we had planned to do."}, {"role": "assistant", "content": "Now, I think what's gotten people concerned is going from 171 to such a lower number in the second quarter. But Horn Mountain is one of the biggest producers that we have offshore. So doing that maintenance in a given quarter is impactful. And along with that, we have another couple of maintenance projects on the schedule along with some well work that we want to do."}, {"role": "assistant", "content": "So the full year still looks really good. We were at 144,000 barrels a day. So that hasn't changed. It's just the timing and how it looks much, much lumpier than we're used to and that others are used to. And again, it's because of the bigger maintenance that wasn't done in Q1 that will be done in Q2, along with much higher production than we -- than people are used to seeing. So thanks for the question. And --"}, {"role": "user", "content": "Yeah. I appreciate the clarification, Vicki, because it remarkable that, that would seem to be the primary focus of discussions after the result last night, and I just thought it'd be worth reminding everyone that legacy Anadarko that was entirely normal. So thank you for the clarification. My follow-up is really, I guess, it's a Rob question. But you mentioned inflation, Rob, or at least I think Vicki did in her remarks that things might be rolling over a little bit. But your capex guidance is still quite wide. So I wonder if you could just give us a tip of the hat as to where you see the trend going? Should we be starting to think that you've got a chance of coming in towards the lower end of that range? Or is that more activity led? Or was it more -- had you already baked in a reasonable amount of inflation that might not now happen?"}, {"role": "assistant", "content": "I think as a discussion in Vicki's comments, and I heard also from Richard, is that we are seeing things sort of plateauing at this point. Some pieces are rolling over. There's still a fair amount of wage inflation pressures in the Permian that we are still seeing. So I wouldn't say, we're ready to committed to the fact that things are going to roll over and decline for the balance of the year so we've maintained that guidance. As Vicki commented on the earlier question that if we are fortunate enough to have things fall off, and it allows us to continue the same level of activity for a lower cost, we would roll that back into additional share repurchases in the balance of the year. And then Richard probably has some additional comments."}, {"role": "assistant", "content": "Yes. I would -- that's perfect, Rob. I just was going to add one. I'd say the other element we factor in is continued efficiency improvement. So Doug, ramping up last year, getting started this year, kind of hitting steady state with our rigs and our frac cores. We do expect continued efficiencies. I mean we highlighted on the singular wells of these records, but it's really in total, we're anticipating some improvement in the second half of the year. So we leave a little bit of room on that where the burn rate just gets a little faster as we gain in efficiency."}]}, {"messages": [{"role": "system", "content": "Our next question comes from John Royall from JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi, good afternoon. Thanks for taking my questions. So my first question is on chemicals. You were in line in 1Q, but you raised your full year guide. So, you're seeing something that's giving you more confidence in the remainder of the year, but it does feel like there should still be some challenges to the housing market. So, just looking for some color on the guidance raised in Chem early in the year and what appears to be an uncertain environment?"}, {"role": "assistant", "content": "Yes, John, I think you've characterized it actually pretty well in your question. So, if you look at domestic PVC demand through the first quarter compared to last year, it's down about 18% year-over-year. However, what we've seen is the export business has picked up that slack in the first quarter as it's up almost 80% year-over-year. So we end up with a combined demand for PVC that's up about 2.5%, 2.7% for the country versus last year. And that driving on that softness in domestic demand, as we discussed on prior calls, is really being driven by construction sector. We still believe that inventories remain low for any PVC buyers, as we're entering sort of the heart of construction season. But no doubt, there's encouraging macro conditions between inflation, mortgage rates and regional bank issues have converters a little more reluctant to build what would be typical inventories for this time of the year for construction."}, {"role": "assistant", "content": "So our guidance reflects that continued uncertainty and the trajectory of the global business, both in the domestic business. We still firmly believe there's a lot of pent-up demand for construction, but they're just cautious with the macro conditions. I would say, however, that the lower energy prices in terms of gas prices resulting in lower ethylene prices also does create the opportunity for some margin in the business that might still be present and stickier at even at these lower demand levels. That's part of the raise."}, {"role": "assistant", "content": "I would say on the caustic side of the business, we're seeing this sort of balanced along type conditions. General manufacturing is certainly off from prior year, particularly automotive remains subdued. So, domestic demand in summer last year, but availability is certainly higher than it was before. And so we're seeing that result in some price erosion continually in the caustic side of the business. So we're still assuming that the unwinding of inventories in Europe take the balance into the middle of the year and then the Chinese economy continues to open slowly. If either one of those happen more rapidly, that would certainly be favorable to the business. So that increase in guidance really reflects some optimism around things kind of reach a stability point at least the next quarter or so and then the preserving some of the margins with the lower feedstock costs."}, {"role": "user", "content": "Great. Thank you. And then my next question is on the paydown of the preferred. You gave some color on the downside case, and if you end up going below $4 a share LTM. Is there a commodity price where you think you might expect to pull back on the buyback and go below that $4 a share? And just assuming we stay above it, is that $700 million-ish run rate, including the premium a good go forward to think about?"}, {"role": "assistant", "content": "Hi. I would say it's just based on the cash available. We're going to use the free cash that we have to continue to buy shares and to trigger the preferred as we can do that. But -- and we're monitoring that. We have an outlook on that. So we're being pretty thoughtful around what the rest of the year might look like."}, {"role": "assistant", "content": "Yeah. it's certainly because of the concentration of share program last year, this year is lumpier, and it makes it more challenging in Q3. I think we've talked on an annualized basis we would probably want oil prices in the $75 range to be able to continually stay above the trigger point."}, {"role": "assistant", "content": "But as Vicki made her comments earlier, our intention would be is even as we fall below the $4, that as part of our shareholder return program is continuing to buy back stock. And so even if we fall below the $4, our intention is to continue to return value to shareholders through buybacks."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Paul Cheng from Scotiabank. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning. Rob, just want to go back into the budget. What's the underlying inflation that you included in your regional budget? And have you -- I suppose that you didn't really build in into any deflationary in the second half? And how much is your service and raw material for this year will be subject to the spot prices if we do see deflationary? That's the first question."}, {"role": "user", "content": "And second question is that, I think, in the prepared remarks, talk about on the DJ Basin that for the remaining of the year. The well come on stream will be pretty variable each quarter. How about in the Permian? Thank you."}, {"role": "assistant", "content": "Hi Paul let me -- I'll try to start on both of those. In terms of really inflation, when we look year-on-year, we are around 15%. This is domestic in the U.S. Of course, internationally, we didn't see near that, but in the U.S., looking at around 15%. We had plans that were embedded in our budget to offset about 5% million of that through operational efficiencies. So we're generally on target for both."}, {"role": "assistant", "content": "Let me deconstruct kind of the second half and then a few of the bigger components. So the second half of the year, we are seeing some things soften. When you think about OCTG, obviously, power costs and fuel, some of the labor components, those are types of things that we see as potential. We also have quite a few of our rigs and frac cores that are up, and so we'll be exposed a little bit either way there, though, like we talk about, we have longer-term relationships and we're able to balance kind of that long-term with short-term pricing with our service partners on that front."}, {"role": "assistant", "content": "So the big areas we're looking for is continuing to kind of watch the OCTG market. We'll see what rigs and fracs do this year. Obviously, we're steady, but we'll see what the rest of the market has to do. And then probably the other point that we would watch or that would impact us is sand. We're using more regional sand even in the Rockies. There's, some different sand choices, but our primary supplier there continues to be in front in the Permian, and so we're seeing some opportunity on that."}, {"role": "assistant", "content": "So at this point, we're not looking to change our outlook or kind of change the way we're thinking about the budget, but we did want to note those are the key variables that we're watching that will impact us. And then in terms of the Permian, similar sort of well count type change, not quite as drastic as what we're seeing in the DJ. But we had 56 wells online in the first quarter. We'll see that kind of hit more steady state of around 100, 110. And really, what happened, just to give a little bit more color, as Rob kind of said in his prepared remarks, a lot around development sequencing. So if you think about the ramp-up and then going into the fourth quarter, where you're exposed to weather, we had pads with smaller well count."}, {"role": "assistant", "content": "And so we did that to really derisk kind of the production in the fourth quarter, and really it was production in the first quarter. As we started in the first quarter, many of our well pads, Midland Basin, Delaware Basin, they've gone north of 10 kind of wells per pad. So you have a lot more sign ups. That's better from a value standpoint, but it does change kind of that sequencing of production online. But we do see -- while the well count was low and the kind of residual DAC count grew for us in the first quarter, we expect to hit steady state really on both of those as we go into the second quarter and definitely in the second half of the year. So hopefully, that helps a little bit there."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Leo Mariani from ROTH MKM. Please go ahead."}, {"role": "user", "content": "I just wanted to follow up a little bit more on the Low Carbon Venture business here. I guess recently, it came out that you guys invested kind of more money into net power here. And I just wanted to maybe get some color around kind of what the sort of confidence is in that business? And why putting the incremental money there?"}, {"role": "user", "content": "And then sticking on Low Carbon Ventures, I just wanted to see on sort of funding for the DACs here at this point in time, you'll having really detailed conversations out there? Or do you think there could be something that gets done here in 2023 in the funding?"}, {"role": "assistant", "content": "I'll start with Net Power. We started looking at Net Power about over two years ago, almost three years ago. The reason we like it is because the physics and the technical aspect of how it works is impressive. And as we've -- I know mentioned on this call before, it's really the only source of emission-free power technology that uses hydrocarbon gases."}, {"role": "assistant", "content": "And with hydrocarbon gases being so plentiful in the United States and in other areas of the world, we felt that a technology that actually can continue to use gas, hydrocarbon gas for the generation of power is going to be incredibly transformative for the power industry, not just here in the United States, but internationally as well."}, {"role": "assistant", "content": "And when you look at it, it combines hydrocarbon gases, combust hydrocarbon gases with oxygen instead of air. So you have no volatile organics, and the CO2, which has created drives the turbine and then it's captured on the -- as part of the process. So it does all the things that we needed to do and that other companies will need as well. And you look at the Appalachia, all the gas there, the gas of the Haynesville, the gas in the Permian and the DJ, it creates a lot of opportunity to build a lot of these things. Our confidence was bolstered also by the fact that we have now -- Baker is an equity owner in this process, and they are redesigning the turbines to make it more efficient."}, {"role": "assistant", "content": "So when we are able to start building this, which should be in the 2026 time frame or maybe a little bit before, we expect that the cost of this will be less than what a traditional power plant would be if you put carbon capture on it. So it's a very flexible technology. We will be building the first one of those in the Permian Basin to provide power for our oil and gas operations, and then in the future, it will be one of the emission-free power sources that we use for our direct air capture units."}, {"role": "assistant", "content": "Yeah. The only thing I would add on net power, like Vicki said, we've started FEED on that first plant with the net power team and getting that 2026 time frame lines up very well to not only what we need for direct air capture, but it's a great fit for oil and gas operations to help decarbonize the power, obviously, that we have, but the other offtake of that is CO2. So as we look to really transition and be able to use more anthropogenic CO2, it's a great fit."}, {"role": "assistant", "content": "So the -- on the DAC, and Vicki can help with this, too. I think we continue to think about funding, not only for DAC1, but especially for DAC2 and beyond, to reiterate that is absolutely our plan. We know that with commercial development success as we go beyond Plant one, we really will need that financial support to be able to develop as we see the market growing for us to fit into."}, {"role": "assistant", "content": "So I think we want to continue to progress this year. Obviously, we'll give updates on any of that as it comes forward. But meaningfully, as I answered earlier, kind of the market or the CDR sales cost progress on the project and then kind of how we think about the capitalization as we go forward. We want to be prepared as we go late this year and into next year to be able to give meaningful updates as that project continues."}, {"role": "assistant", "content": "And I guess what I would like to add that too..."}, {"role": "user", "content": "[Indecipherable]"}, {"role": "assistant", "content": "Sorry, Lee. One thing I'd like to add to that is that as we look at what the cost of this is going to be for us and what funds we will have to provide out of our free cash flow basically, it would be in the $500 million to $600 million range. It wouldn't be a lot more than that over the next two to three years. So I want everybody to understand that, looking forward, our capital program for our oil and gas development, chemicals, midstream, the corporation's capital is going to be invested in a way that, that fits with the priorities that we've established, one of which, and as important as any of the others, is investing in ourselves. That is the repurchase of shares. That's a big part of our cash flow priorities."}, {"role": "assistant", "content": "And I want to make sure that people don't think that we're going to, in the future, have capital spending so much that we can't accomplish that. For example, last year, we -- out of the $17.5 billion of cash that we had available to those three buckets, the debt reduction, share repurchases and capital programs, 57% went to debt reduction, 17% to share repurchases and 26% to our capital programs. If we had a similar situation with that kind of cash, 40% would go to capital programs, but 55% would go to share repurchases, and potentially up to 5% for debt reduction. So this is something that we're very committed to is not to let our capital grow to a point where it's not a -- we're not able to buy back shares at the level that we really need to do."}, {"role": "user", "content": "Okay. Very thorough answer. Very much appreciate that, guys. And then just a follow-up on your comment on sort of chemicals. EBITDA on the expansion over time kind of eventually kind of getting to this $300 million to $400 million as we get towards 2026. You mentioned in the prepared comments that you could start seeing some as soon as late 2023. Can that number kind of start to be significant even as early as 2024? Could we get something even like one-third of that potential EBITDA next year? Just trying to get a sense of how that would ramp over time."}, {"role": "assistant", "content": "Yes. Leo, the early days contribution from that is going to be from the smaller expansion project. It's in the $50 million EBITDA range. The $250 million to $350 million number we've given for the battleground project that's out beyond the project in 2026."}, {"role": "user", "content": "Thank you. Appreciate it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Roger Read from Wells Fargo Securities. Please go ahead."}, {"role": "user", "content": "Yes. Thanks, good morning. Maybe just one quick oneto clarify off your comment, Vicki, to Leo's question about the capex, the $500 million to $600 million per year. That's inclusive of NetPower and DAC or just one or the other? I was just want to make sure I understood that."}, {"role": "assistant", "content": "That's all of our low carbon ventures capital. And that is assuming that we don't bring in a partner. And we are having some really good conversations with -- in fact, with -- one with a preferred partner that could materialize maybe sometime this year or if not this year or next year. So we do expect to get some funding. But what we want to make sure we relate to you guys is that, if we don't, that's the maximum of spend that we would have. Otherwise, we're looking at potentially having a lower spend than that with a partner."}, {"role": "user", "content": "Okay. I appreciate the clarification. And then my other question, and this ties into the goal of maintaining the $4 of common repurchase on an annual trailing basis. None of us know what commodity price is going to be. You've got -- as pointed out in the presentation, right, one of the largest acreage holdings in the US. We've seen some of the other upstream companies trimming back a little bit or identifying some things as, I guess, we could call it non-core or something they simply won't be drilling and completing anytime soon. So is there any acreage or other type of asset sales, proceeds could be used to sort of plug those gaps if they arise or to offset the lumpiness that's coming forward? Just anything you can offer on that front would be appreciated."}, {"role": "assistant", "content": "Well, one of the things we do is we're always looking at how do we make the best value decisions? And when you -- when we think about divestitures, being a source for funding to continue the repurchase and the redemption of the preferred, that's certainly an option that we would consider."}, {"role": "assistant", "content": "We -- the reality of where we are today though is that our position is large. And when you do the relative valuations of divesting versus for the continuation of this program, you have to make sure that you're making the right decision there. And I would say there's smaller things that would be optional for us to potentially do, whether it would be large enough scale to continue it is the question at this point. But we are considering other options that I doubt would mature and soon enough to be able to meet the clip that we're facing right now."}, {"role": "user", "content": "Great. thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Vicki Hollub for any closing remarks."}, {"role": "assistant", "content": "I just talked to say in closing that I know there's been a lot of concerns among investors in the -- in our industry, particularly with respect to asset quality, execution, performance. And as Doug had pointed out, I wonder if that's part of the reason for the reaction to what we're seeing today."}, {"role": "assistant", "content": "But looking at our asset quality, I think there's nobody that could question the quality of our assets. And you look at our past performance, I also think that our continuing improvement in well productivity in the Permian and some data that we'll show next earnings call about our performance in the Rockies, will clearly show that we're not losing any capabilities. We're not losing any performance. And in fact, looking at what our teams are doing technically today, they continue to innovate, continue to optimize."}, {"role": "assistant", "content": "And with the mention of a new technique in the DJ, there are also new ways of doing things that we're trying in the Permian as well as in our Oman operations, Gulf of Mexico with the subsea pumping and systems installations, starting to look at our seismic differently. I think that for our company, we have not seen degradation in the quality or performance of our teams. And I want to thank our teams for that because they continue to push the envelope and every year get better and better. And so I don't think there should be any concern about where we are today and what we're doing is it's just a kind of a strange scenario where in second quarter, it happens to be the lowest of the year, but our production and productivity is continuing to get better."}, {"role": "assistant", "content": "So, with that, I want to thank you all for participating in the call today."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] The first question comes from the line of David Arcaro with Morgan Stanley. You may now proceed."}, {"role": "user", "content": "Hi, good morning. Thanks for taking my question. One thing I wanted to check on, would there be any risk to your renewables growth outlook if the AD/CVD tariffs were to come back into effect just after we've seen the House and Senate pass some legislation there. Just curious how you view that risk and also just longer term, how you mitigate that AD/CVD tariff risk?"}, {"role": "assistant", "content": "Yes, honestly, we don't see any risk whatsoever. First, it passed, I believe, the Senate with 56 votes, and that was -- the President will veto it. And we have all the panels that we need for this year, and expect to have for next year, by June of next year when the tariff, let's say, tariff holiday rolls off. So we're in very good shape for '23 and '24. And after that, we expect to have supply coming in from the U.S. We're having no problems from our suppliers getting through under the UFLPA. So really, I think we're in the best shape of anybody. We have not delayed a single project due to solar panel supply issues to date. And I think that's something -- I don't know if anybody else can say that."}, {"role": "user", "content": "Excellent. Thanks. That's helpful. And then I was just curious, any update into the visibility for the 600 megawatts of projects that are potentially getting completed this year, but could get pushed to next year? Any increased visibility there at this point in the year?"}, {"role": "assistant", "content": "Look, as I said in my script, we are progressing well, we have the supply chain. Everything is in place. But look, we won't know until the fourth quarter of this year, if they're going to fall in this year or they're going to fall in next. But I would remind everybody that's not a value issue. If they come in couple weeks later, it doesn't affect the profitability of the project at all. It is an accounting issue. But as of now, we we're doing well, but we can't give you any particular update now with greater clarity probably until the fourth quarter of this year."}, {"role": "user", "content": "Yes. Understood. That makes sense. And just one other quick question. I was curious if with the Warrior Run project, is there any level of EBITDA or earnings contribution that you would point to for that as that rolls off? And then curious how you think about the use of proceeds there if there's debt specifically on the project that would be paid down or if it gets used more broadly at the corporate level?"}, {"role": "assistant", "content": "Yes, hey, this is Steve. There is definitely earnings from this. And so effectively, we're monetizing the remaining 7 roughly years of the PPA this year. And so we'll recognize earnings this year, and we expect to have an obligation for capacity through the middle of next year. So the earnings over this termination agreement will be recognized over roughly 11, 12 months following when the commission approval comes in."}, {"role": "assistant", "content": "So say if it comes in, in June, probably about half this year and half next year. And there's very little debt to pay down here. So these proceeds will likely -- this is a 7-year payment stream, but we'll likely monetize that this year. And then that's captured in our asset sale in terms of our capital sources this year, if you saw on that slide. So that will be used to fund the growth of the business."}, {"role": "user", "content": "Okay, perfect. Great. Thanks so much."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Angie Storozynski with Seaport Global. You may now proceed."}, {"role": "user", "content": "Good morning. So I know we're going to talk about it on Monday, this transition from EPS to EBITDA. And if I understand correctly, at least that's how I see it, it's about renewables being more levered and having a higher depreciation rate than the thermal assets, for example, however. So there's only one issue here that as we're looking at the first quarter results, right, the contributions from renewables seems very small to the total EBITDA. So that's one."}, {"role": "user", "content": "And also, as you are aware, there are different ways how your peers show adjusted EBITDA. I mean, in your case, you're adjusting it for minority interest and there's no inclusion of the tax benefits, which, again, might understate the EBITDA versus what your peers report. So anyway -- and I know that we're going to talk about it on Monday, but just ease us into this EBITDA transition, please?"}, {"role": "assistant", "content": "Sure, Angie. Well, thanks for the question. Look, first, I'd say, look, we continue to provide adjusted earnings per share guidance. And as we said, we'll be providing adjusted earnings per share guidance through 2027 on Monday. So I want to make that perfectly clear, what we're adding as an additional indicator which is adjusted EBITDA that we're going to be giving. And partly, it's to give greater clarity into our performance of our renewables and partly it has to do with sort of the lumpiness of the projects."}, {"role": "assistant", "content": "So that's the real reason that we're giving an additional one. It also helped people to do, for example, some of the parts of our different businesses, renewables, utilities, infrastructure. So I want to make very clear that we are providing adjusted earnings per share through 2027. Regarding the other questions that you have, I'm going to go ahead and pass that to Steve."}, {"role": "assistant", "content": "Yes. Thanks, Andres, and thanks, Angie. So definitely, we'll be talking some more about this on Monday. But our goal here is to really give the clarity that we think is important to understand and model the business. So as Andres said, we'll give the adjusted EPS, we'll also give the EBITDA, which is more closely aligned to the underlying business performance and cash generation from the PPAs and then we'll also give the tax attributes and then the sum of the adjusted EBITDA plus the tax attributes. So we think it's going to be a very complete view and package that helps people truly understand how the business is earning and generating cash from the different components of the PPAs and the tax attributes."}, {"role": "user", "content": "Okay. And then you can also help us how to allocate the corporate leverage across -- I mean, again, if we are trying to move to the sum of the part valuation from an EBITDA perspective, we need to figure out how to allocate the corporate debt, right, among these subsidiaries."}, {"role": "assistant", "content": "Yes. I mean, certainly in our reporting now, we'll be able to separate the debt here for the business. And then as we look ahead, most all of our growth is in renewables and utilities. About 80% of the growth is in renewables and utilities and about close to three-quarters 80% in the U.S. market. So I think you'll have a lot of good detail to help understand how to do that allocation."}, {"role": "user", "content": "Okay, okay. See you guys on Monday. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Richard Sunderland with JPMorgan. You may now proceed."}, {"role": "user", "content": "Hi, good morning and thanks for the time today. Maybe I'll pick it up from where Angie left off on the new SBUs. Turning to the New Energy Technologies SBU, can you speak more to the green hydrogen side? Curious if this represents a shift in thinking of where you like to be involved in hydrogen? Or are you just specifically calling out the breakout there relative to the renewables feeding in?"}, {"role": "assistant", "content": "Yes. Thanks for the question. Look, what I'd say is that we have a very interesting pipeline, which we'll be discussing on Monday of green hydrogen projects. We really think we're a leader here. We have the most advanced and lowest carbon emitting project in Texas here in the U.S. But we also have projects in Los Angeles. We have projects in Houston. We have projects in Brazil for export, and we have projects in Chile for our corporate clients at the mining sector. So we'll be providing more color there. Now in the specific case, for example, Texas, we do co-own the electrolyzers as well as the renewables with our joint venture partner of Air Products."}, {"role": "assistant", "content": "And the reason for that is to really maximize the value of the project because even though the project will be basically co-locating all the renewables with the electrolyzers, it is interconnected with the grid. So there could be occasions just to give you a hypothetical polar vortex in Texas, where the most profitable use of our renewables is to inject them into the grid and actually not run the electrolyzers. And so we wanted to have all of our interests aligned. So there will be some projects like that where we also own the electrolyzers as well. In the case of Texas, it's a take-or-pay with Air Products, but there are other ones in which we would be selling -- possibly selling green hydrogen to our corporate customers to whom we're already selling renewables."}, {"role": "assistant", "content": "So that's the reason for calling it out. Also, as you know, AES next looks at what's next in terms of technologies. So we're also, I would say, have it there so that we can look at what new technologies help us produce green hydrogen cheaper and better for our clients. So that's the reason for calling it out there."}, {"role": "user", "content": "Got it. That's very clear. Sticking with the SBU theme, energy infrastructure, are you able to disclose how much of that is coal today?"}, {"role": "assistant", "content": "Yes. So we have roughly a little bit shy of 7 gigawatts of coal today, and that includes some of the assets that we've already announced sales and retirements of including, for example, Mong Duong in Vietnam, some of the retirements in Chile, in Ventanas, for example. So that number is coming down rapidly, but that's roughly what's in the base of energy infrastructure today."}, {"role": "user", "content": "This on an EBITDA contribution basis or a percentage of SBU basis?"}, {"role": "assistant", "content": "Yes. So on a percentage, so what we've talked about is it's about $0.30 of EPS is coming from coal today. Now what's important is that's not all necessarily going away. For example, we are converting the Petersburg 3 and 4 units in Indiana under the integrated utility in Indiana. So this will actually be new investments to do the gas conversion, and so there'll be earnings from the rate base and the increasing rate base from that asset. And then in other cases, we are looking at some additional conversion opportunities for these. And then, of course, where there is sales, we'll have proceeds from those sales to then recycle capital into the renewable and utility growth segments."}, {"role": "user", "content": "Got it. Very helpful. And then just one more for me, in consideration of the Warrior Run termination relative to the $400 million to $600 million asset sale target, where are you currently with announced and closed transactions relative to that range?"}, {"role": "assistant", "content": "Yes. So, I mean, we initially announced this exit a year ago. But really prior to that, we had already been significantly reducing our coal portfolio. So our coal portfolio at one point was around 22 gigawatts and we're already down to 7. So the reality is we've already executed on two-thirds of this program over the many years. And as we a year ago saw the pathway to meet our financial commitments and to fully exit coal, which we think is going to attract new investors to AES that have some bright line thresholds here, w saw that path. So I think we've made tremendous progress already, and we have visibility into how we're going to exit the remaining assets, either through sales that we've announced, additional sales that we have not yet announced and then some of these conversions and retirement that will continue. So we feel very good about the program and very good about the earnings trajectory even post coal."}, {"role": "user", "content": "But just on the numbers -- oh, sorry, Andres."}, {"role": "assistant", "content": "Just what I would add is that just like we have simplified our portfolio, getting out of different markets over time. I think we've done it in a way that maximizes shareholder value. I think we're doing the same with coal. So we could have perhaps accelerated this faster. But I think Warrior Run and, for example, the monetization some years ago, the BHP contract in Chile shows that we're really able to make money from the transition and tying this in a way that we can provide renewables to meet the energy demands of our clients, in some cases, batteries or hydro to meet the capacity or dispatchable need. So I just mentioned that we feel very good about the program, and we think we're executing very well on it."}, {"role": "user", "content": "Got it. Thank you. But just on the -- so Warrior Run is $357 million, $400 million is the low range of the '23 targets that gets you most of the way there? And then did you receive any proceeds on the quarter? Or is the rest either, I guess, Jordan or future announcements?"}, {"role": "assistant", "content": "We had -- so also included in that number is the asset or the renewable business recycling. So we had the closure of that operating portfolio of renewable assets, that capital into recycling it to new growth in renewables. So that's an important part of the program here is not just exits of coal, but also the way we recycle capital. Once we've derisked projects, we brought them online, we've recognized tax credits. We sell them down to relatively low-risk type capital and improve both our returns as well as then help us support a higher growth rate in the renewables business."}, {"role": "assistant", "content": "So that's part of the asset sale program. And then we have the Jordan sale that has not yet been closed, but it's been announced, and then there's some additional possible sales and sell-downs in the works this year that could come into that number. But as you point out, we've already made significant progress towards the target this year. So we feel very good about the target that we've laid out."}, {"role": "user", "content": "Perfect. Well, thank you for the time today. See you on Monday."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Durgesh Chopra with Evercore ISI. You may now proceed."}, {"role": "user", "content": "Hey, good morning, team. Thanks for taking my questions. Andres, can you comment on the new PPAs signed year-to-date. When I compare this to first quarter of last year, that is 2022, it signed over 1 gig, now you've only signed 309 megawatts. I think in your commentary, you mentioned a couple of large contracts. So just maybe a little bit more color there? And are you confident that the 4 to -- 4.5 to 5.5 gigs per year signage, is that -- are you still tracking well against that?"}, {"role": "assistant", "content": "Hi, Durgesh. Well, thanks for the question. It's a great question. Look, we feel very good. And the one thing is, if you recall from last year, I believe we had a lot of signings in the last quarter. And so what we're seeing here, these things are lumpy. So we have been ranked 2 years running as the largest developer of renewable projects for corporations. And so when you're dealing with these corporations, these are big projects. So one project can easily be a giga. For example, just another case, our green hydrogen project in Texas, that's 1.4 giga. So these are lumpy. So I'm not the least bit concerned about meeting our growth targets."}, {"role": "assistant", "content": "We're seeing a lot of interest. We're in advanced negotiations. But they don't count until you sign them. So we feel good about them. No cause for concern. And that's one of the issues we have, that they're lumpy. But when you're going for big contracts, as an example, the green hydrogen project in Texas, that's 1.4 gigawatts just in one. And we have others that are in that range. So it's going to be lumpy, but we're not concerned because we will land enough of these to keep us on track."}, {"role": "user", "content": "Understood. That's very clear. And maybe is there a cost update on your joint venture, the hydrogen project with APD. I know their project, and I'm going to mispronounce this, but NEOM. They had some increases early in the year when they reported, I believe. So any update to cost there in terms of the overall project cost or cost allocated to you for that project?"}, {"role": "assistant", "content": "Look, we have no update for cost. It's still going to be in the range of around $4 billion, the whole project. We think it's, -- again, it's going to be the lowest carbon project in the state. As you know, you have a $3 per kilogram subsidy, if you have below a certain threshold of carbon intensity. So we feel we're well within that. If you have less than that, for example, if you're taking energy from the grid, then it drops to $1. So we feel very good about that."}, {"role": "assistant", "content": "In terms of the costs, what I'd say is what they announced on their NEOM project. And again, I'm just repeating what they put on there that they were going to make some more capital investments to lower operating costs. So it's the NEOM project in Saudi Arabia, which is very good for us because they are using a very similar project to this one but it's more advanced, so we can learn from that project, jointly learn from that project. But, no, we have no updates, but we have no reason to think that there'd be any additional cost overruns at this point in time."}, {"role": "user", "content": "That's very helpful color. Thank you, Andres. See you on Monday."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Julien Dumoulin-Smith with Bank of America. You may now proceed."}, {"role": "user", "content": "Hey, good morning, team. Thank you guys for the time and the question here. Look, I just wanted to follow up on the ITC, PTC conversation we've been having of late. Just curious, are you guys still pretty committed to using ITCs. I know some of your peers have been evolving towards PTCs, you guys focused on the Eastern U.S. Can you talk about the thought process and philosophy there? And then also to follow up back on Angie's question to the extent to which that you are using ITCs, 70-30 split is still good. I know that, for instance, here in the quarter for tax cut, it's fairly low. So I just want to make sure that ITC heuristic of 70-30 in year 1, year 2 still applies."}, {"role": "assistant", "content": "Yes. Hey, Julien, it's Steve. So definitely, we have the -- lion's share of our tax attributes are from investment tax credits and will continue to be. And I would say when we look at the investment tax credit with the profile of when projects are coming online, it is roughly fair to say about two-thirds of the investment tax credit gets recognized in the year of the commissioning and then about a-third, 30% in the second year following commissioning. So that holds."}, {"role": "assistant", "content": "The total volume of tax credits will grow annually, and we expect as the portfolio grows. So we're targeting the commissioning of about 2.1 gigawatts this year of U.S. renewables, say that doubles next year, I would expect the volume of tax attributes to roughly follow that same growth rate. So a doubling of the tax credit from this year to next year, just as it doubled from last year to this year when we went from 1 gigawatts to 2 gigawatts. The production tax credit is a good incentive in some or a better incentive in some projects."}, {"role": "assistant", "content": "Typically, it has been in wind. But in some cases now where we see an energy community adder now that we have some clarity on that. And we see the potential for domestic content adders with the investment tax credit. Keep in mind, those adders are actually richer on the investment tax credit than they are on the production tax credit basis the way the IRA was written. So there's a bit of an offset there in that some projects where we have a very healthy pipeline, good opportunity to get these bonuses, the investment tax credit may still be the best option. But we'll look at that project by project and look at what yields the best returns. But I see very strong growth in our tax attribute number year-over-year going forward."}, {"role": "user", "content": "Right. But the point is your ITC, you're still vastly weighted towards ITC versus PTC, right, as you have been and you don't intend to change that necessarily, especially given your commentary here. I just want to make sure there's been some concern otherwise."}, {"role": "assistant", "content": "Yes. vastly. And the vastness of that will be clear on Monday when I show you the tax credit breakdown between ITC and PTC. And then also keep in mind that for our backlog we've essentially locked in already that election and who that tax equity partner is going to be. So for the next couple of years, it's pretty well decided."}, {"role": "assistant", "content": "The one thing I would add --"}, {"role": "user", "content": "Are there going to be doing more wind in the states?"}, {"role": "assistant", "content": "Julien, so we'll be doing more wind in the states, which will be PTC. So for example, the project in Texas is 900 megawatts of wind. So yes, we've been more towards ITC partly is because we've been very heavily in solar. We're very strong in solar. Over time, we expect more of a balance."}, {"role": "user", "content": "Right. And then on just the backlog adds, I know you said it's lumpy, but is domestic content one of the reasons why customers aren't moving because they don't have guidance from treasury yet, so therefore, holding folks back? We've heard this from some folks."}, {"role": "assistant", "content": "Yes. I mean, in our case, not really. I think I would point to that. it's just we're in some negotiations for some whales [Phonetic]. And when we land them, it will come through. What did happen last year because of the AUXIN tariff circumvention case, that did delay projects. It did delay projects and set them off into, let's say, a longer time horizon than would otherwise. But again, and since we do a lot of bilateral negotiations, and we haven't had any problems with our supply chain. That is not what's driving it. Where the domestic content issue does come in is in terms of the $6 billion contract we have for domestic manufacture of solar panels here in the States."}, {"role": "assistant", "content": "And so obviously, what's key there before sort of signing on the dotted line is what is domestic content. And the main difference is how granular it's defined because if it's more similar to what has been done, for example, for wind, then it's much easier to comply with initially. But our plan is to move up the supply chain and have more and more of the inputs made in the states, including some of the more basic minerals, etc., coming in. We already have with our suppliers, the wafering is moving out of China, which was the last sort of main component. We were already buying panels that were made outside of China. And, of course, all the wafering etc., was done in Eastern China not Western China. So we feel very good about that, and we've had no issue thus far."}, {"role": "user", "content": "Got it. And last question just on '23 earnings. Just when you look at some of the items in the quarter, whether it was the gain on the asset sale, or whether it was LNG, was that upside relative to the plan? Are you trending better than you would have expected? Or was that gain kind of contemplated in your '23 guide earlier when you think about your positioning on the year here?"}, {"role": "assistant", "content": "Yes. I would say some of these are definitely upsides, Julien. So all else being equal, yes, there's upside. Unfortunately, as is the case, I think, with most utilities, the warmer winter weather was somewhat of an offset to those upsides for the first quarter. So we still see the potential for upside above even the midpoint of our guidance, but it remains to be seen how the rest of the year goes."}, {"role": "user", "content": "Okay, excellent guys. See you Monday. Thank you very much. All the best."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Gregg Orrill with UBS. You may now proceed."}, {"role": "user", "content": "Yes hi, thanks for the question. I was wondering if you could touch on the financing plan, just sort of the levers that you feel are available to you for equity or equity-like and would you need that to execute at least the plan through '25, just to sort of reaffirm your thoughts there. Thank you."}, {"role": "assistant", "content": "Yes. Hey, it's Steve. So sure. So we'll definitely talk some more about the longer-term financing plan through 2027. So I think that will give additional color. So we'll hold for that. This year, I think as I laid out on the slide, we will raise additional parent debt capital largely to fund growth in the Renewables segment. And then we have the asset sale program in addition to the close to $1 billion of parent free cash flow coming up from the existing business. So there's no plan for equity this year."}, {"role": "assistant", "content": "Looking ahead, we'll talk some more about that in the plan for Monday. What I would say there is, certainly, we have -- we're well positioned for growth. We're in a leadership position, and we want to grow beyond 2025. But certainly, through 2025, we would not need equity to meet our 2025 commitments. However, we would expect to start investing in growth, including things like the green hydrogen project, which would get started before 2025 to support the second half of the decade. But we'll share more detail on that on Monday."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Ryan Levine with Citi. You may now proceed."}, {"role": "user", "content": "Hi. I'm hoping to get a better understanding of how you arrived at the new disclosure. You're using EBITDA with additional tax disclosure. How did you decide on that versus maybe CAFD [Phonetic] or free cash flow for FFO metrics that some other peers are utilizing."}, {"role": "assistant", "content": "I would say, look, part of it is that, that's what most of our peers are using. And what we felt was most transparent is to provide EBITDA and also then the tax attributes. And so if for comparison purposes, you need to add the two, you can do so. But it was really try to make it easier on everyone by using what's most used in the market."}, {"role": "user", "content": "And then in terms of the new developments and extending contracts in California, are you anticipating that, that get extended further beyond the initial extension that was recently announced?"}, {"role": "assistant", "content": "I think we've got a 3-year extension. Those locations are extremely valuable for the grid. So we'll see what developments there are. But right now, 3 years going forward is pretty good."}, {"role": "user", "content": "Okay. Thank you."}]}, {"messages": [{"role": "system", "content": "There are no additional questions waiting at this time. So I will pass the conference back over to Susan Harcourt for closing remarks."}, {"role": "user", "content": "We thank everybody for joining us on today's call. We look forward to seeing many of you at our Investor Day on Monday. As always, the IR team will be available to answer any follow-up questions you may have. Thank you, and have a nice day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And we'll take our first question from Juan Sanabria with BMO Capital Markets."}, {"role": "user", "content": "Hi. Good morning, Joe or Tom, I was just hoping you could speak to April trends and what you're seeing in terms of demand and-or price sensitivity from customers out there? Any -- some of your peers have talked to some softness in March or April depending on their market exposure. Just curious what you guys are seeing across your platform?"}, {"role": "assistant", "content": "Yeah, thanks for the question, Juan. As we move through the quarter, and you could can hear it in the prepared remarks, we saw continued strength in move-in volumes and interest into our system. And so, as we move through March and into April, that trend continued. I wouldn't characterize March as weak, but I would characterize April is strong."}, {"role": "assistant", "content": "And so, we've seen accelerating move-in volume growth as we move through what was a strong margin into a stronger April. The one of the things you highlighted there was existing customer sensitivity to price. And I'd also note that we haven't seen anything concerning there. Price sensitivity has been very in line with our expectations. And so against that backdrop, seeing good move-in volumes, which is encouraging in particular, as we head into the next several months."}, {"role": "user", "content": "Thanks. And then just for my second question, just on the Property of Tomorrow spend, you guys have made excellent progress on deploying that capital. Just curious on the types of returns you're generating as you look at the capex you spent and how that's augmenting growth in the same-store and non-same store pool?"}, {"role": "assistant", "content": "So the step back one, the program has been quite well-received by both customers, our employees and now that we're at a point where we're actually getting to full market completion in several of our key markets as we finish up and round out the program over the next couple of year. We're actually seeing very good response and overall lift just to the again the image and the power of the brand, particularly where we've got meaningful scale in many, many markets."}, {"role": "assistant", "content": "So we continue to track and see the benefits from that. It's continuing to enhance our presence market-to-market. And with that, we continue to be very excited about getting the program completed. The team has done a very nice job figuring out any and all ways to optimize the amount of volume were actually going to pull it in plus or minus a year earlier than we intended to. And with that, we'll be in very good position nationally, to have elevated the crisp and enhanced brand attributes that play well in many parts of our business."}, {"role": "user", "content": "I appreciate the time. Thank you."}, {"role": "assistant", "content": "Thank you. Thanks a lot."}]}, {"messages": [{"role": "system", "content": "We will take our next question from Michael Goldsmith with UBS."}, {"role": "user", "content": "Good afternoon, and thanks for taking my question. My first question is on the guidance. You brought up the low-end. Is that a reflection, the trends that you've already experienced in the first-quarter or that guidance -- the low-end of your range was based on a full recession scenario. Is the increase in guidance more reflective of that that outcome is less likely to occur. And then within this, you've included this quote in your -- in the supplemental that suggests that the potential of revenue growth rate is wide and including the potential for Year-over-Year declines in revenue in the second-half of the year. Is there anything that you saw in the first-quarter that changes your view on that? Thanks."}, {"role": "assistant", "content": "Sure, thanks for that question, Michael. I would characterize the first-quarter as a strong quarter and that is really what's leading to the lift in the low-end of that revenue assumption component. And so, we've talked to the strength in the first-quarter. You're highlighting how we characterize the wide range of potential outcomes embedded within our outlook for the year. There still certainly macro uncertainty in the back-half of the year. That hasn't changed. But the performance to date has been quite encouraging, which is leading to the increase in the outlook for the year."}, {"role": "user", "content": "And my follow-up question is about the strength and the sustainability of the LA market. Same-store NOI growth was up 20% in the quarter which added 300 basis-points to the overall number. Presumably, this is reflecting the rate restrictions have lifted in February of 2012, which you lap during the quarter. But is there -- is there kind of like a second -- is there a second year of growth coming from the LA market or have we kind of -- we kind of used up all of the game there and the gain should be more modest going-forward? Thanks."}, {"role": "assistant", "content": "Yeah, Michael. First of all, LA being our largest market, we've been very pleased by the performance we've been able to achieve over the last year or so. To your point where the onerous restrictions have been lifted, but it is also a market where we have a commanding presence. We've got very good inherent demand. We've got very good occupancies and very little new competitive products coming literally to any of the sub-markets that we're competing in."}, {"role": "assistant", "content": "So the inherent demand in the market is quite good. We think we've got again some good traction ahead of us certainly going into the rest of 2023 and we'll continue to see where we go from there. But we've been very pleased by the performance of that portfolio. It is one of the markets that we -- go back to my comment about Property of Tomorrow, we put about $75 million in that portfolio to lift it from a brand awareness standpoint, finished that little over a year-and-a-half ago. And again, good timing and tie to that being that much more prominent in the market. And, one of the ways we measure the receptivity of that too is Net Promoter Scores again getting very good reaction from customers and the brand itself is playing through quite well."}, {"role": "assistant", "content": "So with that, good demand, and then continued performance."}, {"role": "user", "content": "Thank you very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "We will take our next question from Smedes Rose with Citi. Your line is open."}, {"role": "user", "content": "Hi, thank you. And you mentioned almost 30% move-in volume across the first-quarter. But move-out volume was lower, but kind of almost kept pace with the move-in volume. I was just wondering if you saw a similar trends in April as well."}, {"role": "assistant", "content": "That's a great question, Smedes. So one of the things that took place during the quarter was, we did gain occupancy as you anticipate and so occupancy from the end-of-the year through March was up 50 basis-points. And in April, we gained another 20 basis-points. So, starting to see that seasonal uplift in occupancy that will really continue here into May. And I'd characterize the trajectories of Year-over-Year move-in and move-out growth as being favorable, i.e., as we move through the quarter, the move-out volume growth has modestly lowered. And the move-in volume growth has modestly increased in April, i.e., so April was actually our best month in terms of gaining occupancy and in closing the Year-over-Year occupancy gap on a incremental basis."}, {"role": "assistant", "content": "So again, encouraging trends here as we head into the peak leasing season."}, {"role": "user", "content": "Thanks. And then I just -- I noticed that the late charges, the pace of growth picked-up at a faster pace in this rental income. I am just wondering if there's anything kind of to read into that and we've seen an uptick in kind of non payments or anything that would suggest some customers are under economic duress."}, {"role": "assistant", "content": "Sure, yeah, there's two components to that line item. One is, what you're highlighting, which is that there are more customers that are making late payments this year than last year. But if you frame it over a multi-year time period, we're coming off of really, really low delinquency time periods over the last several years and remain well below 2019 levels of delinquency. But you are seeing an uptick there in late payments."}, {"role": "assistant", "content": "And then I think more interestingly, the fact that we had significant move-in volume growth also contributed there with our administrative fee that charged new customers when they move-in, leading to a Year-over-Year increase in that line-item as well."}, {"role": "user", "content": "Great. Thank you."}, {"role": "assistant", "content": "Thanks. Smedes."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Todd Thomas with KeyBanc Capital Markets."}, {"role": "user", "content": "Hi, thanks, good morning out there. First question just related to investments. Tom, the balance sheet's in great shape. I think you commented that you're seeing an increase in inbound call volume from owners. Are you seeing the pipeline build. And can you speak a little bit the pricing, whether pricing seems to be moving in your favor such that we should expect to see deal flow pick-up in the quarters ahead?"}, {"role": "user", "content": "Sure, so we have started to see or started to receive more inbound more recently. And I do think that that's healthy. As you know, Todd, its traditional to have a busier second-half for storage transaction volumes than the first-half and we're encouraged to start to see that inbound activity. And we suspect it is going to lead to a pickup in volume as we move into the second-half of this year."}, {"role": "user", "content": "And in terms of the valuation, as you think about the assets and where things have traded, transaction volumes have been relatively light to start the year. So, I wouldn't point to a significant amount of data for us to sit here and say that cap rates are X or Y with significant precision. We're continuing to find good value in many of the assets and are closing that buyer and seller gap in many instances. But it remains wide in others. And so, we're still working through that and anticipate to work-through that through the rest of the year, given what's played out with interest rates and the macro-environment."}, {"role": "user", "content": "To put some numbers on it, I think in the last call, we said the cap rates have moved up about 100 to 125 basis-points from the lows. And I would say we haven't seen anything over the last three months that would have us direct you any differently than that."}, {"role": "user", "content": "Yeah, [Speech Overlap]"}, {"role": "assistant", "content": "Todd, just a little bit more relative to the complexion of the activity so far. So, Tom, mentioned that we've been doing a number of deals off-market. So as always, we are looking for those kinds of opportunities as well. There are still owners out there that are looking for an efficient clean transaction. The average occupancy of the 186 million that we've done so far has been about 50%. So thematically, very similar objective on our part, where and if we can acquire properties that have upside once we put them on our platform, that's going to make sense relative to the ultimate yields that we're likely to achieve from those assets. So we're confident we're going to continue to see those kind of opportunities going into the rest of the year."}, {"role": "user", "content": "Okay and then, how would you sort of pair and contrast the U.S. versus non-U.S. opportunity set today. And then also, would you, just given the amount of development activity that's taken place over the last several years and some of the tighter lending -- the tighter lending environment that we're seeing today, would you consider building out a structured finance program at all to be financing solution for borrowers, but also as a way to maybe expand the platform through third-party management and build a future investment pipeline."}, {"role": "assistant", "content": "Okay, so, yeah, a couple of questions are more on that statement. So first of all, from an international standpoint, I would say, consistent with what we've spoken to for some time, which is, we are well-equipped to consider and evaluate outside border opportunities. We continue to do that. Nothing to speak to as we are here today. But again, that's part of the overall mining that we're doing both inside and outside borders, but we'll see how that plays out over time. Clearly, there has been far more in-border opportunities over the last three or four years. And maybe to tie it -- another part of your question is the fact that part of the reason for that is the amount of development that's come into the cycle has been done by owners that have no intention of being long-term holders of those assets. So that continues to be a good breeding ground for us to find deals."}, {"role": "assistant", "content": "I'll let Tom talk about thoughts around going into any kind of lending platform, etc."}, {"role": "user", "content": "Yeah, I'd maybe take a step back and comment on your question around the lending environment because I do think, stepping back, the lending environment has certainly gotten more challenged for many developers at this point and could lead to lower new supply heading forward. And so, we will have to see how that place out. In terms of our participation in other parts of the capital stack, we continue to find very good value in the equity portion of the capital stack and have been deploying capital there consistently over the last several years and have found that to be a good risk-adjusted return. And I'd note, in addition to that, we have made some lending investments with some of our partners on a smaller-scale. So something that we're considering as part of our wheelhouse as we move forward."}, {"role": "user", "content": "All right. Thank you."}, {"role": "assistant", "content": "Thank you. Thanks."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Keegan Carl with Wolfe Research. Your line is open."}, {"role": "user", "content": "Hi guys, thanks for the time. Maybe first here, just any more color on your development pipeline, particularly those assets that are completed from 2018 to 2020. It seems that occupancy levels are below your portfolio average by decent margin, but this should stabilize at this point based on your press release commentary. So just any any sort of color on what's driving and if it's maybe market-specific would be helpful."}, {"role": "assistant", "content": "Yeah, I'd characterize the performance of those assets to be pretty strong. All right. I mean, anything we delivered over that time period has benefited from really strong demand drivers and frankly, they've been exceeding our expectations. Your comments around occupancies, I think some of those vintages are a"}, {"role": "assistant", "content": "Touch under 90%. But they'll certainly stabilize above 90%."}, {"role": "assistant", "content": "One of the things that I'd remind you is that occupancy is only one part of the equation of stabilization and rental rates is certainly the other and we're seeking to maximize revenue from those pools of assets the same way we do our same-store pool. So, occupancy will ultimately get over 90%, but. I think more importantly the rate growth there has been exceptionally strong and likely has several more years of strong rate growth compared to the same-store pool from that group of assets. And you can see the yields that we're achieving there continues to reinforce the strong risk-adjusted return of that program and leads to our increase in desire to continue to build moving forward. So the development pipeline now sitting over $1 billion as we seek to grow that program."}, {"role": "user", "content": "That's helpful. And then one thing I noticed in the supplement, just your commentary on credit card fees stood out, just kind of curious, is there a way for you guys to charge a higher-rate on those using credit cards to offset that or you just now want to take the risk them bulking given those people on auto pay tend to be better customers."}, {"role": "assistant", "content": "Yeah, I'd say for the most part, the increase in credit card fee is related to the increase in revenues and that's by far and away the contribution. So as revenues increase, you're going to see the payment processing fees go higher. From an operational standpoint, we do spend time thinking about ways to incentivize our customers to use attractive payment patterns for them, but also one that may be cheaper for us to process and that's an ongoing kind of year-in and year-out attempt through different operational methods. But to your point, we love to move people in and achieve that auto pay and ultimately it's much more important to achieve that move-in than it is to focus on their payment process."}, {"role": "user", "content": "Got it. super helpful. Thanks for the time guys."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]. We'll take our next question from Steve Sakwa with Evercore ISI. Your line is now open."}, {"role": "user", "content": "Great, thanks, good morning. I'm sure you guys are disappointed in the outcome with Life Storage, but does that sort of change kind of your view at all about kind of large-scale M&A or do you feel like this kind of puts pressure for you to find other transactions of size to Kind of keep your lead in the industry?"}, {"role": "assistant", "content": "Yeah, Steve, clearly, we are well-positioned to continue to grow in all different shapes and sizes and we feel every bit, if not more, confident that opportunities will continue to rise going-forward. So we're very focused on that. We are looking at many different alternatives going into future opportunity scenarios, but we feel that again the reset to whatever degree happens in the sector by virtue of the LSI and ESR combination at the end of the day doesn't change the landscape from a competitive standpoint. One of the things that we've learned over time, scale is one part of efficiency and optimization, but many other things play through as well that we continue to invest in that lead to our industry-leading margins. The things that we've done to enhance our own brand, the effectiveness of the presence we have market-to-market and we feel very confident, we're in good shape going-forward. And we'll continue to make those investments."}, {"role": "user", "content": "Great and then I guess secondly on development, we continue to hear that development should be coming down given all the challenges in the lending environment. You guys have remained. I think, active. I'm just curious, are you sort of changing kind of how you guys underwrite development today? Have you changed your hurdles? Are you changing anything in the. I guess, the framework in the way you evaluate new development projects?"}, {"role": "assistant", "content": "Yeah, first of all, development is a long game, right. So, we're typically looking at scenarios that will, without question, go in and out of all kinds of different ranges of economic cycles, etc., when you're thinking about total time periods to actually put a property to a point of not only opening but stabilization. I mean, you can easily be at a five-Year plus mark asset to asset. So that I think is a good headwind particularly in this environment, where again many owners are seeing different headwinds around cost of capital, availability of capital, component cost. I mentioned the amount of timing it takes to get approval city to city. And we've been talking about this for some time. It's far more difficult today than it's ever been on that front and literally almost everywhere. I can't even name a market where it's easier to develop today than it was one. two or three years ago."}, {"role": "assistant", "content": "So you got to be again ready to work through those kinds of demands or those kinds of factors, those kinds of risk components. We feel very well-suited to do that. In this environment, we're actually seeing the opportunity to pull more interesting properties into our own pipeline that potentially have far less competition from a land standpoint or even a repurposing standpoint. So the team is working hard and we're finding some good opportunities."}, {"role": "assistant", "content": "I'll let Tom talk a little bit about how our underwriting process play through as well. But that's something that always is reflective, not only of the current environment, but the long-term environment."}, {"role": "user", "content": "Yeah, and just to piggyback on that, I think we're consistently looking to try to improve our underwriting processes year-in and year-out. And if you recall, at Investor Day, our data science leader talked about some of the tools that team has helped develop with -- for use with our development and acquisition team, those processes continue to be underway. We try to use our wealth of data internally to give us advantages on picking those sites and adding in new developments. So, the underwriting process is consistently evolving in a positive way. In terms of hurdles and the like, obviously we do with acquisitions, as well as development and think about what our cost-of-capital is and evaluate that in the context of the returns that we expect on new capital allocation."}, {"role": "user", "content": "But I'd point you to a relatively consistent trend, which you said that we're seeking to build new sites that will generate a yield on cost of circa 8% plus at delivery and that's not significantly changed over the last several years."}, {"role": "user", "content": "Great, thanks."}, {"role": "user", "content": "Thanks, Steve."}, {"role": "assistant", "content": "Thanks, Steve."}]}, {"messages": [{"role": "system", "content": "We will take our next question from Ki Bin Kim with Truist. Your line is open."}, {"role": "user", "content": "Thanks, good morning. Did you guys provide an update on April moving rates. Sorry, if i missed it."}, {"role": "user", "content": "No, we didn't. The way I'd characterize move-in rents and I think this is the first question on move-in rents on the call, which may be a record in terms of depth before we get that question. But move-in rates across the sector have been lower and I think that's been pretty well-documented. In move-in rents, in the first-half of the year, we anticipate to be down more significantly than maybe the back-half of the year given the comp scenario that we've been discussing with the first-half really tough comps versus last year and the second-half easier comps."}, {"role": "user", "content": "And so, as we move into the second-quarter, we anticipate moving rents and we're seeing that in April to be down. In that kind of upper single digits to low-double-digit types of quotes."}, {"role": "user", "content": "Okay great and how many stores do you have right now that are managed fully remotely without people? And any kind shared characteristics? Are those usually just smaller stores in tertiary markets or in different places as well?"}, {"role": "assistant", "content": "Yeah, Ki Bin, there, I would tell you there's a broader context the way we're approaching the whole concept of \"remote.\" One of the things I mentioned in my opening comments, as we've now got 400 properties on what we call customer-driven technological platforms, which includes a piece of what you might consider a property to be remotely managed, a misnomer pn remote is remote also requires every property still require some level of onsite personnel. What we have done in a broader context is, continue to test and now deploy pretty effective technological predictive and data sources that we have to put people in the right places based on property activity, the amount of demand that's likely to come through, the patterns both on a weekly, daily and monthly and even quarterly basis. So with that, we can really take even that baseline concept of remote to a far different level, which can work in suburban or remote areas that can work in more dense areas, it can help us optimize the amount necessary on-site labor and this is all built around something that's first and foremost, which is actually maintaining or improving customer service."}, {"role": "assistant", "content": "So there is a whole range of different components to that platform, some of which include kiosks for instance. Some of which include the way that we interact with customers through our customer care center and then another leg of that whole puzzle is very effective time and presence from face-to-face Public Storage employee. So all of those things are being optimized piece by piece. And we've done some very interesting things and we have a lot more to come. Very excited about that part of the business."}, {"role": "user", "content": "And so, you said 400 properties. You have about 2,900 I guess. What it -- can you apply to all and if you do, like does the FTE go from two to one or I am just trying to understand the impact overall. Yeah, yean, it's the roadmap we're on. I wouldn't say it's pure enough to say each and every one of the 2,900 properties have the same impact from the platform. But the great part about our overall strategy as there are components to this. So you can optimize FTE-based on again what size of property you're dealing with, what historic level, either staffing or presence you have from an employee standpoint, And then Tom, you can talk a little bit about some of the economic benefits that we're likely to continue to see. But the great thing about this, it's, like I said, far deeper than just remote because it can apply to many different types of assets and we're excited about deploying that in many more parts of the business."}, {"role": "user", "content": "Yeah, the only thing I'd add to that ki Bin is in our Investor Day presentation, we did highlight our objective to reduce labor hours and get more efficient with labor hours through the specialization and centralization that Joe speaking to in reacting to customer demand And the target we set was for a reduction in labor hours of 25%. We'll achieve that this year and frankly, we think that there is more upside from here. So just another component of how we are seeking to get more efficient and drive our industry-leading margins higher."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Mike Mueller with JPMorgan. Your line is open."}, {"role": "user", "content": "Yeah, hi. I was wondering, are you seeing any signs of like the degradation of length of stay for your longer-term customers that have been there over a year or two?"}, {"role": "assistant", "content": "Yeah. I mean we characterize length of stay is sitting at records in our prepared remarks earlier. And so, generally speaking, while we have seen move-outs increase and trend back towards 2019 levels, the length of stay of the overall platform continues to be really strong. The portfolio now, the average length of stay of the tenant base today is over 36 months and has been sitting around that sort of zip code for the last several quarters."}, {"role": "assistant", "content": "In terms of the longer length of stay customers themselves and how they're behaving, they continue to behave quite well and on a Year-over-Year basis, the percentage of customers greater than two years is actually higher than where it was last year. So, continuing to demonstrate the strength of that component of the tenant base. Got it, okay, thank you."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Spenser Allaway with Green Street. Your line is open."}, {"role": "user", "content": "Thank you. Maybe just another one similar to the development topic. But can you just remind us what percent of the portfolio would you say has true expansion opportunity?"}, {"role": "assistant", "content": "Well, yeah, Spenser, I don't think we've ever characterized that as a specific number. What leads to those kinds of expansion opportunities are several factors. We have hundreds of properties that have been developed, say 30, 40 or 50 years ago that in those periods of time, a traditional property might have a much larger amount of acreage and would typically have what we would call our Gen one product, simple single-story drive-up product. There are many opportunities within the portfolio to potentially acquire different and higher levels of FAR to magnify the size of those properties. And frankly, many of them are in great locations, some of which we get far better customer demand once we actually even make the property that much bigger. So, there is a sizable set of those types of assets."}, {"role": "assistant", "content": "The time and the effort that goes into that can be quite complex. Many cities won't allow us to do certain expansions of that magnitude. Some that may open the door to that actually though put you through a multi-year process that again you've got to work-through very diligently. So we've got a number of those efforts in play as we speak. Another thing that we have at hand in many assets for instance is, either some additional excess land or parking area that too can be developed or expanded into again a more modern facility as an extension of what's already on the property."}, {"role": "assistant", "content": "So there's a whole range of things that we're continuing to evaluate on that front. But the good news is by virtue of our very consistent investment processes now for several decades, we've got amazing sites. And with that, in many areas, properties that have far different demand and better demand dynamics when they're originally built, that could fit very well to again the opportunity going-forward. Today of the $1 billion development pipeline plus or minus about 50% of that is actually tied to the kinds of sites I'm speaking and the team is going to continue to work to monetize and unlock those opportunities as we go forward."}, {"role": "assistant", "content": "One of the great things about our development team is they can wear both hats. They can work on ground up development, as well as expansion development. We're doing that like-for-like clearly in many of the markets that we're looking for expansion."}, {"role": "user", "content": "Okay, that was really helpful color. And I'd also just wondering, just given the fact that there has been a lack of larger portfolios on the market, has there been any increase to the personnel dedicated to sourcing or underwriting acquisitions, just I would imagine the deals are a little bit more granular -- excuse me -- than normal. But it sounds like from what you just said, your personnel are very dynamic and perhaps can wear multiple hats."}, {"role": "assistant", "content": "Yeah, to that point, maybe just to give you a little context, in our 2021, to your point, it was an unusual year where we did a couple of very large unusual transactions. And again, but flip side of that though is that was only half of our volume, of the $5.1 billion that we did. The other half was dedicated to what's very traditional, either single-asset acquisitions or much smaller portfolios. We've got a deep seated team, very knowledgeable, very well-placed relative to knowledge of markets, knowledge of owners and the kind of dialog that comes with that. From a relationship standpoint, it has been and will continue to be very important for our efforts to grow the portfolio."}, {"role": "assistant", "content": "Tom mentioned about half or more than half -- excuse me -- a lion share of the acquisition volume that we've done in 2023 has come from off-market transactions. So, part of that's just again as I think you're alluding to, we got the right team in place to go out, engage. We've got a great reputation as a preferred buyer. And we're going to continue to leverage that."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "It appears we have no further questions on the line at this time. I would turn the program back over to Ryan Burke for any additional or closing remarks."}, {"role": "user", "content": "Thanks. Brittany and thanks to all of you for joining us. Have a great day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Christopher Parkinson from Mizuho. Please go ahead."}, {"role": "user", "content": "Thank you so much. Could you just give us like a real quick update on how we should be thinking about your phosphate strip margins just across rock costs processing, where sulfur is trending relative to last year as well as your ammonia mix? Just any insights on how that should affect phosphate margins throughout the balance of the year would be incredibly helpful. Thank you so much."}, {"role": "assistant", "content": "Yeah. Good morning, Chris. Thank you. If you look at how we're projecting, I guess, stripping margins for the rest of the year, you will have seen that the raw material prices have declined in the last while. And obviously, I think I've talked before, the sulfur -- it takes 0.4 of a ton of sulfur basically to make a ton of DAP and about 0.2 of a ton of ammonia. So those moves which have been quite material have allowed even though the price of phosphates has come down in time, the actual margins have stayed relatively constant throughout that period. And we see those margin staying relatively constant through the rest of the year."}, {"role": "assistant", "content": "If we look at our cost of our actual inputs, rock and conversion, our rock costs were driven a little higher this quarter basically because of a lower volume throughout the quarter, probably due to both -- well, more than anything due to the grade of the area we've been mining through. And then if we look at conversion costs, those have been impacted by higher variable and fixed costs such as electricity and process chemicals. For the balance of 2023, we believe our maintenance and capital assets that we've invested in should really improve both volumes and costs as we move forward."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Steve Byrne from Bank of America. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning. The price for potash to the second quarter looks like it's roughly $75 a ton more than historical levels and yet it sounds like Jenny's comments would suggest that potash is the one that is going to be more curtailed in supply in 2023 as opposed to your FOB DAP forecast is a couple of hundred dollars higher than historical prices. So my question is what is fundamentally different here between P&K that would lead potash pricing to be generally weaker? Is it a reflection of a second tier price coming out of Russia?"}, {"role": "assistant", "content": "Okay. Thanks, Steve. Yeah, let me go through a couple of points there. I think what I said earlier in the prepared questions or whatever the early questions still holds which is when we were setting up the quarter and doing our preparation for this, you're talking a couple of weeks ago, we hadn't seen fully the impact of what we would see in April and May or sorry, March and April. We're seeing that come in better than we expected. So from a volume perspective, we're pretty confident that, that guidance is at least very realistic and probably even we could see upside on that."}, {"role": "assistant", "content": "In terms of pricing, it's all about combination of what's going to which market for instance. It's product mix, whether we're selling the standard grade product to some of the foreign markets where the prices are a lower and the transport is higher, but then secondly, how much is coming from North-America, which is a strong market and a good -- both good pricing and relatively lower transport and then Brazil which really hasn't started yet. So as we end the North American spring and move into the -- or wind down North American spring and move into the quarter, our question is going to be does Brazil come in to replace the higher costs or the higher priced North American product or do we get more of a balance on other exports in which case it just makes it a little hard to come up with a real good forecast for those prices."}, {"role": "assistant", "content": "But I think the comment you make is more than valid. There is definite tightness in the potash market. We're seeing it probably strongest through North Africa. We are seeing a strong in Europe and I think we're going to see the impacts of it in Asia. So our view is they have to step up soon and start buying and the price will follow."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Ben Theurer from Barclays. Please go ahead."}, {"role": "user", "content": "Thank you very much. Good morning, everyone. Actually it's a good follow-up just on the price development and like long-term versus short-term. So if you think about all the comments you made around the structure challenges and obviously the tightness, potash just reiterated, but still prices are not coming up that much. So maybe help us understand a little bit that in context prices being soft, but then at the same time, you do consider some of capacity increases towards the back half of the year. So just to understand a little bit the rationale behind the volume you plan to put in additionally given where prices are."}, {"role": "assistant", "content": "Yeah, sure. So if I'm going through potash, again, it's the same story. First, we're going to see North-America. We didn't see a strong -- although we don't sell to it, we didn't see a strong European market, but very quickly we're going to turn over to Brazil and Latin America. That market should start moving. The softer season starts basically at the start of the third quarter, if you will. So they have to be moving product towards the end of this quarter, so June, let's say, things have to start moving to get product in place in time. Now we're coming into the year and I think one thing that has to be understood is there was some pretty severe overshoot last year. Price went high, usage went way down and I think we're seeing an overshoot downwards right now and so it's not following fundamentals, but long-term, it has to."}, {"role": "assistant", "content": "So Brazil and the rest of Latin America will start moving. China is a very similar season to North America. And while they are getting more product from Belarus and Russia cross from rail, there's still going to have to buy potash. So all of that stuff starts moving. Asia has to move. They need their staples like rice to grow. Indonesia, Malaysia needs the palm oil. So all of those start moving. We think it's still a constrained market and the short-term -- sentiment drive short-term, fundamentals drive the longer-term. So we think right now, it's just sentiment-driven."}]}, {"messages": [{"role": "system", "content": "The next question comes from Andrew Wong from RBC Capital Markets. Please go ahead."}, {"role": "user", "content": "Hi, good morning. Just a couple of questions on phosphate for me. What are your expectations for the phosphate segment production run rate? Can we get back to what historically we've seen kind of 2 million, 2.2 million tons per quarter coming out of that segment? And then just a question on the Q2 pricing guidance. Yesterday, we kind of saw U.S. normal DAP prices drop down to kind of at the low 500s. How does that factor into the price guidance for Q2? Thank you."}, {"role": "assistant", "content": "I'll let Jenny talk a little bit about summer fill and whatnot, but look let me start by the run rate. I think realistically, our run rates probably have been a lot closer to 8.5 million tons per year since we shut down the plant city operation. So 2.2 million is probably at the top end. I think a good quarter for us will now run probably 2 million to 2.1 million, but we would expect an average probably in that range as we go forward if everything is running well. We've had -- as I mentioned in my prepared remarks, we have had weather related issues. Hurricane Ian shut us down for a fair bit and caused some real problems. So we think that, that number of, say, 8.5 million is a better run rate than let's say 9 million to 9.5 million with all things sort of settled and looking at the possibilities."}, {"role": "assistant", "content": "Let me talk -- get Jenny to talk a little bit. I think what you're talking about is summer fill pricing on phosphate. So let me get Jenny to talk about that."}, {"role": "user", "content": "Sure. Andrew, I believe the number that you talked about was DAP NOLA [Phonetic] barter price. We noticed that as well and as some of the trade publications reported lower prices maybe driven by the incoming import battles the traders play on index setting. So that's what we learned and that happened many times in the past. It does not necessarily represent the real market value. As we go through this in that setting, we will see the real value to be reflected for summer fill. Having said that, it is very normal for the market like North America after spring season, we will see -- we might see a price reset. It happens usually every year, but the price eventually is going to be supported by fundamentals as we discussed earlier. Lastly, we want to remind ourselves when we say phosphate market, it is a very constructive market environment. As the raw material price is coming down, there are some pull throughs to the phosphate prices as well."}, {"role": "assistant", "content": "And just don't forget the never ending logistics issues. I'm not convinced that product coming in through NOLA certainly isn't going to get there in time for most of spring. So it is about summer fill, not about spring demand. And as you know, the flooding in the Upper Mississippi that's actually been shut down for a while or was."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Joel Jackson from BMO Capital Markets. Please go ahead."}, {"role": "user", "content": "Good morning, Joc. I give a bit of history and now we're back to some of the presentations you gave in November of 2020 when you were presenting kind of your look of all the segments going forward. So look at the Fertilizantes one and the Fertilizantes one, you talk about Transformation 1.0, Transformation 2.0 where you can maybe add $200 million to $300 million of earnings to Brazil to Fertilizantes by your different synergies, transformations, whatever. Now -- and that was off the base to what you're achieving, you were achieving $30 to $40 a ton margins in 2019, 2020 already and that's the guidance you're giving now as steady state. So I guess my question is what's happened to all those opportunities to where you're now guiding to a $35 ton margin, the same margins you achieved in '19 and '20 before you launched all these initiatives."}, {"role": "assistant", "content": "Let me start. Thanks, Joel. Let me start by saying that is the distribution margin that we're referring to there. And it's important to kind of think about that in terms of the overall. If you think last year, I think in distribution, we sold approximately was it 6 million tons of distribution tons? So 6.5 million tons of distribution tons at I think it was about $60 on average. So if you think about that that's contributing $200 million of the $1 billion and I know I'm probably adding to the confusion of how hard it is to estimate what Brazil looks like."}, {"role": "assistant", "content": "But the distribution business itself is a pretty small piece of the overall. We make about $100 million a year of co-product sales and we make the majority from our actual production business, selling our MAP and feed, TSP and SSP. So those are the ones that are really -- and right now that market is moving pretty slowly. We're in an off season and so what we're seeing is a more than usual impact on margin by that distribution business, if you will. So I don't think anything is inconsistent with what we said in 2020."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Richard Garchitorena from Wells Fargo. Please go ahead."}, {"role": "user", "content": "Great. Thanks for taking my questions. Just wanted to touch on the guidance for pricing in the second quarter. The range reflecting a higher percent of lower priced export sales. Any reason for that in terms of why more lower cost sales if demand is picking up in April and you're seeing it as well in May? Thanks."}, {"role": "assistant", "content": "Yeah. Thank you, Richard. Do you want to take that, Jenny?"}, {"role": "user", "content": "Yeah. I think it's -- just want to remind what Joc mentioned. The guidance for the second quarter for potash price, it is a mix of different market between North America and export market. In the export market, there are a mix of different grades for different destinations. So for example, the price to Brazil can be very different than the price to go to India because of the freight differences and also the grade differences. So as we forecast the second quarter, this is a combination of different price, different product rate and different market, very strong North America price. We believe it is going to be carried over into second quarter. The mix of the market will have impact in the guidance."}, {"role": "assistant", "content": "Yeah. And let me reiterate, I think somebody might have been Steve Byrne, mentioned that is this the aggressive behavior of the Russians and the Belarusians and yes, in a very -- in a less robust market, which we've been in for the first part of the quarter, they have a bigger impact. So in the export market right now, they're being quite aggressive and they're having a bigger impact, but recognize they can't keep producing enough to impact the markets once they really start moving."}]}, {"messages": [{"role": "system", "content": "The next question comes from Edlain Rodriguez from Credit Suisse. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning, everyone. I mean, Joc, a quick question on philosophy. In the past 12, 18 months, I mean, potash prices have peaked and have come down really hard. Like is there anything that Mosaic or Canpotex or the industry could have done to mitigate that volatility? I mean, this is something that has happened before where potash prices get to those high levels only to come down really hard very quickly. Like is there a better way to \"manage\" the pricing? I mean, yes, potash is a commodity, but it doesn't really have the same cost push aspect like nitrogen does with natural gas. I mean, potash is supposed to be different. Any insight you can provide in there, like what's going on there?"}, {"role": "assistant", "content": "Yeah, thanks, Edlain. And look, from our perspective, the huge price peak, the quick drops back down is certainly not how you'd like to see the markets perform. And we were saying that last year and I wouldn't change my view on that at all. If you think back to -- you got almost think back to the start of the. Russian invasion of Ukraine where you had for instance President Bolsonaro of Brazil was in Canada asking for more product. You had him in Russia talking to boot and looking for more potash. You had this huge almost panic run on potash and phosphates as they're trying to make sure they had enough for the season and the price got to the point where it was literally at least from a psychological perspective unaffordable."}, {"role": "assistant", "content": "So people took what we've talked about as the potash holiday. Well, now you're seeing virtually the opposite where you still in some markets and some of the retailers are trying to sell their high priced product. They're resistant on dropping their prices to the market. So now you see overshoot on the downside. And yeah, unfortunately, it's kind of that system. It's the highs were too high and now the lows are probably too low. It will balance out again just like it did in '09, but we have to get through the first phase of it."}, {"role": "assistant", "content": "What could we have done differently? We were aware of the risk and I think we talked about that risk in some of these meetings even. So what can you do, you try and send more to those markets to make sure they're well supplied, we did that, but then of course when things slowed down, there's no way around it. So I'm not convinced that anything that the suppliers could have done would have changed the overall outcome. Now this year, again, we're trying to supply and as people buy that will start balancing out."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question comes from Joshua Spector from UBS. Please go ahead."}, {"role": "user", "content": "Good morning. This is Lucas Beaumont on for Josh. I just have two quick ones. Firstly, so on your potash volume guide for the second quarter, your target sounds like you think North America is going to be up year-on-year. So if that's the case and I kind of split out like what Canpotex is doing then in the second quarter, what's implied. It's implying that's kind of down 15% to 20% year-on-year. So I guess, is that right? Why would it be down that much taking less allocation there? And secondly, just wanted to follow-on from Joel's question on Fertilizantes. So maybe how do you kind of see the normalized mid-cycle EBITDA in Fertilizantes now? And could you split that between distribution EBITDA and production EBITDA for us, please? Thanks."}, {"role": "assistant", "content": "Yeah, okay, Lucas. Yeah, potash volume, I think I said earlier, we have taken a relatively conservative view of international sales and so yes, our portion of exports is a bit lower. And when I say this, I mean, we're looking right now and I think what it would say is if North America keeps performing as it does, we'll be at the higher end of our guidance. And if the international market comes back, we'll be at the higher end of the guidance. All I can say at this stage is probably there's -- we try to keep a balanced, but it is probably a little more upside potential than there is downside risk at this point it looks like, although again supply chain and everything else can become a risk in this. You can only move so much product."}, {"role": "assistant", "content": "Now the second question, oh, Brazil, yeah. And again let me -- so let me kind of highlight Brazil, if you will. I think you can look at Brazil as being -- 50% of their earnings are going to be a production kind of economics. Now you have to take into account the fact that they're producing right in the market. So I think that one is probably 50% of Brazil's earnings come from that. 30% comes from the distribution business and the rest comes from other things like co-products and whatnot. So that's kind of how we look at it and that's how we've tried to portray that business."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Jeff Zekauskas from JPMorgan. Please go ahead."}, {"role": "user", "content": "Thanks very much. A couple of questions about potash. India signed a contract for six months instead of a year this time in potash. Why do you think they did that? Why sign a short-term contract? Normally, China quickly follows suit after India signs a contract and maybe gets a $20 a ton better price. And as you said, the Indians signed at for $422 a ton down from $590, but the Chinese didn't sign a contract down $20 per ton. What do you make of that? And do you have an expectation for when the Chinese might sign a potash contract?"}, {"role": "assistant", "content": "Yeah, okay. Thanks, Jeff. Look, let me start with India. It was not India that drove the six month contract. It was the suppliers, including Canpotex and I don't like to normally speak for Canpotex. But I can tell you that we don't think the fundamentals are such that the price is going to still be at $422 come six months from now or at least we thought there's pretty good upside potential. So that was the reason that was a six month, not a year. In terms of China and recognize -- sorry, let me finish the India thing."}, {"role": "assistant", "content": "He other thing with India though is it hasn't really taken off tonnage wise because they haven't established the subsidy program. So while there is a contract price, the importers are still a little bit leery because there isn't a subsidy guarantee for them, which means the NPK plants are taking what they need, but they're taking it hand to mouth. So it's a bit problematic and it's more of a political and subsidy issue than it really is the on the ground demand."}, {"role": "assistant", "content": "In China, why didn't China follow? I think there's a couple of reasons. I think the first is they had the inventory that they needed for the short-term and they're looking for when do they really need product. And recognize some things have changed in China. With 2 million tons coming from the rail across from Kazakhstan with -- from Belarus and another 2 million plus coming over the Urals from Uralkali and the Russians and then 6 million tons coming from Qinghai Lake and that production, your seaborne needs while still there are less than they were before."}, {"role": "assistant", "content": "So maybe we have to reassess what 2 million tons of inventory really means because I think it will last them a little longer because they're getting their basic needs. Now having said that, I think by about mid-year, they still need seaborne tons. So I think there's still a place for them, but I will say and we've been saying this for years, the relevance of the Chinese contract is becoming less and less overall because they are less and less reliant on seaborne tons."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Vincent Andrews from Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Thank you and good morning. Joc, I'm just trying to synthesize all the comments today about the market and price expectations and so forth on potash. With -- what are the sort of thresholds which you're anticipating crossing in the back half of the year that would get you to turn Colonsay on? Is it that you're looking for a certain increase in price from here or is it you're waiting for China to come back into the seaborne market or what is it that you guys are watching to determine whether you can make that decision or not?"}, {"role": "assistant", "content": "Thanks, Vincent. If I'm thinking about Colonsay in particular and I know there is one at least a sent question that said why are we talking about restarting Colonsay at all. And really it's almost been a timing issue that every month that goes by, Esterhazy increases its capacity a little bit to where I think now we're probably going to be well over 6 million tons of capacity at Esterhazy in the second half of the year. We're going to be 3 million tons of capacity at Belle Plaine. And so overall, we've got 9 million tons of total capacity without Colonsay."}, {"role": "assistant", "content": "So I think whether does Colonsay come in, I think if the export market really heats up and you start seeing good demand from China, good demand from India, good amount from Indonesia, Malaysia, Brazil start moving and Latin America, then you're going to start to see the potential for us to not only have the need. The inventory will get run down that we have at the plants and we may not be able to keep up with the 9.5 million. Now if that only comes in Lackluster, Colonsay probably doesn't run."}, {"role": "assistant", "content": "So Colonsay, it's not really a price issue for Colonsay say because I think the profitability of Colonsay would still be reasonably good at this level. But I don't want to be stuffing product into a market where there isn't a buyer or we just actually destroy the market we're in and not unlike what happened when BPC broke up. And so I think there's a good case to be careful about how we bring that new -- that other production on. It's sitting there, maybe we have a little excess capacity that we're -- the cost of holding is high, but there is enough uncertainty right now that I don't want to risk not having it if that market comes back if that's strong."}]}, {"messages": [{"role": "system", "content": "This concludes our question-and-answer session. I would like to turn the conference back over to Joc O'Rourke for any closing remarks."}, {"role": "assistant", "content": "Okay. Thank you everyone. Let me conclude our call by reinforcing a couple of our key messages. The agricultural commodity prices are still elevated. This gives farmers strong incentive to maximize their yields and use fertilizer. So fertilizer demand is robust and volumes are starting to move quite strongly. Our operations are running well and our strong earnings and cash flow are allowing us to return significant capital to shareholders. 2023 is off to a good start for Mosaic and we have a positive outlook for the remainder of the year. So with that, thank you for joining our call. Have a great and safe day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Barry Jonas with Truist Securities. Please proceed."}, {"role": "user", "content": "Hey guys. Last quarter, you noted the midpoint of EBITDAR guidance could be conservative, potential upside if early year trends held. Do you still feel that way? And should Interactive still total to about positive $25 million for the year?"}, {"role": "assistant", "content": "Barry, I would say no change to how we felt when we had our call in February. It's still very early in the year. So it really depends on the macro. And your guess and speculation around what's going to be the environment three months or six months from now, it's probably better than mine or as good as any. So we're -- I think it's too early in the year to consider doing something like that."}, {"role": "assistant", "content": "I would just highlight what we said earlier during the prepared remarks in terms of our core retail casino businesses and momentum. We had our strongest slot volume weekend of the year, the last weekend of April after a relatively slow start around Easter. So it's really -- it's hard to peg. We talk about it a lot internally, and you go through these pockets of two or three weeks where trends start to soften up and then they come back strong."}, {"role": "assistant", "content": "And we're still kind of going through that real-time. So as of right now, we're feeling really good about the volumes and customer trends and behavior. But I would say too early in the year. And yes is the answer to your question on Interactive."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Joe Greff with JPMorgan. Please proceed."}, {"role": "user", "content": "Hey good morning. It's Omer Sander on for Joe. You mentioned in the past that you're likely to reinvest more or increase your marketing and get more active in promos in your digital business through 2024 as your competitors likely ratchet down those activities. And this is the reason why the arc of ramp in profitability may look different for Penn than your OSB and gaming peers in the hockey stick-shaped profit growth will be more in 2025 and beyond."}, {"role": "user", "content": "Can you please talk about how you're presently thinking about this? And what directionally this might look like in 2024 and 2025 relative to 2023 digital profitability?"}, {"role": "assistant", "content": "Omer, great question. And I would say that your summary is consistent with how we're thinking about things. It's a little too early to get into a detailed discussion around what that stick is going to look like in 2024 versus 2025. I would say that we're very encouraged by the products based on our trends in Ontario. We've shared a lot of stats around retention and the success of our promotional engine, the momentum we have in not just online sports betting, but importantly, we continue to set new records every month in online casino in Ontario."}, {"role": "assistant", "content": "So we're feeling really good about what bringing that product to the U.S. and that technology stack is going to allow us to do much better than we do today here in the U.S. I mean, you have to recall that we really had kind of a frozen product for the last six to nine months, and it will continue to be frozen until we migrate in July. Everything is on track for that migration."}, {"role": "assistant", "content": "Benjie Levy and our team at theScore and Penn Interactive have been doing a great job getting ready for July. Everything is on track. And I would say more to come in terms of how we're thinking about what football season this year and then going into 2024, what that looks like. But I think you're right about we have a great product. We're going to invest in that product and make sure that people know we've got a brand-new product that we believe is going to be as good, if not better, than most everything out there."}, {"role": "assistant", "content": "And you can't just launch a product without supporting it from a marketing standpoint. So we will do that. And I think 2025, obviously, will be really important for a year and when you'll start to see the EBITDA growth really start to make a difference as we report numbers on a quarterly and annual basis."}, {"role": "user", "content": "Great. And then a follow-up to that. How do you think about the profitability in Barstool Sports in 2024? What drives the improved profitability versus the top line growth? How profitability sort of be different going forward? I guess, ensure what's the bull case versus the base case?"}, {"role": "assistant", "content": "Yes, sure. And Erika, feel free to jump in. I'll just make a couple of comments on that. we provided this morning revenue cadence throughout the year of how things will likely play out from a quarter-to-quarter basis here in 2023. You should assume that from a seasonal perspective -- or seasonality perspective, that would look the same in 2024. And we're assuming roughly breakeven here in 2023."}, {"role": "assistant", "content": "We have and will continue to make investments in top talent as well as new potential business verticals for us, of which we're exploring a number of with Barstool Sports now. So I don't want to get into a 2024 discussion around Barstool Sports and guidance. We'll do that at the right time more toward the end of the year. As we sit here today, I think you should continue to see revenue growth because we've been showing strong revenue growth every year."}, {"role": "assistant", "content": "As a reminder, Barstool Sports revenues have more than doubled since we made our initial investment three years ago. And 2023 is going to show nice growth on 2022. We'd expect to see that in 2024 as well. But with regard to 2024 and some of the things that we're working on and are excited about, Erika, I'll call hand it over to you to make a few comments."}, {"role": "assistant", "content": "Sure. So when I look at this quarter in particular, we had record growth, so we did 19 billion cross-platform video views. Nearly six billion of those were original content. When you think about the future, our vision is to monetize those impressions fully. We're beating our peers in terms of our year-over-year revenue growth, and our audience continues to grow and we continue to grow on multiple platforms."}, {"role": "assistant", "content": "So being sure that we maximize that with a diverse revenue set will continue to be our priority. And then we'll obviously get more efficient about how and where we do it."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Carlo Santarelli with Deutsche Bank. Please proceed."}, {"role": "user", "content": "Hey thanks, good morning everyone. Jay, Felicia, when you guys think about kind of the segments in the first quarter where you saw revenue growth, namely kind of the Northwest and -- or sorry, the Northeast and the Midwest, and you look at the flow-through, and obviously, with the Pennsylvania growth that you guys saw and the tax rate there, it's understandable."}, {"role": "user", "content": "But you're also, in both segments, lapping periods where clearly more employment came back on, more amenities came back on, etc, and staffing levels were higher. When do we start to see, over the course of this year, flow-through start to normalize to what you guys have experienced in the past in those regions?"}, {"role": "assistant", "content": "I'll let Todd answer that one, Carlo. It's a great question."}, {"role": "assistant", "content": "Carlo, so I think you're kind of seeing it now, and I think what had been happening with some of the expense creep, there was some inflationary pressure in there. But I think what we're seeing is that starting to moderate more kind of muted growth in there. And then as we've added the amenities back, we've been more strategic than we were. And you still look at 2019 and what we are flowing through then compared to what we're flowing through now, and we're still showing tremendous improvement."}, {"role": "assistant", "content": "As we start looking at our models, our playbook, we're more strategic in our offerings. We're trying to avoid the entitlement programs that were there in the past and the offerings that were there in the past that really didn't add a tremendous amount of value. So I think what we're seeing, especially February, March time frame, starting to see what will be normalized as we go forward."}, {"role": "assistant", "content": "There's still obviously going to be seasonality in some of the different regions. But that growth coming from the lower segments compared to 2019 and finally starting to see the older demographics come back, it's feeling more like we can start looking to traditional trends in this area."}, {"role": "assistant", "content": "And I would just add one thing to Todd's comments, which we hit a little bit in the prepared remarks and the earnings release that -- and you've noted this, Carlo, most have, that there is some new supply that entered the market over the course of the last, call it, six to 12 months between Black Hawk, Council Bluffs, obviously, Lake Charles with the Horseshoe opening there."}, {"role": "assistant", "content": "And we've been pleasantly surprised. We had estimates kind of worst case, base case, best case in terms of what the impact would be. And I would say that we've held up better in most all of those markets with new supply. Todd and our team of regional executives and general managers in those markets have done a great job really focusing on the customers that are of highest value and that we have very strong long-term relationships with."}, {"role": "assistant", "content": "So that continues to be a good story. And you can see that on the revenue growth in terms of being ahead of where I think a lot of us estimated we would come in, in Q1, maybe a little bit less so for this quarter on the earnings for all the reasons that we've covered and making some additional reinvestment at the VIP and strong core player level in some of those key markets."}, {"role": "assistant", "content": "But I agree with everything Todd said and you're starting to see things settle out here. And it's -- this is probably, I would say, maybe April of this year, should be the last time that we're really talking about noise on a year-over-year basis. I think for the first four or five months of this year, you probably still want to compare to 2019 to see what the trends really look and feel like because last year at Jan, Feb, you had softness between weather and Omicron hangover and then you had pent-up demand in March, April."}, {"role": "assistant", "content": "And so those year-over-year comps look a little odd. But I think April is a good example of you want to look at it versus 2019 also. Once we get to May, certainly June, I think you can just start looking finally year-over-year and going forward, that will be the case."}, {"role": "user", "content": "Jay, one more follow-up, and you kind of gave a little bit of a prelude to the question I'm about to ask. But I think if you just look at the four regions year-over-year, EBITDAR is down about 3%. Obviously, the mix of revenue and the tax impact that, that has was a factor. But when you isolate the assets that did not see year-over-year competition, or said differently, how much of that year-over-year was stemmed from some of the competitive impacts that you guys mentioned?"}, {"role": "assistant", "content": "Yes. I mean -- and Todd, feel free to jump in here. I guess I would answer it this way, Carlo, that as you look at our portfolio of properties market by market and asset by asset, we have some that are showing very strong growth on the top line, bottom line and even margins despite how strong the margins were last year. And then you've got some offsets and some markets where you've got new supply, or you've got assets that are more tired, some of which we're addressing, obviously, like the two in Illinois, Juliet and Aurora."}, {"role": "assistant", "content": "So it's a bit of a mixed bag. But certainly, when you look at markets like Ohio and Missouri. And even -- it's interesting because even though we are down year-over-year, and I always stress year-over-year in the South, if you look at our results region by region compared to 2019, the South region is still showing the strongest results from a top line and bottom line perspective of all of the regions."}, {"role": "assistant", "content": "So it's down a little bit. There's some noise and pent-up demand and whatever that was in there last year, but we feel good about the trends that we're seeing across most of the portfolio with the exception of some new supply. Todd, feel free to jump in with anything."}, {"role": "assistant", "content": "Yes. The only thing I'd add, Carlo, that South segment, yes, it's down year-over-year, but it was such an amazing quarter last year. And it's still an amazing quarter this year, just comparatively speaking, it's down slightly. And then maybe a little more color on the new competition. What we're seeing is traditionally, when new competition had come into the market, it really came in very aggressive, and they were trying to get people to come over and kick the tires."}, {"role": "assistant", "content": "But I think what we're seeing is a more rational approach, trying to come out of the gate very responsibly. So it's led to a really good competitive environment in all the markets that we're seeing. And Jay and I and others were recently traveling around, viewing our own properties but also some of the competition."}, {"role": "assistant", "content": "It's well thought-out. It's well done. And the goal will be that they'll continue to grow the overall market and grow the overall pie, and we'll hold on to our share."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Shaun Kelley with Bank of America. Please proceed."}, {"role": "user", "content": "Hi, good morning everyone. Thanks for taking my questions. Jay, I just wanted to start with the younger demographic. So kind of going back to the slide deck, I think you pointed out there that in the lowest demographic cohort, things actually did slow a little bit year-on-year. Just kind of how would you characterize that, I think, broadly speaking? You're still up a lot from where we were in 2019."}, {"role": "user", "content": "Is this just a little bit of behavioral normalization? Kind of what are your people on the ground telling you about that change?"}, {"role": "assistant", "content": "Yes. I think, Shaun, another good question. I think it's probably more of a last year dynamic than a this year dynamic. We're not hearing or seeing anything from our folks on the ground telling us that things have changed. And the point that you made about what these age demographics looked like versus 2019, I think, is really important. When you're looking at it versus 2019 in Q1, that 21- to 34-year-old age segment is still up 76% versus 2019."}, {"role": "assistant", "content": "The 35- to 44-year-old segment is up 51% versus 2019. 45 to 54 is up 38% compared to 2019 and 55 to 64 is up 12%, and then you have a decline of 13% at 65-plus. So we feel really good about the mix, and we've been trying to answer because we haven't had a great answer on why is that 65-plus still down and when is it going to normalize and return?"}, {"role": "assistant", "content": "And I'm not sure that you get back to flat there on a versus 2019 basis just because some of those older segments were your most frequent visitors on buffets and things that we're not offering anymore. So I don't know that we should set the target at getting back to breakeven versus 2019. But I think getting it from 13% down to a single-digit number, given that we're starting to see some more sort of pre-pandemic visitation pattern behavior return right now, I think, is probably a good goal."}, {"role": "assistant", "content": "And if we can keep these other segments continuing to grow with such strong growth versus 2019, but even if we have a small hiccup in this current quarter of down 5% versus last year, growth in all of the other segments obviously more than offset that. And we've been adding so many new amenities that, I think, appeal to all of the age demographics, but in particular, the younger."}, {"role": "assistant", "content": "Todd and team have done a great job figuring that out, and we've seen a ton of success as we've shared every quarter for the last couple of years."}, {"role": "assistant", "content": "Yes. Shaun, just a couple of other adds and sorry to throw more percentages at you. But even at younger demographic, much of the growth from 2019 is coming from the value on a per-trip basis. So that alone is up over 51% for that 21 to 44 segment. And then even on the 55-plus, it's maybe fewer trips but we are seeing them play at a higher level when they come in."}, {"role": "assistant", "content": "And then Jay and I and Felicia, others were talking about this last week. A lot of that younger demographic comes back in during the kind of the spring and summer months when we have outdoor events and outdoor concerts and things like that to kind of drive the overall experience. So we're very comfortable with where we're at now as well as the programming we have for the upcoming months."}, {"role": "user", "content": "Appreciate all the color. And as my follow-up, maybe turning to Barstool and Erika a little bit. Obviously, there's a pretty big event as it relates to social media and the Barstool team last night. I was just wondering if you could comment on that, Jay -- maybe for Jay, do you expect any sort of financial impact or fallout from that? And for Erika, more of the cultural question."}, {"role": "user", "content": "How do you protect kind of the content and the talent acquisition side as you start to grow into this bigger platform with Penn with, obviously, a different set of kind of cultural guardrails than maybe you had in the past?"}, {"role": "assistant", "content": "Yes. I'll hit that first and then Erika can jump in on the second part of your question, Shaun. We're obviously not commenting on personnel issues on the call or publicly. It's something that happened inside the company that we dealt with. We felt like we dealt with it appropriately. And I would also say that you've been following us and the relationship, and I think the public markets and financial community has gotten to know Barstool pretty well over the last three-plus years, and there's going to be some drama sometimes."}, {"role": "assistant", "content": "There's going to be some things that pop up here and there, and we'll manage through those as we always have. It's one of the strongest sports media brands certainly in the U.S., if not the world. It's high growth. We've got tremendous people at Barstool, tremendous IP, great leadership and have a very exciting future ahead of us. But Erika, feel free to jump in on any of the cultural questions or anything else that you want to address."}, {"role": "assistant", "content": "Sure. The way we think about things, we have about 100 personalities here. And when you think about Barstool Sports, in some ways, we're a media company and in other ways, we're a collection of influencers. And when you look at our business overall, there's very, very few competitors left. Most people who play in the digital media space or the cable media space or the print media space don't exist or are faltering."}, {"role": "assistant", "content": "And when you look at the success of our business, a lot of that is due to the fact of how we run our creative team and the freedom we give them, the tools we give them, the entrepreneurial spirit that exists inside of Barstool. We also are a company that talks about anything and everything incessantly, right? This is a company that's authentic. It's a company that's unapologetic."}, {"role": "assistant", "content": "It's a company that exists on the Internet 24/7. And that's part of what makes Barstool Sports interesting is that we are not particularly corporate in how we think about the culture of our content. Now there are certain lines you don't cross. There's guardrails that exist. Those have obviously increased now that we're in a highly regulated category. And we knew that going into the Penn acquisition."}, {"role": "assistant", "content": "We knew it prior to that going into the Penn investment. And what we really believe is that there is no place like Barstool Sports to make content. There is no platform that will give a talent or a creator a laptop, a microphone and a camera and to enable them to broadcast opinions, creative thoughts, franchises, all sorts of content and to be able to have the promotion of Barstool Sports as well as the monetization engine underneath it."}, {"role": "assistant", "content": "And we feel really strongly about that. That's how we've built the top podcast brands in the world. That's how we've built some of the most captivating creators and influencers in this country, and we will continue to do that."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Chad Beynon with Macquarie. Please proceed."}, {"role": "user", "content": "Morning, thanks for taking my question. Just in terms of the iGaming conversation. Earlier in the year, it sounded like there was a lot of momentum in six or seven states. Good, just kind of legislative support, all at this point, I believe, have died. Jay, curious how you're thinking about what the industry learned and kind of where the conversation is, maybe the setup for next year, which would obviously be a big catalyst for Interactive and for the industry."}, {"role": "assistant", "content": "Yes. Chad, I would say that it's obviously well covered, well documented. It looks like there's probably no movement here in 2023. There absolutely could be in 2024. It's really hard to handicap because it does depend on a number of factors, probably well-known but not worth getting into on a year-to-year basis. I think the way we think about this is that it's only a matter of time and the states that have already legalized online sports betting, that is online gambling. And so online casino is very likely to come."}, {"role": "assistant", "content": "It's a question of what does that cadence look like? Is it staggered? I think once you get a state or two in the Midwest, it usually becomes an arms race for revenue -- tax revenue purposes. And so it will probably start to move faster once you get Indiana, Illinois or Iowa, it will probably start to move from there. So nothing imminent. I'm not going to try to put a -- bring out of a crystal ball and say exactly what that might look like in 2024 or 2025."}, {"role": "assistant", "content": "I would say that from our perspective, given the timing of our technology and product migration this summer, this is actually setting up quite well for us because we have an inferior product today, and we don't believe that's going to be the case the second half of this year. And as we head into 2024, we're going to be in a position to be able to launch stand-alone online casino apps."}, {"role": "assistant", "content": "And today, it's all mixed in with what we do in the online sports betting side. And so we've got a lot in front of us that's exciting. And so the timing of legalization being maybe pushed off to 2024, 2025 and start to really roll from there, we think that sets up very well for Penn."}, {"role": "user", "content": "And then, Erika, you mentioned just the changes with Barstool now being part of a bigger and more regulated industry, bigger company, more regulated industry. Just in terms of what that could bring on the positive, more access to capital, how are you thinking about inorganic opportunities with recent valuation adjustments for high-growth companies? Are there things that maybe you decided not to do in the past couple of years just because of where your North Star was and kind of how you were running the company?"}, {"role": "user", "content": "And now that it's part of a bigger company with different goals, maybe there could be other pieces of the media ecosystem that could make sense?"}, {"role": "assistant", "content": "Yes, absolutely. It's a great question and It's something I spend a lot of time thinking about. When you look at -- if you look at the last six to nine months, we are putting on major scale live sporting events with our own comedy, with our own personality, with our own commentators on those broadcasts. We are entirely doing that because it's something that Penn has made possible for us."}, {"role": "assistant", "content": "That's not something we would have been able to do prior to the investment or prior to the acquisition. And I really look at Barstool Sports as a company that can create and do most anything. And Penn provides guns, money and steel for us to be able to do that. So whether that's hiring new personalities or extending into new demographics, new categories, new topics or taking on more traditional sports in terms of broadcasting events, hosting events, you name it."}, {"role": "assistant", "content": "So we look at a lot of that, and the acquisition, exactly to your point, has made much of that possible, whereas that was not something in the last six years, seven years that we would have been able to afford nor been able to execute."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Ryan Sigdahl with Craig-Hallum Capital. Please proceed."}, {"role": "user", "content": "Good morning. Want to start or stay on Barstool. I don't think you've commented, but curious how -- what your thoughts were on the start in Massachusetts, 6% GGR share there in the first partial month but obviously, Barstool's home state."}, {"role": "assistant", "content": "Yes, happy to, Ryan. Look, it's interesting because as you saw in Ohio and then again in Massachusetts, every state provides a little bit different level of granularity in what they report. There's been -- I would say, the launches at these states have been more promotional than they were initially in many cases. And so we have made the decision that we're not going to get into that initial launch, arms race of promotional spend and have negative NGR for the first three or four months."}, {"role": "assistant", "content": "So we took a similar approach in Massachusetts. I would expect that as things settle out, you'll see that percentage of market share continue to grow. I also think that you just have to keep in mind, and this has been very strategic on our part and you have to have patience when thinking about it, but we have not been aggressive because our products really is substandard today, and we know that."}, {"role": "assistant", "content": "And so you have to think about that as you're launching and how much money do you want to spend to get people on, and you may lose some with a bad first impression. And so we have to think through all of that. I think we've been very thoughtful and judicious in our approach for these state launches. We're able to generate positive NGR after the first month and profitability really by month three in almost every case."}, {"role": "assistant", "content": "So that's been the approach. I think you'll see us transition when we have a product that we believe stands up well to the competition, that we'll be more aggressive in getting some marketing dollars dedicated toward getting new people into the ecosystem, downloading the app, registering and depositing and engaging with us because we feel like our retention results will be significantly higher based on the new capabilities and the new promotional engine and how we'll think about the business."}, {"role": "assistant", "content": "So I think the setup for us is actually -- it's, again, sort of like the iCasino question, but the setup for us on OSB is, I think, a good one in that there clearly is a focus amongst the top five or six players of which we're one of. There's a clear focus on getting the profitability quickly, which means that most of the top tier are going to have to pull back significantly on their marketing and promotional expense."}, {"role": "assistant", "content": "That's the path to getting to profitability quickly. And we're in a position with a much improved product and an ability to support some additional spend to get people onto the platform and engage with us. I think that's a good setup for us as we get to the end of the year and certainly into 2024."}, {"role": "assistant", "content": "Yes. Ryan, the only thing I would add, this is Todd, is if you look at slide 15, that's also a big part of the story for us. And looking at that growth in Massachusetts of over 14% from our traditional core product is pretty impressive. And a lot of that is new to our brand and new to the property, and it's very much driven by the new sportsbook offerings."}, {"role": "user", "content": "Then just a quick clarification for my follow-up. 2.4 million shares issued to Barstool within the diluted share count. I guess, is that stock options or was that part of the purchase price of the company? And if it's the latter, was that the company's decision or was that the Barstool owner's decision to take part stock or cash?"}, {"role": "user", "content": "Yes. So Ryan, if you go back and we've kind of put this out in our financials, in our Ks and our Qs over time, when we had the put call options, there was also an option on the part of Penn to, in terms of the mix of cash and stock."}, {"role": "assistant", "content": "So it mirrored the initial award, Ryan. Remember, the ownership group structure, the Chernin Group was the majority owner and that was all cash. And then for those who were owners from Barstool, founder Dave Portnoy, Erika, Dan and a number of others who had equity in Barstool, they received 55% consideration with Penn stock and 45% consideration was cash."}, {"role": "assistant", "content": "And so when we moved from 36% owners to 100%, the consideration was the same breakdown."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Bernie McTernan with Needham & Company. Please proceed."}, {"role": "user", "content": "Good morning, thanks for taking the questions. Maybe to start, Jay, you talked a lot about just retention capabilities that will be coming that you don't have access to now once you have your own tech stack in the U.S. Can you just talk about some of those, whether it's like the ability to segment customers, if it's certain product capabilities? Basically just trying to get at what's driving the better retention in Ontario versus the U.S. currently."}, {"role": "assistant", "content": "Bernie, this is Todd. Happy to share some of that. So basically, everything you just said is what we're focused on. And what we're seeing in Ontario not only three months but going out six months, it's the ability to kind of personalize and tailor the messaging and the reinvestment levels will be a tremendous help to us where we don't have an easy way to do that now."}, {"role": "assistant", "content": "It's much more of a manual process. So it will bring more automation to the process to allow us to be much more nimble and really allow us to do a lot better promotions. But traditionally, that reinvestment that you would see with a gaming customer, we're excited to have that capability post migration."}, {"role": "assistant", "content": "I mean, I think to Todd's point, I think about what we've been able to do to date on third-party platforms is really more shotgun style marketing, not personalized really at all. So we do a promotion, it's kind of a promotion for all. That's not an effective approach from a CRM perspective. You're under-reinvesting in some customers, over-reinvesting in some."}, {"role": "assistant", "content": "And so we'll be able to tailor the reinvestment and the promotions based on what we know about the user. And a lot of our competition, they're there, on their way there, and we're doing it in Ontario, and we're looking forward to being able to bring that level of personalization in our marketing efforts and a new promotional engine here to the U.S. here soon."}, {"role": "user", "content": "Great. And then just a follow-up for Barstool. Erika, would you possibly get a breakdown of Barstool revenue, just advertising versus e-commerce? I know we got the mix pre pandemic but I'm sure it's been shifting since then."}, {"role": "assistant", "content": "I would just add, Erika, I don't think we're ready to provide that level of detail yet. I think, Bernie, we might do that down the road but I think it's too early, and we're trying to keep the results within Interactive at a pretty high level. So I would say more to come. As you would imagine, advertising is the biggest driver but we're not going to get into exact breakdowns on the revenue mix today."}]}, {"messages": [{"role": "system", "content": "Our last question comes from John DeCree with CBRE. Please proceed."}, {"role": "user", "content": "Hi, good morning everyone. Thank you for taking my question. Maybe just one to round it out on brand strategy. It's pretty early still, but are there thoughts or plans, especially in light of the new loyalty program, to integrate some of your brands? Or would the idea to be to kind of continue to run a multi-brand strategy?"}, {"role": "user", "content": "And I guess the question maybe specifically for the media properties, Barstool and theScore, if there's some ideas in kind of cross-pollinating but also more broadly across Hollywood or any of the other retail brands."}, {"role": "assistant", "content": "Yes. Todd, I'll let you jump on that one from a PENN Play launch perspective and how we're thinking about sort of enhanced features and how we're thinking about the PENN Entertainment brand umbrella and everything that sits underneath it."}, {"role": "assistant", "content": "Thanks, Jay. And John, really, the PENN Play moving from mychoice to PENN Play was a huge step for us as we work to try to create that brand loyalty and allow people to kind of play across the different channels we have. So when you start thinking about what we've been able to add, and it's really listening to what the consumers want and making sure that we can integrate technology where appropriate as well as make it very seamless for them."}, {"role": "assistant", "content": "So kind of a host-for-all approach where we have different options that we can create through technology, a more seamless experience where people can start engaging with us long before they come to a property or start engaging in wagering or gaming activity. Improvements in our app, improvements in our cashless technology, sharing information, being transparent with our reward statements, offering greater flexibility with unified currency, the PENN Cash option and then eventually having one wallet to play across not only online but taking that into one of our properties."}, {"role": "assistant", "content": "And then really that increased awareness that we have. And I think you can look to a lot of the hotel companies that are out there that may have multiple brands in their portfolio, but they're all tied to the major flag, whether that's a Hilton, a Hyatt, a Marriott. So we'll have -- we'll continue to have different brands because they really have a lot of value in the specific markets that we're in. But we'll make sure that people understand that it's part of the broader PENN family."}, {"role": "user", "content": "Great. The hotel analogy is perfect."}, {"role": "assistant", "content": "Thanks, John, and thank you all for dialing in this morning, and we look forward to speaking with you again next quarter. Have a good one."}]}, {"messages": [{"role": "system", "content": "Thank you [Operator Instructions] And our first question comes from Vincent Andrews with Morgan Stanley."}, {"role": "user", "content": "Thank you and Good morning everyone. Just a question on pricing. In Europe, crop chem, the pricing was very strong and you referenced sort of pricing for value initiatives. So if you could just give us a little bit more detail on what you're doing there and how new or different it is? And then also, if you could just talk a little bit about U.S. seed pricing, which came in at 7%. If you could give us some color on soy seed pricing versus corn seed pricing?"}, {"role": "assistant", "content": "Good morning Vincent. So I'll have Robert and Tim answer those questions. Just let me give you a couple of other comments to set the stage when it comes to price. So as we mentioned in our prepared remarks, we're seeing very good demand."}, {"role": "assistant", "content": "The underlying demand on the farm is still strong. And that underpins our forward thinking. Obviously, it underpins the guidance that we put out today. And we're just seeing a willingness around the world for farmers to maximize yield and productivity. It is really one of the few tools they have to ensure that they're going to be profitable long term."}, {"role": "assistant", "content": "So maybe, Robert, you want to answer Vincent's question on CP?"}, {"role": "user", "content": "Yes, absolutely. Thanks, Chuck. Like Chuck was talking about, the underlying demand remains unchanged. So when you begin to look at what is price for value when we talk about that, it's the same strategy that we've had across the last year as well, where we say, we're looking at our differentiated products, our new products that give a new technology, a different technology to the growers that really helps them begin to add value to their farm."}, {"role": "user", "content": "And it's an opportunity for them to be able to protect yield and improve yield. So when we talk about price for value, we're talking about -- we're going to price in such a way that the farmers are getting to add value, and we're getting paid for our technology. And so it's a strategy we've used over the last year, and we'll continue to use this with price and productivity to help offset the inflation and FX that we've had over the last year and that you've seen in the first quarter."}, {"role": "assistant", "content": "Tim?"}, {"role": "assistant", "content": "Good morning Vincent. So our North America pricing, obviously off to a strong start in terms of pricing. And I'd say it's turning out consistent with our expectations, clearly driven by our strong value proposition and in terms of our ability to execute in the field. I think we've got several years of demonstrating that we're going to get paid for value that we deliver."}, {"role": "assistant", "content": "In terms of the mix between corn and soy, I'd say the first quarter soy numbers, there's a little bit of an anomaly in that in the sense that we had a route-to-market change. And so it's -- I think it's showing up at about 1% on soy in the first quarter, and that's going to be lower than what we would expect over the course of the season."}, {"role": "assistant", "content": "The route-to-market change is driven by the move from direct sales in the South and mid-South to dealer sales. And so instead of paying a commission on the back end, it's an off-invoice discount. So our gross price is different under the two models. But in the end, what our margins -- it will demonstrate pricing there. In terms of how the season has gone, I'd say, as competitive as normal."}, {"role": "assistant", "content": "Farmers have been very committed to corn and very strong corn orders throughout the season. And soybeans are always just a little bit more competitive. But I'd say playing out as we expect and I think representative of what we'll see over the course of the season."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Joel Jackson with BMO."}, {"role": "user", "content": "Hey good morning everyone! This is [Indecipherable] on for Joel. So just in terms of free cash flow which moved up to 36% this quarter, what would be some of the opportunities to move that above 40%? And what work are you guys doing in that area?"}, {"role": "assistant", "content": "Dave, why don't you take that question?"}, {"role": "assistant", "content": "Sure. Yes. So as we cited on prepared remarks in our release, we're raising the guide for the year. That really reflects two things. One is the higher EBITDA, the higher earnings. We also just fine-tuned. It's not that significant, but it's part of the math, fine-tuned our capex full year forecast."}, {"role": "assistant", "content": "In terms of improvement for here, there's a lot that's going on in the organization and in both businesses that's really giving us greater confidence in terms of our cash flow for the year. On the other side of the equation, what we have is with some of the timing difference in terms of the distribution between 1H and 2H, we're obviously going to be carrying a little bit more working capital, including as you would suspect, we'll have receivables balances that will be weighted now more significantly than our original forecast towards the second half and towards the end of the year. So it's really the balance of those items."}, {"role": "assistant", "content": "I think as we look into '24 and '25, we remain very confident in our ability to continue to increased cash flow as well as cash flow conversion. And by the way, just to tell you a little bit about the conversion numbers, that conversion for 2023, the midpoint, the $1.3 billion free cash flow represents about 63% of our operating earnings."}, {"role": "assistant", "content": "So if you will, the free cash flow divided by our operating earnings forecast, it's implied with our EBITDA update, our EPS update, which compared to EBITDA [Indecipherable] denominator, it would be more in the neighborhood of about 35%. So it also gives you some relative measures. But we're very, very confident looking forward that we've got the ability to continue to drive towards the kind of numbers that you mentioned in the 40% and then even into the 50% range on cash flow conversion as it relates to EBITDA as the denominator."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Kevin McCarthy with Vertical Research Partners. Good morning! With regard to crop protection, it sounds like you're seeing good underlying demand. Would you comment on your current view of channel inventories around the world? I think you made a comment in the prepared remarks that buyer patterns were normalizing here. And just curious on what you think that could do to the volume experience as the year progresses? Thank you."}, {"role": "assistant", "content": "Okay, Kevin, how are you? Robert, why don't you take that question?"}, {"role": "user", "content": "Kevin, when you begin to look at our channel inventory, we track our distributor inventory as well as our [Indecipherable]."}, {"role": "user", "content": "So we have a pretty good handle on what's going on in the channel from our inventory standpoint. And when you look at it across the regions, they're full as they should be at this time of the year, especially in North America. But overall, for Corteva, we're about normal."}, {"role": "user", "content": "The two hotspots are two exceptions. One is in Asia, where we have insecticide inventory in the channel that is elevated but we do believe we're in a better position there than the industry is from a standpoint of channel inventory there that it will work itself out across the second half of the year. And in Latin America, fungicide obviously, is one that is up, as we talked about in Q4 and as we got into the drought."}, {"role": "user", "content": "So fungicide is something there that also we believe with normal weather will work itself out across the year also. When you begin to look at the shift that we talk about there and how does that impact channel inventory, really, it's just the shift of first half, second half that we're talking about. And that's the normalization of buying that's happening right now that we're seeing in Crop Protection. And this really has a lot of things to do with the supply chain getting better."}, {"role": "user", "content": "Disruptions aren't totally gone but they're manageable now. And so the supply chains have plenty of availability for the farmers. So with that, they don't need to buy right now. And then when you begin to look at all the other extraneous factors that will impact their decisions from glyphosate pricing dropping and then looking at how that impacts, et cetera."}, {"role": "user", "content": "And quite honestly, the retailers are really trying to manage their cash flow. And so they're looking at things as well to make sure that they're empty by the end of the season. And so with all that, you get delayed buying pattern that really is more normal. And so when we say normalized, you begin to look at prior years before 2022 and you begin to see that we're just basically saying that ordering will become more like it has been in the past."}]}, {"messages": [{"role": "system", "content": "And moving on to David Begleiter with Deutsche Bank."}, {"role": "user", "content": "Thank you, good morning. Chuck, commodity prices have been dropping a little bit here. At what point is that concern for you and your longer-term earnings guidance? I know it's still well above long-term rates, but they have dropped a little bit here. Thank you."}, {"role": "assistant", "content": "Good morning David. So look, if you step back and you think through the last two years in terms of crop pricing, we've seen very strong crop pricing and one was a record, right? So that is where we are coming off of. But when you look at 2023, we're still well above mid-cycle. And crop pricing is still above historical averages."}, {"role": "assistant", "content": "There is still a very tight stocks-to-use ratio out there. And then if you look at the growing markets, the major growing and exporting markets around the world, you've got Argentina that is under 60 year drought. It's the worst in 60 years. You've got the Ukraine still under significant conflict and not able to produce corn the way they want to."}, {"role": "assistant", "content": "The drought in Southern Brazil looks like it's turned the corner, so we're going to see, I think, good production out of Brazil. But in our view, it's going to come down to the U.S. and the planning in the United States. And it's too early to talk about that crop right now because it's just going in the ground. But we also believe when we look at the stocks-to-use models that we need two consecutive years at trend yield. And this year may or may not be. So look, we're still very optimistic about where we are in the cycle."}, {"role": "assistant", "content": "Now when you talk about Corteva and the influence of the cycle on Corteva, that's a bit of a different question. In fact, if you look at the way we frame the value creation opportunity for 2025, $4.4 billion, $20 billion of revenue, and 21% to 23% margins, a lot of the value creation levers are well within our control. And of course, we're operating in the ag market."}, {"role": "assistant", "content": "But when you talk about royalty neutrality of the journey, when you talk about the product mix and really optimizing the percentage of differentiated products that we put into the market, when you talk about the number of new products that are going to go in the market in the next couple of years, all of these things, I think, are well within our control, and they are the major levers of value creation. So I think there's two points to make today."}, {"role": "assistant", "content": "One is we're very comfortable with where we are in the cycle. In fact, we think that 2023 is going to be a very, very good year for agriculture. And then on top of that, when you think through our value creation levers, a lot of that will be within our control and it's a matter of execution. And as the team has been saying today, we feel very good where we are today."}, {"role": "assistant", "content": "And the first quarter is a bit of a testimony of that [Indecipherable] significant amount of new product sales we put into the market. It was the first time we hit 25% EBITDA margin in the first quarter. So we like the strategic levers we're pulling, and we think they're adding value."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Christopher Parkinson with Mizuho"}, {"role": "user", "content": "Great, thank you so much. So when you look at your -- the first quarter EBITDA bridge, I mean it's clear that you're pricing well above cost, which is positive. But could you just give a little bit further insight on how we should be thinking about that by segment just for the balance of the year and the cadence and how that evolves throughout the balance of 2023?"}, {"role": "assistant", "content": "Go ahead, David."}, {"role": "assistant", "content": "Maybe I can take that one. So when you look at the first quarter and -- sorry, there we go."}, {"role": "assistant", "content": "When you look at the first quarter, of course, the pricing, as we talked about, was influenced also by EMEA. And just maybe just chat a little bit about that just to give you some perspective. As we mentioned, Chris, in the call that we had fairly significant currency headwinds in EMEA in quarter one. And in fact, if you exclude euro-based currencies, the headwind was only 1%. So it really gives you kind of an indication of how significant it was."}, {"role": "assistant", "content": "So given that fact, that really also influenced our pricing. So in other words, it wasn't just the price for value and against cost. It was also against the currency headwinds that we faced. So that's important."}, {"role": "assistant", "content": "As we've indicated, our pricing remains on track for the full year against our original guide that we made for pricing. And the numbers are significantly consistent whether you look at the seed business where we expect high single-digit pricing for the full year or crop protection where we expect low to mid-single-digit pricing for the full year for crop. So no change from that. And again, first quarter very much influenced by that EMEA phenomenon that I mentioned to you."}]}, {"messages": [{"role": "system", "content": "And we have a question from Jeff Zekauskas with JPMorgan."}, {"role": "user", "content": "Thanks very much. Sort of a two-part question. Is your mix in corn seeds in North America improving and making an appreciable difference to your corn economics?"}, {"role": "user", "content": "And second, in terms of cash flows, the cash flows year-over-year were lower by $600 million. And a big piece of that was accounts payable, and that accounts payable sequentially went up, I don't know, $950 million. And normally, decreased $950 million. And normally, it decreases maybe $400 million?"}, {"role": "user", "content": "What's going on with payables? Will your payables be higher in 2023 than in 2022? How does that line work? What's going on there?"}, {"role": "assistant", "content": "Yes. Do you want me to maybe take the cash first, Tim, and then you can come back and talk about seed, North America? So Jeff, this is Dave. So you're right, the cash flow was $3.5 billion use of cash in the first quarter compared to $2.9 billion in Q1 of 2022. As you know, that was really related to, you would expect, significantly related to receivables balances with the growth that we had. And we also had relatively neutral contribution from inventories in the quarter on a period-over-period basis. The payables is really timing related. It's a good call-out."}, {"role": "assistant", "content": "We expect that to normalize over the course of the year. There's a number of factors that influence that. We can explain a little more of that detail if it makes sense offline. But just to know that, number one, it's a good call-out. And number two, we do expect that to normalize over the course of 2023. And by the way, the cash forecast that we had for the quarter were basically slightly ahead of our own internal plans."}, {"role": "assistant", "content": "So the numbers that you're looking at are consistent with what our own expectation was and consistent with what the guide is that we've updated today for cash flow for the year."}, {"role": "assistant", "content": "Tim?"}, {"role": "assistant", "content": "[Indecipherable] Jeff, on the second -- or the first question, I guess, on the mix if we're seeing an improving mix in corn technology. What I'd say is when you look over the course of the season, our technology mix doesn't vary that much on a year-to-year basis. Farmers get comfortable with certain types of technology. It's critical for their operation."}, {"role": "assistant", "content": "They kind of plan accordingly for that. And in terms of the year-to-year shift, you might have a point or two shift, but it tends to be very consistent. I think what you are seeing in terms of first quarter versus first half is we had a little bit different mix in terms of the out-the-door sales. And so we probably had a lower representation of the Pioneer in the sales rep model and more dealer distributor, which will be primarily Brevant in the retail as well as in the South and Southeast where Pioneer is going through distribution as well."}, {"role": "assistant", "content": "So probably saw more of a mix effect on the quarter in terms of channel versus technology. And again, our technology, they don't change that much. I would just emphasize, we had a kind of a miserable end of March and beginning of April. So that's why we ended up with a higher percentage of -- from a weather standpoint, from a higher percentage of, call it, dealer distributor business and to farmers through our agents. So -- but the technology mix doesn't change on a year-to-year basis so much."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Steve Byrne with Bank of America."}, {"role": "user", "content": "Yes, thank you. I would like to better understand what you mean by the shortened safrinha season? Or perhaps you can break down that 41% decline in seed volume? CONAB has safrinha corn area modestly up year-over-year."}, {"role": "user", "content": "So I don't quite understand it. Perhaps it was a pull-forward from the fourth quarter and/or how much of it was due to just insufficient seed supply?"}, {"role": "assistant", "content": "Hi Steve, morning this is Tim. I'll take this. So there are a couple of things happening in terms of seed in Brazil and we knew we were going to be tight on supply. And as you called out there, and we've been talking about that, I think, for probably the last couple of quarters."}, {"role": "assistant", "content": "We had low inventory, challenging production seasons. And so we knew we were very tight in terms of what our supply would be for the entire safrinha season. And what happened was the dynamic played out as soybean harvest continued, it expanded into some of the smaller states. And so Mato Grosso which is about half of safrinha was planted on a relatively timely basis."}, {"role": "assistant", "content": "But when you get into Sao Paulo and Minas Gerais and Parana, it was much more delayed. And so in the end, there were fewer hectares planted. And you're right, CONAB is showing about 3% increase."}, {"role": "assistant", "content": "We had planned and expected for it to be more like 10%. So that's where we talk about the season being shortened. And in terms of the timing, what was fourth quarter a little bit bigger, it was, and part of that was because farmers knew we were going to be tight on supply, and they physically wanted to have that seed and so there was a pull from our farmer customers to get that seed in their hand."}, {"role": "assistant", "content": "When you look at it on a seasonal basis, so with the -- let's assume the 3% area increase, take our volume in the fourth quarter and the first quarter, we're actually about flat on volume. So -- and that includes very strong price increases as you've seen right there. So didn't play out exactly as we expected it to, but we're very close to holding share in a market where we knew we were tight on supply, and we were very strong on value capture."}, {"role": "assistant", "content": "And as we go forward, so I'll touch on the whole question around supply just so we can do it, kind of close the door on that. We did take a different approach in terms of focusing much more on summer production and we're much less dependent upon just-in-time or safrinha seed production."}, {"role": "assistant", "content": "So just like farmers have summer season and safrinha season, we produce over both. We increase the mix of production more towards the summer season. As we sit here today, a significant portion of the seed that we're going to use for the upcoming summer and safrinha seasons, has either been harvested or it's very close to being harvested."}, {"role": "assistant", "content": "So we're in a materially better position to meet the needs of the market based on the growth trajectory. And as we look at next year, we expect that Brazil will continue to increase both soybean area and safrinha area and that we're going to be in a good position to meet the needs."}]}, {"messages": [{"role": "system", "content": "And we have a question from Kristen Owen with Oppenheimer."}, {"role": "user", "content": "Great. Thank you so much for taking the question. I was wondering if you could just talk a little bit about what you're seeing on the ground in terms of the flooding in Iowa?"}, {"role": "user", "content": "Just any impact to planting season? Or just how we should think about maybe the puts and takes, positives or negatives that may come from that event as you see it throughout the rest of the year? Thank you."}, {"role": "assistant", "content": "I think that's heading my way again, Kristen. Good morning. So in terms of the state of the season, I describe overall, we're off to a decent start with planning progress. And we're at -- on corn, we're at about the five-year average as of Monday when the USDA last reported, and we're slightly ahead of the five-year average on soybeans. And so again, it's despite getting off to a really pretty slow start at the beginning of April as we were working through the end of winter and really moving towards spring conditions."}, {"role": "assistant", "content": "Across the corn belt, all indications are that we're going to continue to get the crop in the ground on a timely basis. So we do have some isolated places where we've had some river flooding due to the snowmelt. And you pointed out Northeast Iowa is one of those areas. Another area that we're looking really closely at is the Northern Plains or the Red River Valley. Tuesday afternoon, I had a conversation with our area leader there to understand where we were sitting and actually a tremendous amount of progress has been made up there, and we're very optimistic that farmers are going to be able to get most or nearly all this crop in the ground."}, {"role": "assistant", "content": "So the thing we've got to remember is that we have large farmer customers, and they are highly motivated to get the crop in the ground. So we've got about 30 days of good corn planting window here, call it, the month of May in front of us. And as the season opens in those areas, farmers are going to be able to move fast, and they're very motivated to get that corn in the ground. So we'll continue to watch it. But as of right now, I would not put up a red flag on that."}]}, {"messages": [{"role": "system", "content": "And we have a question from Arun Viswanathan with RBC."}, {"role": "user", "content": "Great, thanks for taking my questions. Your results look [Indecipherable] from maybe some of your peers. Was that -- would you attribute that to maybe share gains in Crop Protection and new product rollouts? Or how do you kind of consider your performance versus the global ag market trends?"}, {"role": "user", "content": "Have you seen any changes in ag markets? Or is it just more internal? Thanks"}, {"role": "assistant", "content": "Yes. I can have Robert and Tim talk about where they think they stand from a share perspective. But at the highest level, look, we've been on this strategic journey now for a couple of years, where we're trying to really drive the portfolio through some choices around which countries we operate in and what our product slates look like and really drive the differentiation of new technology around the world."}, {"role": "assistant", "content": "And so we've made a series of decisions. I think we've been prudent with our SG&A. Dave referenced that essentially flat for the last couple of years on an apples-to-apples basis and really trying to focus on our controllables."}, {"role": "assistant", "content": "So -- and then, of course, we do have just a very strong line-up from an R&D pipeline perspective. Some of those new products now are coming into the marketplace, both in seed and in CP. And I think that is allowing us to drive market acceptance of these products and allow volume growth. So Robert, maybe talk a little bit about what you're seeing and then Tim can do the same."}, {"role": "user", "content": "Yes. Thanks, Chuck. On the CP side, let me start with -- we continue to see the market will grow on a year-over-year basis even in '23, where we're expecting from the non-glyphosate -- take glyphosate out, about 6% to 8% or mid-single digits is really the better normal -- or the better number."}, {"role": "user", "content": "For growth on total market, when you begin to look then at how we performed from a market standpoint, 2022, the organic growth for the industry was in the mid-teens. And we grew, as you saw in the Q4 report, about 20% on organic growth. So we expect we picked up a few points of market share around the globe. Obviously, all the numbers aren't totally in, so we've got to see how things settle out. But we do expect that we've gained a little bit over the last year. And as you begin to project that forward into this year and what's happening, the volume is growing from crop protection around the world and for us as well."}, {"role": "user", "content": "The shift that I talked about earlier is just timing. And so the demand remains very strong as we see it. And for us, it's really centered around the differentiation and the strategy that we put in place to be differentiated and sustainably advantaged in our portfolio, and that's really being driven by two areas primarily. New product growth as you saw in first quarter was up, and we expect that we will be up across the year from new products and Spinosyns. Spinosyns continue to be a franchise of over $1 billion this year, and it is continuing to grow."}, {"role": "user", "content": "So when you begin to look at how we're different in the market, we're continuing to be able to deliver new technologies to the growers that really help them add value and yield to their farms. So those are some of the things that's driving us, how we see the numbers a little bit there across the last year and the first quarter."}, {"role": "assistant", "content": "And Arun, on the seed side, obviously, it's too early to call 2023 on a market share standpoint. We felt good about how our order position has sat for both corn and soybeans in North America and Europe as the seasons have gone on."}, {"role": "assistant", "content": "So we'll kind of wait and see how the seasons develop, but we feel pretty decent about where we're sitting right there. In terms of how we performed over the past several seasons, much like Robert said, we carry a lot of momentum in the marketplace right now. And on the seed side, we've been growing -- holding or growing market share for the last several seasons in many of the largest markets out there."}, {"role": "assistant", "content": "So North America corn and soy, last year, we gained about one point each, which is significant. We've had multiple years of share growth in Europe on corn and sunflowers. And up until this past safrinha season, we've been on a very positive share track across Brazil as well. So when we think about unit volume as important because it is a metric key in the marketplace, we also look at the value share out there as well. And I think when you look at the combination of strong unit growth as well as the pricing we've been able to deliver over the past several seasons as well, we're also gaining on that value side as well."}, {"role": "assistant", "content": "So we feel very comfortable about where we're at and something that we do watch as a key metric for our business."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Joshua Spector with UBS."}, {"role": "user", "content": "Hi good morning this is [Indecipherable] on for Josh. Just wanted to clarify the earlier comments on the EBITDA [Indecipherable]. So were you implying that the second quarter would be sort of $1.6 billion to $1.7 billion based on 80% in the first half."}, {"role": "user", "content": "And if that's right, then your guide is sort of implying $700 million to $800 million in the second half. So could you help us bridge there sort of how you get from the $465 million in the second half last year to $700 million to $800 million this year, please?"}, {"role": "assistant", "content": "Yes. This is Dave. I can give you a little bit of additional color on that. So again, it's against the backdrop of the EBITDA guide, as you cited that we've given for the full year, call it, $3.650B at the midpoint."}, {"role": "assistant", "content": "When you look at the pattern for this year, we would expect revenues to be slightly different, but roughly in line with last year. So roughly 60% first half, 40% second half. On the other hand, on the -- in the EBITDA, as I said, if you look at last year, we had about 85%, a little over 85% of our EBITDA that was generated last year, it was generated in the first half."}, {"role": "assistant", "content": "We're going to be some 300 to 400 basis points likely less than that in terms of 1H 2023 EBITDA as a percent of the total year compared to 2022. So when you do that, and back into math, what you get is you still have growth, obviously, in the second quarter, but it's more muted for the reasons that we talked about, the timing of EMEA and the shift out of LatAm mostly from 1H last year or more significantly 1H last year into a more normalized pattern of 1H/2H for this year."}, {"role": "assistant", "content": "So that's really the difference. And again, that earnings, when you look at that distribution, it's not that much different than we've had pre-2022 levels. So hopefully, that helps."}]}, {"messages": [{"role": "system", "content": "And we have a question from Ben Theurer with Barclays."}, {"role": "user", "content": "Yeah, good morning, than you very much and congrats on the result. I wanted to follow up just a little bit on the short and medium-term impact as to your guidance and some of the strategic announcements you've made."}, {"role": "user", "content": "So how should we think about the portfolio execution on these exits and how is that going to shape? Is that all baked into the guidance for this year, what are the main impacts? And where do you see maybe potential to increase [Indecipherable] get closer, call it, to the higher end of the range in the long run versus the lower end of the range? What are like kind of the levers we should consider here? Thank you."}, {"role": "assistant", "content": "Dave, do you want to take that one?"}, {"role": "assistant", "content": "Yes. I think one of the things we've been saying, Chuck referenced this earlier, we're well on path in terms of the product exits, the AIs, if you will, the active ingredients exit as well as some of the geographies that we're exiting. So the majority of that is going to be completed over the course of 2023, and that's baked into our guidance."}, {"role": "assistant", "content": "Now importantly, when you look at the numbers in terms of the significance of those exits, it really does have a big impact on the figures. So for example, when you look at total Corteva for the full year, and now I'm talking just specifically about volume, when you look at the full year on an adjusted basis, what we're going to see is positive growth of over 3% for total Corteva. It's really significant when you look at the Crop Protection business, on the significance of exits because when you include both the impact of product exits and also the decision to exit Russia, which, as you know, we announced in 2022, I mentioned for the first quarter that Crop Protection volume would actually be up. And for the full year, it's going to be up attractively mid-single digits when you adjust for those strategic decisions."}, {"role": "assistant", "content": "So I think a couple of takeaways. I think, number one, relative to your question, we're absolutely on track. It's built into our numbers. You're seeing that, as Chuck said, in terms of the quality of earnings. You're seeing that in terms of the margin lift that we're generating and the guide that we've given you for the full year. And second, the optics are fairly significant when you look at the volume numbers."}, {"role": "assistant", "content": "So when you adjust for those exits, the numbers are, as we said, are pretty attractive and continue to contribute to our strong organic growth outlook that we've shared with you today."}]}, {"messages": [{"role": "system", "content": "Thank you and that does conclude the question-and-answer session. I'll now turn the conference back over to Kim Booth for any additional or closing remarks."}, {"role": "user", "content": "Okay. Thank you. And that concludes today's call. We thank you for joining and for your interest in Corteva. We hope you have a safe and wonderful day."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now begin the question-and-answer session."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Please standby while we compile the Q&A roster. The first question comes from Stephen Richardson with Evercore. Your line is open."}, {"role": "user", "content": "Great, thank you. Ryan, I was wondering if you could talk. I mean, on the return of capital. Obviously, outperforming 50% of cash-flow from ops and setting up really strongly versus the $11 billion target. I just wonder if you could address the environment is not straightforward. There's a lot of volatility out there just from a shareholder's perspective, how do you think about balancing the [indecipherable] buyback and just the general flexibility as people consider kind of the volatility in the commodity environment?"}, {"role": "user", "content": "Yeah, thanks Stephen. I think. Let's start with just recognizing the volatility that's currently in the market, but even with that as we look at the first-quarter average prices, we're in the mid-70s WTI quarter-to-date in the second-quarter. They are in the high 70s, so that's close enough to our planning framework that we set-out early in the year, that close enough to 80 and delivering the 22 beginner of cash for the year. So we're not going to overreact to kind of what we're seeing in the volatility right now. So we're on-track and hopefully, you see that with the rock that we set for the third-quarter, on-track to deliver the $11 billion distributions that we set-out at the beginning of the year."}, {"role": "user", "content": "Now we're comfortable with that we have the balance sheet to support it if prices turned out a little bit -- a little bit lower as well, so we take a structural change and we certainly don't view this volatility we're seeing right now as a structural change in the marketplace. In terms of the mix and the balance. We said we do about 50% shares, we lean-in a little bit in the first-quarter on the shares, but through the year, we expect to be about fifty-fifty between RV rock and the shares to deliver the $11 billion of returns back to the shareholder. Hopefully, you see that with the third-quarter is setting of the V rock at $0.60 a share. That should give you comfort that we're on-track to deliver that."}, {"role": "user", "content": "Thank you so much, Ryan."}, {"role": "user", "content": "Thanks, Steve. Next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Neil Mehta with Goldman Sachs. Your line is open."}, {"role": "user", "content": "Yes, thank you so much and congrats on a really good Lower 48 quarter in particular. Ryan, I think you sort of cut this question off, but I'd love you to comment to the extent you can on Surmont recognizing it's an active situation. And as you think about that asset, first of all, it seems from the Analyst Day, that is a core position for you guys and just any thoughts on whether it makes sense to be a bigger part of the portfolio to the extent you can comment at all?"}, {"role": "user", "content": "Yes, Neil. Thanks. No I can let Andy, maybe make a few comments about the asset which would be kind of reiterating what we said at the Analyst Meeting. But yes, we're in receipt of the notice from the transaction between Total and Suncor. We have -- we have a right on the Surmont asset, which we know really well, because we own 50% and operate it. So we're in, we're in the process of taking a pretty serious look at that, I can maybe have Andy reiterate some of our thoughts about the asset that we described in the analysts meeting."}, {"role": "user", "content": "Good morning, Neil. Yes, as we said in the Analyst Meeting, we do, we do like seven as a nice sort of long-life, low capital intensity asset for us. As we -- as we covered in the analyst meeting, now that, that low capital intensity is an important part of our portfolio. And just to sort of reiterate that sort of the maintenance capital on Surmont, I'm just I'm referring now to our 50% share of Surmont, it has been in the $20 million to $30 million a year range for the last four-five years and you'll recall, I mentioned that we're -- we're drilling our first new pads since 2016. That pad, for example, it will be in the $40 million to $50 million. So it's a it's a very low capital intensity asset for us with that, sort of basically flat production profile. And as you know, sort of pretty much all of our other driver information we disclosed in terms of our production data, our bitumen realizations, our operating costs, that's all-out there, you can form your own view on the asset, but it's -- it's an asset that is a core asset in our portfolio. So probably just stop there."}, {"role": "user", "content": "Great color. Thanks guys."}, {"role": "user", "content": "Thank you Neil. Next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Roger Read with Wells Fargo. Your line is open."}, {"role": "user", "content": "Yes thanks, good morning. I guess I'd like to follow-up on Port Arthur LNG Obviously, the Phase one was covered, there is always a possibility of greater expansion in LN. it just what would be the. things we would watch coming up in terms of the second phase?"}, {"role": "user", "content": "Yes, sure, Roger. This is Bill. As we talked about at the Analyst and Investor Meeting, we're currently really satisfied with 30% for Phase one and our 5 million ton equity offtake and we're prioritizing market development over any additional off-take and equity right now. We really think we've got sufficient capital allocation to Port Arthur, and we're looking for ways to optimize our current investments, our plate's pretty full and we don't need -- see a need to allocate significant additional capital in the near-term. And so there needs to be some pretty unique reasons to make it attractive."}, {"role": "user", "content": "All right. Clear enough. I'll stick to the one. Thanks."}, {"role": "user", "content": "Thank you, Roger."}]}, {"messages": [{"role": "system", "content": "The next question comes from Doug Leggate with Bank of America. Your line is open."}, {"role": "user", "content": "Hey, good morning guys. This is actually Clay on for Doug. So, thanks for taking the question. My question is a follow-up on Surmont. Our understanding is that Suncor could receive certain tax benefits as part of their -- as part of their deal. And I'm wondering if those tax benefits would be available to you if you exercise your right of first refusal? And I'm asking the question because I think George would look more like an asset deal, while it is just more of a corporate deal."}, {"role": "user", "content": "Well, as you said Clay, we are currently reviewing the proposal that we got and the terms and conditions, it's a bit early to comment on tax pools."}, {"role": "user", "content": "Okay, I'll leave it there, thanks."}]}, {"messages": [{"role": "system", "content": "The next question comes from Sam Margolin with Wolfe Research. Your line is open."}, {"role": "user", "content": "Hello, thanks for taking the question. The capital efficiency looks like it's going-in the right direction with the production guidance and the capital plan in-line. At the Analyst Day, you made some comments where you thought it was at least possible that you could start to see inflation ease if not, if not reverse. And the question is, just as you think about this production results, is that an outcome of maybe an opportunity to press activity a little bit as costs are easing or is this a more of a well results driven outcome? Thank you."}, {"role": "user", "content": "Yes, thanks. It's Dominic here, just to talk to inflation a little bit first. I think overall, capital inflation for the company, we still expect to be in the mid single-digits year-over-year. So we certainly see that leveling-off. As we mentioned before, we've certainly seen deflationary trends and still tubulars all price-related commodities such as fuel and chemicals beyond that. On the rig frac and other services, they've certainly leveled off. We may be trending towards some reductions, we have seen rig counts peak and begin to decline. That's led by the gas basins. So our teams are very focused on costs and they are working, working with our many service providers on that -- that we still expect around the mid single-digits at this stage on inflation. Having said that, we certainly see capital efficiency coming through. I think, was really on an execution front. So we've had a strong start, particularly in the lower 48, our full-year production guidance as we've said, is up at the midpoint. We do expect low-to-mid-single-digit growth for the year and that's pretty consistent with the long-term 45% CAGR we presented at our Investor Meeting. And yet we're holding our capital range the same, with $11 billion at the midpoint, so. We're definitely seeing some execution efficiency. We're pleased about that. Nick, you may want to talk a little bit more about the lower 48 on that?"}, {"role": "user", "content": "So thanks Dom. Yes, Sam, just take you back to the Analyst call, when we talked about drilling and completion efficiency. If you recall, we had from 2019, 2022, we had a 50% improvement in drilling, 60% improvement in completion that stages per day. We continue to see that in Q1, very promising results. And that's the use of technology like simul frac, e-frac, we're testing out some remote frac as well, where we keep a a frac spread on pad one and then we add frac pad two, pad three, pads four, so very promising results there. As well as on the drilling front, we continue to use data analytics and rig automation. But all that's coming together to really promising. That did lead to some accelerated places on production of wells in Q1, driving some of the overperformance."}, {"role": "user", "content": "Thank you so much."}, {"role": "user", "content": "Thanks Sam. Next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from John Roy with JP Morgan. Your line is open."}, {"role": "user", "content": "Hi, thanks for taking my question. So my question is just on WILLOW, are there any updates there too how the lawsuits are progressing and are you any closer to a resolution there and getting to FID then, when we last saw you a few weeks ago at the AIM?"}, {"role": "user", "content": "Hey, John, this is Andy. Yes, there's really not too much new to comment on over the last few weeks. So the only incremental news we've had all being positive. The 9th Circuit Court of Appeals denied motions attempting to stop our construction work. So we've been -- we've been progressing with the winter season and we've we've had gravel extraction and road construction underway. It's pretty much going as we expected it would. So as you have in the last two-three weeks, not much, not much more to add than we talked about at the Analyst and Investor Day."}, {"role": "user", "content": "Thank you."}, {"role": "user", "content": "Next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Ryan Todd with Piper Sandler. Your line is I've been pitched."}, {"role": "user", "content": "Hey, thanks. Ryan, maybe one for you. Following-up on the Analyst Day, but what impact, if any, does -- you increased your view of the mid cycle oil price from 50 to 60, what impact, if any, does that have on the way in which you think about the business. I mean, you're still focused on low-cost of supply assets well below this price. Does the view that oil prices would be structurally higher over-time have any impact on the way you think about managing the business over the long-term, your balance sheet, allocation of capital or or anything else?"}, {"role": "user", "content": "Thanks, Ryan. In terms of how we're running the Company day-to day and the allocation of Capital that we put in each year, it really doesn't. We're only investing in things that have a constant supply, less than $40 WTI in the portfolio. So what a mid cycle price changes, our Chief Economist Officer, our commercial team, we go through a process every year, where we take a current view of the macro and long-range view of what we think is happening and as we've gone through a lot of turmoil in the business, the pressure invision in Ukraine, just the lack of investment going into the business these days, we step-back and get our own bottoms-up, which we do every year, but important this year, we did our own bottoms-up work, trying to understand where we think the mid cycle price is moving to and was it staying at kind of that $50 level. Our assessment of the price required to generate that incremental barrel to meet that incremental demand, our assessment, put it at around $60 today. And so -- so the implications of that are really just how much how much cash-flow, we think we're going to be generating as we interrogate the portfolio, as we invest in the growth and development of the company and we put capital into the company. The way it manifests itself is just how much cash-flow we can deliver at that kind of mid cycle price, which is obviously a little bit more than what we would deliver at a lower-price. So it goes to sort of how we think about cash on the balance sheet and how we think about the debt that we're have, how we think about distributions and how much capacity there is to distribute a bunch of cash, which our commitment's about 30% and when we get above mid cycle price in our case, like we are today, obviously, we're generating a lot more cash and we're turning a lot more cash to the shareholder. Now something in excess of 50% today. But that's driven by the lower reinvestment rate that we have in the company and our commitment to invest only in the lowest-cost supply things we have in the portfolio."}, {"role": "user", "content": "Thanks for that."}, {"role": "user", "content": "Thank you. Operator, next question."}]}, {"messages": [{"role": "system", "content": "The next question comes from Devin McDermott with Morgan Stanley. Your line is open."}, {"role": "user", "content": "Hey, thanks for taking my question. So I wanted to go back to the lower 48, it was helpful detail before and some of the efficiencies that you're seeing there. I think one of the other drivers of the strength and production that you called out in the prepared remarks was well performance beating your expectations. Can you talk a little bit more explicitly about what you're seeing there and if there's any development changes that you've made driving that uplift?"}, {"role": "user", "content": "Yes, Devin, this is Nick, you're right. Strong well performance was definitely a contributing factor for Q1. If I take you back to the Q4 call, I had mentioned that our well performance was meeting or exceeding type curve expectations. And we continue to see that trend into Q1. So that's very encouraging. No overall development changes, we're just seeing very promising results across all assets. It's just not the Permian as well. and as I mentioned earlier, the completion and drilling efficiency has allowed us to accelerate some wells earlier into Q1. And so we're seeing that production come into play."}, {"role": "user", "content": "And then on the Eagle Ford stabilization plant that we've upgraded, the team just did a remarkable job in sheltering the amount of downtime in Q1, we had less DT, but overall, very strong quarter."}, {"role": "user", "content": "Thank you."}, {"role": "user", "content": "Thanks, Devin. The next question comes from Josh Silverstein with UBS. Your line is open."}, {"role": "user", "content": "Hey, thanks guys. Just some questions around potential LNG opportunities in the future. You mentioned at the Analyst Day that you have options around Port Arthur Phase 2, 3 and 4 and even Costa Azul as well. Can you just give some more details around the options? Does it need to be at a 30% like you did in Phase 1 at Port Arthur or could it be 10% or some other agreement there, could be before after FID as well?"}, {"role": "user", "content": "And then just along the same lines, because there are already some infrastructure in the ground for Phase 1, will the capital outlay for Phase 2 or 3 be less because of that? Thanks."}, {"role": "user", "content": "Yes. So yes, I think we laid this out pretty well at our Analyst Meeting. So at Port Arthur, we've got options on both equity and offtake for future phases, those can be executed either four for equity offtake or both as they present themselves through time. We also have some options on the West Coast of Mexico at Energia Costa Azul on Phase two. And so those are long-dated options that we continue to look at."}, {"role": "user", "content": "Talked a bit about Phase 2 earlier in the call. And so there's going to be some pretty unique opportunities on that because we think about that right now. Now, as we think about future phases, we have structured our investment in Phase 1, such that we benefit from the economies of scale for future phases on our Phase 1 investment. So future phases actually benefit Phase 1."}, {"role": "user", "content": "Great, thanks guys."}, {"role": "user", "content": "Thanks, Josh."}]}, {"messages": [{"role": "system", "content": "The next question comes from Paul Cheng with Scotiabank. Your line is open."}, {"role": "user", "content": "Thank you. Good morning, gentlemen. Maybe this is for Nick. In the -- in the [indecipherable] you are talking about 2023 the shale oil production of one million barrels a day and in the first-quarter, you're already there. That means that for the rest of the year, the lower 48 shale oil and [Indecipherable] together will be pretty strapped, for that number is somewhat conservative now."}, {"role": "user", "content": "Yeah, Paul, this is Nick, you're right. I mean, we had a very strong performance in Q1 as we just described. As you look at the future quarters of this year, we got some larger pads projects, longer horizontal wells and kind of put that in context, we've got 80% of our 2023 Permian wells are two miles or greater and we got a fairly large portion of that on the three miles, but you're going to see kind of small variation, but overall, that's going to be relatively flat, but I'll leave you with this pause. Our plant will deliver at least mid-single-digits for Lower 48."}, {"role": "user", "content": "Right. Thanks a lot."}]}, {"messages": [{"role": "system", "content": "The next question comes from Scott Hanold with RBC Capital Markets, your line is open."}, {"role": "user", "content": "Hey thanks. I just wondering if you could provide some updated commentary, if you have any, on Venezuela? About a month ago, there were some talks about kind of easing oil sanctions there and you all have a potential big asset. Or at least value that, at one point in time, we're looking to extract. Is there any update on that or is there any kind of color you can talk about like the progress and remind us of the value there?"}, {"role": "user", "content": "Yeah, Scott, yeah, we're right in the middle of all those conversations as you might imagine, including the most recent conversations around the Citgo refining assets. We're in the queue, we're right in the middle of anything that would happen there. We \\have a, as a reminder ICC judgment of $2 billion, we've collected about $700 million on that judgment to-date. So we have an outstanding -- what they owe us on that, particular judgment, where appeal process with exit, which is the other tribunal and that's an $8 billion potential award coming now, there is some overlap between the two. So you can't necessarily add the two together, but I guess the point is, there is a lot of money and we're hard at trying to get some resolution of that."}, {"role": "user", "content": "The recent news out of how the judge and the US government around Citgo is certainly helpful in that regard. It looks like despite the sanctions that are on the Venezuelans and on US companies for doing work in Venezuela. There is a little bit of -- there is some light developing at the end of that tunnel, and we're right in the middle of it all."}, {"role": "user", "content": "All right. Good to hear. Thanks."}, {"role": "user", "content": "Thanks, Scott."}]}, {"messages": [{"role": "system", "content": "The next question comes from Alister Sam with Citi. Your line is now open."}, {"role": "user", "content": "Hello, everybody. On your remarks at the beginning on the lower 48, you mentioned about infrastructure build and I was really just interested to try and understand across the lower 48, but I guess especially in the Permian, what's the sort of ratio of capital that's going into infrastructure versus[phonetic] drilling? I guess -- I guess it changes over the life of the asset. So just kind of intrigued at what sort of point of asset-life are we in terms of that ratio?"}, {"role": "user", "content": "Yes, I'm not sure of the exact ratio maybe Nick might have some numbers, but I think most of what we're doing is large pad development with not single-well facilities but central facilities, supporting those large pads. I don't know what the split between drilling and infrastructure spend is, I can let Nick have a comment, but I don't think it's much different than what we've been doing for the past few years."}, {"role": "user", "content": "Yes, Alex, it's very limited. As far as on the infrastructure spend, most of your expenditures is on drilling and completion in the Permian, as an example."}, {"role": "user", "content": "Okay, thank you very much."}, {"role": "user", "content": "Thanks, Alistair."}]}, {"messages": [{"role": "system", "content": "The next question comes from Raphael Duway[phonetic] with Societe Generale. Your line is open."}, {"role": "user", "content": "Hello, thank you for taking my question. I just have one question about the working capital deterioration in 1Q. I was wondering if you could tell us how much of it is due to some Norwegian cash tax catch-up and what is it to expect for the rest of the year?"}, {"role": "user", "content": "Yes, sure, happy to talk about working capital. So if, if you look at working capital for Q1, you can see that in the supplementary documents we put out on our website, Q1 was about $100 million use of working capital. For Q2, we would expect that to be just over $1 billion. And as you rightly noted, that's associated with Norwegian tax payments, which is normal for operators here in Norway, we accrued those in 2022, they're payable in the second-quarter of 2023."}, {"role": "user", "content": "And then looking for the rest of the year, assuming we don't see FX rates move materially for the remainder year, we'd expect -- we wouldn't really expect any material working capital movements across Q3 or Q4. So hope that helps for kind of full-year view?"}, {"role": "user", "content": "Thank you."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Neal Dingmann with Truist Securities, your line is open."}, {"role": "user", "content": "Good morning. My question is on shareholder return planned specifically. What do you view sort of in broad terms is an optimal quarterly payout given, I guess, now even more volatile the commodity market continues to be, and looking at your most recent I guess, the payout is a bit over over 100%."}, {"role": "user", "content": "Yes, well. I think Neal, you have to kind of go back to how we set the VROC in the first-quarter, that was actually set-in the third-quarter of last year at a $100 price environment. So we probably had a ratable, a little bit higher distribution in the first-quarter and then it gets more ratable as we go through the second, third and fourth-quarter as we deliver the $11 billion that we've targeted for this year and that's evidenced by how we set the VROC third-quarter at $0.60, $0.60 a share."}, {"role": "user", "content": "Thank you."}, {"role": "user", "content": "Thank you, Neal."}]}, {"messages": [{"role": "system", "content": "Our last question comes from Leo Mariani with Roth MKM. Your line is open."}, {"role": "user", "content": "Obviously, strong results out of COP today and you enumerated a couple of reasons for the first-quarter production beat, sounds like some wells came on early and well results continue to be very strong, but just wanted to dive in a little bit on the maintenance side. I know you guys kind of talking about 35,000 BOE per day of maintenance in the quarter, did that actually come to fruition, maybe, that number was a little bit different. And then can you talk about maintenance for the rest of the year as you had 10,000 to 15,000 expected in 2Q but any expectations for 3Q or 4Q?"}, {"role": "user", "content": "Yes, thanks. It's Dominic here. So you're right. We did anticipate about 35,000 barrels a day of turnaround maintenance impact in the first-quarter, that actually came in at 25,000, so 10,000 lower. That was partly because of the efficiency that Nick talked about at the lower 48. The Eagle Ford Sugarloaf stabilize expansion went really well and the team did a great job sheltering some of that. Then there was a little bit of timing there on Qatar turnarounds as well."}, {"role": "user", "content": "So we had 25 -- 25,000 barrels a day impact in the first-quarter. We still expect a full-year average impact from our turnarounds of about 15,000 barrels a day equivalent. Bill said second-quarter, I think as you mentioned, you expect to be 10,000 to 15,000. And there will also be some standard sort of seasonal downtime in the second and third-quarter, we typically see in Norway in Alaska and APLNG. But all that's reflected in our new guidance, 1.78 million to 1.8 million-barrels a day for the full-year."}, {"role": "user", "content": "Okay. Thank you."}, {"role": "user", "content": "Thank you all for being here today. We appreciate it."}]}, {"messages": [{"role": "system", "content": "Of course, thank you. [Operator Instructions] And we'll go ahead and take our first question from Chris McNally with Evercore. Please go ahead."}, {"role": "user", "content": "Good morning. Thanks, team. So two quick questions on sort of Auto 1.0. I guess the first, if we start with the obvious on production, the slide, Joe, you call it in-line quarter, but I think we are all starting to see better production in Q1, the schedule for Europe full year. So I think the main question is your minus one global production, are you seeing something in your call-offs that are quite different than sort of the LMC, IHS 4% to 5%? Or Joe, is it just too early in the year to update that and you'll have more visibility maybe in the middle of the year?"}, {"role": "assistant", "content": "Yeah. I think it's the latter, Chris. I mean schedules were in line with what we expected for the most part in Q1. As I said, in North America, we did have a couple of OEs that get impacted by supply chain constraints not related to us. So we weren't the constraint, but we were obviously impacted. They didn't build as many vehicles as they thought. But again, overall, I'd say in line. And I think, yeah, generally speaking, an in-line quarter, we continue to be tied out to customer schedules in Q2. Understand there's some optimism out there in the back half of the year. But our view is it's a little early at this point in early May to call that. But I would say Q1 as a positive in terms of both what we saw our customers do and how the business performed, and we'd expect that to continue into Q2."}, {"role": "user", "content": "And Joe, as a slight follow-up, is it fair to say that there's some early shoots in Europe on the production side? I mean we are sort of seeing it on the sales and regs, which is giving us a little bit that confidence just on Europe specifically?"}, {"role": "assistant", "content": "Yeah. I would say Europe has progressively gotten -- I would say, from a customer perspective and what we're seeing on the ground, sentiment has been improving since the late fall of last year. I think that continues again. A little -- for us, a little too early to put it into the numbers, and we have to really see it in customer schedules as we get detailed production schedules for the back half of the year. But sentiment has been improving since what I'll call that low in sort of September, October last year, in our view."}, {"role": "user", "content": "Great. And then the last quick one. On the strong orders number, obviously, a big, big number for SVA. Does it -- will that have any negative impact to the guide versus prior expectations? Sometimes there's engineering expense that falls when orders are this big. Just if you can comment on that. Thanks, team."}, {"role": "assistant", "content": "Yeah. Maybe I'll take that, Chris. I think just given the nature of -- the strategic nature of those SVA programs, the bulk of that activity has been proceeded with advanced development programs. So there's very clear line of sight as it relates to investment required in timing of that investment, and that's obviously incorporated into the outlook for the -- for this year as well as beyond 2023."}, {"role": "user", "content": "Thanks so much."}]}, {"messages": [{"role": "system", "content": "We'll go ahead and move on to our next question from John Murphy with Bank of America. Please go ahead."}, {"role": "user", "content": "Good morning, guys. First question around the price cuts that are going on in EVs both in China and the US, to a lesser extent, in Europe, also to a lesser extent. What could that mean for volumes for EVs for you? And Kevin, I know with Wind River and SVA, there's kind of a view of sort of the full life cycle management. It seems like there's a developing strategy of lower margin at the front end on the vehicle and higher margin or profit over time from the lifetime of the vehicle. How could those SVA and Wind River maybe partake in that as well as help the automakers achieve that?"}, {"role": "assistant", "content": "Yeah. Well, I think your first question, listen, we haven't -- to the extent you see cost of those -- prices on those electric vehicles decline, you should see the opportunity for more pull through, more sales, more retail demand. I'd say, near term, we haven't seen much of a change. But having said that, Joe walked you through the numbers. I talked about the bookings, we see a tremendous amount of demand for vehicle electrification that we obviously benefit from."}, {"role": "assistant", "content": "As it relates to SVA, both the hardware solution as well as the software solution, really, it's an effort from an OEM standpoint to enable ongoing revenue opportunities. And I'm not sure any of them have, John, concluded that upfront profit on the vehicle will be less. I think the real focus is on how do they drive efficiency as it relates to designing, engineering, manufacturing and ultimately delivering a vehicle. And then how can they, on an ongoing basis, either address issues that minimize warranty costs as well as to provide revenue -- ongoing revenue opportunities with enhanced ADAS solutions, enhanced user experience opportunities, opportunities on the battery as it relates to increasing battery life or range."}, {"role": "assistant", "content": "So it's really that endgame that's really driving the demand. And I think given what the industry has gone through over the last couple of years as it relates to heading towards software-defined vehicles, given the challenge associated with that, I think there's been a lot of learnings. And I think as a result, there -- we've been involved in a lot of discussions, which has generated a lot of demand for what we offer both from a hardware standpoint as well as Wind River software solution."}, {"role": "user", "content": "Maybe just a follow-up to put it more succinctly, how much opportunity for revenue and profit do you think you may have beyond initial point of sale? And maybe on these calls at some point in the future, we might stop talking about global production, and you might start talking about subs. Or how much of your revenue could be beyond point of sale that would be much more profitable over time?"}, {"role": "assistant", "content": "Yeah. No, it's -- I don't have a specific number other than saying it's big. To the extent we have a -- we have solutions that enable life cycle management, that enable the constant upgrade and enhancement of certain solutions, obviously, that increases the size of the markets that we operate in today based on the way we look at them, whether that's ADAS, whether it's battery management systems, whether it's user experience. So to the extent we're creating revenue opportunities for our customers, the size of the market increases and there's an opportunity for us to benefit in that increased market."}, {"role": "user", "content": "Great. Thank you very much."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Rod Lache with Wolfe Research. Please go ahead."}, {"role": "user", "content": "Good morning, everybody."}, {"role": "assistant", "content": "Hey, Rod."}, {"role": "user", "content": "Wanted to ask first about the numbers. This quarter, you achieved 15% organic growth, that's $625 million. You mentioned, Joe, that you're achieving the 30% conversion. So that would be about $180 million year over year. I see the $113 million of EBIT growth, and you mentioned manufacturing and productivity was kind of a wash. It sounds like FX and commodities might have been a $50 million drag, but wasn't there some benefit from the pricing that you took in the middle of last year or maybe no? I'm not seeing it in the growth over market in the quarter."}, {"role": "assistant", "content": "Yeah. It was a slight benefit, Rod, but it's -- net price and commodities basically are netting out to what I'd call sort of a slight benefit on the top line. I think to your point, the slight benefit on the top line, they're actually a slight negative on the bottom line so -- from an OI perspective. So again, that's what drove -- if you really think about, and it was in the prepared comments, 100 basis point margin impact of FX is in part driven by topline going one way come out -- OI going the other way on the commodity side of things. So I think there's a little bit of mix there."}, {"role": "assistant", "content": "But I think the big piece is, if you look at it, FX particularly on the RMB and the Mexico peso, total FX impact was about $65 million in the quarter. So as you think about incremental revenue flowing strongly, I mean that, at least in our view, that sort of came out sort of in total where we were expecting. But the incremental volume or the flow-through on any additional volume really got taken up by the FX impact, particularly peso for us, which isn't usually an impact, but it was particularly strong. It strengthened a lot this quarter. A lot of folks don't expect that to continue, but that was certainly a meaningful number in the quarter."}, {"role": "user", "content": "Okay. Maybe just to follow up, how should we - how are you thinking about the FX transactional exposure, at least what you've embedded for the year? And just a question for Kevin, you've got obviously, a lot of exposure to some of the growth of your companies in the industry with Tesla being your fifth largest customer and Geely now. And I was hoping you might be able to address this phenomenon of the Chinese starting to export a lot more and whether you think that actually is something that could move the needle for Aptiv over time?"}, {"role": "assistant", "content": "Yes. Rod, from an FX perspective, haven't changed our assumptions from the start of the year. So the pesos in 2.50. RMB is a little under seven. Obviously, I think just given the volatility in those markets, for us well at the midyear point, take a look at where we are and update those assumptions. But those -- and they're in the deck with the FX assumptions. They have not changed from the original guide."}, {"role": "assistant", "content": "Yes, I think, Rod, just to add to that, I think in light of or assuming rates stay where they are effectively as you fall out into the balance of the year sequentially, it should be less of a headwind across our business. So it should be a net positive there. Listen, as it relates to our exposure to -- you referred to them some of the growth or OEMs, we've made tremendous progress with players like Tesla. As you all know, we've grown with them across models, across regions. I referenced, Geely, in the L2-plus ADAS program that we were awarded that will initially focus on the China market but is intended to be used on vehicles that will be exported outside of China as well. So that is certainly an opportunity."}, {"role": "assistant", "content": "As you look at the major local OEMs in China based on our discussions, they are clearly focused on how do they begin to export vehicles outside of China. I think their general view is they have technologies and they have quality, which is at a level where they can meet kind of consumer standards outside of the China market and provide themselves with additional opportunities for growth. So it certainly is an opportunity. I am not quite sure how large it is for us at this point in time, but given the progress we've seen in the locals make over the last three years, which has been significant, I think, would be a fairly good opportunity."}, {"role": "user", "content": "Okay. Just to clarify, Kevin, I know that the locals are like half of your China backlog. What percentage of your business in China is accounted for by the local OEMs?"}, {"role": "assistant", "content": "Today, from a revenue standpoint, I think, it's about 40% -- yes, 35%, 40%."}, {"role": "assistant", "content": "It's growing. If you go back to 2019, Rod, that number, we were 75% global, 25% local. And from a revenue perspective, today, we sit at about 60-40, global, local. And bookings are about 50-50."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Adam Jonas with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Thanks, everybody. Hey, guys. Hey Kevin, it really seems like the narrative around supply and demand for EVs has changed pretty markedly this year and from my read, at least in kind of an adverse way. I mean, when you hear Tesla talking about selling vehicles for no profit, and you see the Ford Model losing $60,000 per car in names like Rivian, Lucid and Fisker are really, really struggling to kind of get by here. If Western OEM volumes end up being lower than expected, what would the impact be on Aptiv margins medium term?"}, {"role": "assistant", "content": "Yes. Our high voltage margins mixed out, and if you were to focus on North America and Europe are slightly higher than our overall SPS margins at this point in time. If you think about its engineered components from our connection business, cable management solutions from HellermannTyton, as well as bus parts from Intercable and wire harnesses. So it mixed out, it's slightly higher than our SPS margins. Our two biggest markets from a revenue standpoint today are Europe and China, then followed by North America, I believe from a revenue standpoint, although they're all relatively close. It's relatively balanced. So I don't know, maybe Joe can take a shot at it."}, {"role": "assistant", "content": "Yes. North America is about 29% or expected to be about 29% of high voltage volume, Adam, in the year. You'd call that to Kevin's point, North America slightly above SPS segment margins on a high voltage basis."}, {"role": "user", "content": "All right. I appreciate that. And just as a follow up, going back to Rod's question about the Chinese OEMs. Again, they have a clear mandate from Beijing to accelerate exports into international markets like Asean and looks like they're targeting Europe near term as well. How would - I hear you that you're very much, as you've always done, your team thinking of the future and skating to where the puck is going, getting the content where you need to get it. It seems like you recognize that folks like BYD and Geely are here to stay. I am thinking if there was a surprise, all else equal of those two names specifically, taken more share out of China, given where you are on those products today, would that represent a positive, negative or neutral mix shift for you..."}, {"role": "assistant", "content": "Yes. BYD or Geely were to grow outside of the China market in a disproportionate way, what impact does that have on margins?"}, {"role": "user", "content": "Yes..."}, {"role": "assistant", "content": "Let me correct -- fully understand, would be positive."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Yes. Thank you."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Itay Michaeli with Citi. Please go ahead."}, {"role": "user", "content": "Great. Thanks. Good morning, everybody. Just two questions for me, perfectly for Joe. Can you maybe just help us and just talk about how you expect the cadence of margins for the business throughout the rest of the year."}, {"role": "user", "content": "And then secondly, maybe for Kevin, back on the bookings with Q1, I think the last five quarters you're now running or averaging about $9 billion. Was Q1 another just a lumpy quarter? Or is there potential upside to 2023 bookings relative to your expectations?"}, {"role": "assistant", "content": "Maybe I'll take the first. Joe, the second, if that's okay? Listen, as Joe has always said, bookings are lumpy. And I think when you -- especially when you factor in some of these Smart Vehicle Architecture programs with OEMs, they are significant programs that go across all vehicle lines over a number of years. So when we're awarded that business, I think you're going to see a disproportionate impact on bookings."}, {"role": "assistant", "content": "Having said that, when you look at the underlying trend about domain consolidation and integration, I think it's fair to expect, Itay, that the amount of our bookings actually go up naturally, just given the nature of the products that we're selling. Hard for me right now to give you an exact dollar amount but we would expect that trend to continue. We'd say we have a high level of confidence in the $32 billion of bookings that we have communicated for this year. Is there an opportunity to beat that? Yes, there is. But we'll see how the timing as it relates to program awards."}, {"role": "assistant", "content": "Itay, thanks. I appreciate that question. We have talked about this a lot in the first quarter. I think with one exception, which I will come to, I think you just think through quarterly cadence of margin, we should be returning to what I'll call sort of that 2018, 2019, our historical cadence, right, of just sort of the natural flow that's in the business. So Q1 will be weaker, will build up over the year. Q4 will be a stronger year and will average to the full year margin. That's historically how the business behaved through 2020. And we -- and I realize we're not giving quarterly guidance, but that's how we've talked about margins building up through the year. So I think just on reference point, you can sort of go back to those years. 2019, you've got to watch out a little bit for the strike. But the flow is basically there."}, {"role": "assistant", "content": "I think the one caveat this year that we're obviously managing closely, but it's just a little bit of an unknown still is the supply chain disruption costs and how those hit on a quarterly basis. As we talked about it in February, we have $180 million in the guide, full year COVID supply chain disruption costs. We believe those are probably more weighted to the first half of the year as they roll out in the second half just given the sequential improvement. And those costs were -- round number is $50 million in Q1, which is a $30 million improvement year over year. So you got to make an assumption of how the $180 million rolls out. But apart from that, I'd sort of go back to how the business would flow sort of pre-2020. And I think we're getting may not be perfectly on that, but I think that's a good proxy, if that's helpful."}, {"role": "user", "content": "Yeah. That's very helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Dan Levy with Barclays. Please go ahead."}, {"role": "user", "content": "Hi. Good morning. Thank you. Joe, I want to start with just a follow-up on Itay's question there. And a bit more specific to ASUX. You just did roughly 4.5% margin. I think you said for the year, it's 8% to 9%. So I think that implies like an exit rate, probably double digits. So is it just the timing of the recoveries that get you that ramp-up over the course of the year? Or is it just some visibility on those supply chain pressures dissipating over the year?"}, {"role": "assistant", "content": "Yeah. There's -- listen, I think it's a combination, right? There's the natural flow in the business. Q4 is much heavier for ASUX. You get those engineering credits. That's unrelated to COVID, unrelated supply chain disruption. That's my earlier comment on how the business flows. I do think it'd be low-double digits in Q4. I think that's a reasonable proxy. So you have the sequential improvement, you have the normal flow of the business and then you're going to have volume growth. That business is going to grow throughout the year. We've got some strong launches coming in in the second and third quarter."}, {"role": "user", "content": "And the visibility on those recoveries, is that just based on historical? Or just you have a good sense with your customers that you'll get those recoveries?"}, {"role": "assistant", "content": "Yeah. I mean those are in, right? You got a lot of -- remember, we did a lot of it last year. There was obviously some to take care of this quarter. But a lot of it last year and then that rolled in a piece price in the beginning this year. So yeah, I would say visibility there is good. We've got confidence there, and it's in the guide."}, {"role": "user", "content": "Great. Thanks. And I wanted to follow up on the prior line of questions on the EV pure plays. And I think one of your very large customers, their strategy clearly has been to reduce a tremendous amount of cost to unlock lower price points. So I just want to understand in an environment where -- and I presume that's their strategy, but others will follow that strategy as well. In an environment where you have customers that are trying to cut cost out of their system as much as possible to unlock these lower price point, to what extent does that make it a tougher commercial environment for you? Or can you still hold firm on your margins and your offering?"}, {"role": "assistant", "content": "That's actually a perfect environment for us. We benefit from that. So when you think about a full system solution, our ability to integrate and our ability to optimize that integration, the result of that sort of situation and the result of customers thinking that way is we tend to get more content. We tend to get more of our own content, which not only translates to higher revenues, it translates into higher margins. And a great example, I think we've talked about this in the past, we've had a couple of OEMs come to us and asked us to take a look at their vehicle architecture, kind of soup to nuts, both low voltage as well as high-voltage and come up with ideas where we can reduce weight, mass and costs. And there have been a number of situations where we've been able to reduce overall cost by 20% to 30%. And we are able to do that, saving the customer money, while at the same time, enhancing our profitability. So those are situations that are really good for us."}, {"role": "assistant", "content": "And as we evolve into the challenges that our customers are having with software, which we've talked about previously in terms of that debate about in-sourcing versus outsourcing and the fact that we are seeing -- we are having more of our customers come to us to provide solutions, when you think about Wind River, when you think about Wind River Studio, when you think about what we're doing with the overall software stack, those are all things intended to drive flexibility and reduce cost. And we fully understand that we need to enable our customers to achieve their objectives. And a big piece of that is delivering technology at lower cost. So to be candid with you, it might sound a little crazy, but that's the sort of environment that we're actually looking for, and we think we really prosper in."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Next question comes from Emmanuel Rosner with Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Thank you very much. A couple of more questions, if I may on, I guess, expected cadence for the rest of the year. First, I guess, on the gross over market, 6 points in the first quarter and then obviously, your normal framework of 8 to 10 for the full year. In terms of what drives this acceleration, is it mostly the timing of your launches?"}, {"role": "assistant", "content": "Yeah. Launches will strengthen throughout the year, but the 6, I think, is more of the sort of the abnormal number there, right? We just -- and this happened in Q2 or Q3 last year, too. We just had a couple of customers, particularly in North America, they were launching, they were accelerating ramp. Those ramps slowed just given some supply chain constraints. So we are -- just relative to market, they weren't as strong. So those problems are clearing up. They're getting better in this quarter. So we -- it's more of a returning to the framework then something needs to happen to get us to the framework. And we've always said, and I appreciate it's -- I appreciate it's a long-term guide, and we've historically been well within it, but it's always going to be a little lumpy, right? It's historically been lumpier to the high side with launches, but this is more a specific thing to Q1 than a longer-term concern."}, {"role": "user", "content": "And just quickly following up on this, are you expecting these volumes to be made up? Or are you just saying that there's enough sort of growth of the market in the back half -- in the rest of the year.."}, {"role": "assistant", "content": "Yeah. There's enough -- I think if they can make it up, that's going to depend on the other suppliers being able to get the parts. I think the supply is at least returned to where they can hit schedule, so we'll be back. We'll see how much they can make up."}, {"role": "user", "content": "Okay. Thank you. And then the second piece would be on the margin. And I appreciate the comments around cadence and sort of like normal flow of the business. Can you just -- maybe just remind us in terms of the margin improvement in the back half, the big pieces of it, right? The cadence is -- of 2019 is extremely helpful. Just interested if there's pieces that you could quantify either in terms of lower disruption costs or sort of like more price recoveries, I guess, just..."}, {"role": "assistant", "content": "Yeah. Listen, the net price benefit is really going to be first half. If you think about when that kicked in last year was really that July or August time frame, a little bit in June. So we are sort of seeing that now. That will continue into Q2. And then really when you get to -- we've started to see the material manufacturing performance improvement, right? We talked about that needing to offset labor costs and it did offset a little to the positive side actually. So that's going to continue. And then you see volume build through the back half of the year, then I think you have that normal cadence of a strong Q4 as well around engineering credits and those types of things. So -- but the net price, the customer recoveries are really a first half just given the timing of those last year when they started to kick in."}, {"role": "user", "content": "Okay. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Mark Delaney with Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Yes. Thank you for taking my questions. Good morning. Another one on the cadence and on the revenue side, in particular, if I take the 1Q revenue, you are annualizing to nearly the high end of guidance around $19.3 billion. We spoke about growth over market maybe picking up a bit. We spoke about supply chain starting to ease. So it appears maybe you are tracking towards the high end of guidance on the top line for the year. But if you could maybe help us understand are there any offsets we need to be considering and how to better think about the cadence of revenue throughout the year?"}, {"role": "assistant", "content": "Yes. Listen, I think it sort of goes back -- Mark, it goes back to Chris' first comments, right? Q1 is off to a good start. I think we're very happy with delivery. Obviously, the FX, and as I mentioned, North America. But on balance, it's a quarter that was very much in line with our expectations we feel good about. And we expect Q2 to be the same, and then I think we reassess where we are for the year."}, {"role": "assistant", "content": "I think on the margin side, as I said, there's -- we're starting to get back to what feels like to Kevin and I sort of the normal cadence and flow of the business historically with the exception of the 180 million, just when do these disruption costs hit. Ideally, those go away much faster. We saw good improvement in Q1, $80 million in 2022, down to $50 million this year. And again, I think we see how Q2 plays out and we'll have a better sense of where we are in disruption costs so we continue to see sequential improvement and then can look at what customers actually do in their detailed production schedules for the back half of the year."}, {"role": "user", "content": "Okay. That's helpful Joe. Thanks. And my second was on Wind River and good to hear all of the momentum that you're seeing with customers. You did talk about potential lumpiness in Wind River in the prepared remarks. So maybe you could just double click a little bit on that. I mean certainly aware there is some telecom capex weakness and maybe that's what you were speaking to, but anything more on Wind River, especially because it's a high margin business and maybe we need to be mindful of the cadence within Wind River as we're thinking about the EBIT both for the year. Thanks."}, {"role": "assistant", "content": "Yes. So both, as I mentioned, both acquisitions performed in line with expectations. Acquisitions are accretive to the margin for total Aptiv margin. So it's positive on both the revenue and the OI. My comment around Wind River, just trying to set some expectations ahead of time. It's not necessarily on telecom weakness or any particular weakness in the market. Relative to -- that -- it's a very important business, but it's a relatively small revenue stream, right? It's about -- there will be over $0.5 billion this year, up from a little less than 450 last year. They tend to have some big deals come in on a quarterly basis. So it's more of a cadence within that business. It's always existed of timing of when some of the larger revenue opportunities get signed up. And much like our bookings, it's not necessarily a straight line quarter-to-quarter-to-quarter. That's all I was cautioning about. So I think full year, they have a very good sense and have historically a very good track record. Quarterly, as a private company, they hadn't historically been managing the business quarterly, if you will, and some of those contracts to be a little lumpy. And I just -- we wanted to caution that before the lumpiness appeared versus after. If that makes sense."}, {"role": "assistant", "content": "Yes. It's really -- it's the accounting for the revenues, the nature of the contract."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our last question will come from Tom Narayan with RBC Capital Markets. Please go ahead."}, {"role": "user", "content": "Hi. Thanks, guys. Yes. A quick follow-up on, I think on Rod's question. Just -- it sounded like you said that the, Joe, like the FX assumptions was based at the end of Q4 and now it's changed in Q1 and that has impacts in Q1. Just curious if FX is at the Q1 level, how does that change your guidance specifically like EBITDA or EBITDA margin? Is it -- how would that be impacted if..."}, {"role": "assistant", "content": "Let's be clear, though, right? We've let the rates in place for guidance. The impact we're talking about is the year-over-year FX, Q1 2022 versus Q1 '23, that's the $65 million. So it's where rates end up at the end of the quarter. So that specifically, that transaction loss, particularly in Mexico and the peso and the RMB is a year-over-year number. And again, our assumptions are there. We haven't changed since the beginning of the year. We've seen some volatility in those FX markets. And again, I think as we get to the midyear, we will assess macros, vehicle production, FX, commodity prices and look ahead to the next six months and see what we think. But the impact is really year-over-year versus - we didn't have a guide out there. So it's really the year-over-year impact I was talking about."}, {"role": "user", "content": "Okay. Thanks for that. And then just the follow-up would be there's a large ADAS provider that this earnings season noted that one of their OEM customers, I think reduced kind of purchase order pretty substantially in China, the specific OEM. Just curious if your specific OEM exposure in China, how would you characterize? I mean, certainly, your guidance suggests a really strong growth over market despite the challenges there. But is there anything noteworthy in terms of your specific Chinese OEM exposure?"}, {"role": "assistant", "content": "Yes. No, our outlook as it relates to China market, our customer base hasn't changed since the beginning of this year when we gave guidance. So we would -- we, at least, don't see any significant changes."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]"}]}, {"messages": [{"role": "system", "content": "Your first question is coming from Dariusz Lozny from BofA Securities."}, {"role": "user", "content": "Hi, Good morning, This is Dariusz on for Julien. Maybe just first one, I acknowledge that we haven't gotten the staff testimony in the rate case yet, but maybe just looking at one of your peers that's a couple of months ahead of you. I think there was a proposal by the staff in that case to consider use of a mechanism that had previously been used by water utilities in lieu of a brand-new renewable rider."}, {"role": "user", "content": "I was wondering if that's something you guys have evaluated at all in your planning. I know you have a proposed modification in there. But are you perhaps looking at what the staff proposed in that rate case and starting to think about contingencies ahead of the staff testimony that's coming in a few weeks here?"}, {"role": "assistant", "content": "Yes. Darius, we -- I mean, obviously, we follow those cases pretty closely, and we're always open to looking at different alternatives. I think in our case, still focused on the kind of mechanisms that we currently have and that we've used before is probably the better path for us. But we're early. We'll wait and see how the staff testimony comes in, the intervenor testimony comes in, and then we'll begin working from there."}, {"role": "user", "content": "Okay. Certainly I appreciate that. And just on your annual -- the drivers in the annual guidance for the year, you're still -- I see you're still guiding roughly flattish on adjusted O&M. Obviously, that was a bit of a headwind in the quarter. As we think about shaping for the remaining three quarters, should we think of the delta there as more or less ratable who keeps you through Q2 to Q4? Or any particular ups and downs to it for the remainder of the year?"}, {"role": "assistant", "content": "Sure, Dariusz. It's Andrew. The most important thing I would say about the O&M profile for the year is that we remain on plan. And so if you look at the year-over-year comparison, a lot of what you're seeing there in the first quarter is timing-related, where when you compare the first quarter of 2022, you're seeing an uncharacteristically low O&M first quarter if you look at the last three or four years. And there's a confluence of things that drove last year to be lower than average."}, {"role": "assistant", "content": "You had the A&G credits from Palo Verde and outage schedules and things like that, that drive that. But you also really didn't see in the first quarter of last year, inflation in the way that we saw it later in the year and that we continue to see it this year. And so that run rate of O&M that we ended up with for last year really didn't start until later in the year when we were still thinking in the first quarter of last year that inflation was transitory, it became a lot stickier. And so the trend that we typically see seasonally throughout the year, I think, holds here around O&M."}, {"role": "assistant", "content": "This quarter looked fairly characteristic for a first quarter from an O&M perspective. We certainly continue to focus on our lean initiatives, customer affordability opportunities on the O&M side and that declining O&M per megawatt-hour. But from a shaping perspective, this year so far has looked like a relatively typical year. Last year happened to have and is driving that comparison in our chart, in our deck to look like a drag, which certainly in the scheme of the quarter, it is year-over-year, but against an unusual comparison from last year."}, {"role": "user", "content": "Okay, great thank you both very much. I appreciate the caller. I'll turn it over here."}]}, {"messages": [{"role": "system", "content": "Your next question is coming from Jamieson Alexander Ward from Guggenheim Securities."}, {"role": "user", "content": "Hi guys, It's actually James Ward on for Shar. How are you?. Looking forward to seeing you guys in a few weeks, or actually, you're not doing EGA. Sorry, it's a habit over the last -- I just covered a bunch of all of these calls. We wish we were seeing you. Shar is seeing you for AVR in a couple of months. That's what I was thinking of. All right. Getting to the question, and Jeff, very glad that you're able to make it."}, {"role": "user", "content": "That's terrific. So our first question is just earlier this year, and it's relating back to O&M but sort of from a slightly different angle, the question that was just asked. Earlier this year, we saw the stock come out with a recommendation -- sorry, ROE for some or mixed up here. Recommendation of 9.6% ROE for Tucson Electric and on May 22, we'll be seeing the first round of staff and intervener testimony get filed in your case. Based on what you have been seeing recently, and I get that there are a few data points, how are you thinking about ballpark expectations of what a reasonable ROE recommendation might be?"}, {"role": "assistant", "content": "Yes. I don't want to go into kind of a ballpark. Obviously, I think a couple of things that are moving. One, as you know, the Court of Appeals did come in, in our last case, I will say, I think that 8.7% in the last case was very much an outlier. And I believe that the commission of the parties have kind of seen the negative impacts that can happen when you get a cost of capital that has stepped far outside of kind of industry norms. We did see in the Court of Appeals, the 20 basis point disallowance that had been addressed by the commission."}, {"role": "assistant", "content": "That was reversed by the Court. So we're still waiting to see whether the appeals go up, but I think that moves you up to an 8.9% from the last case. And then I do think it is fair to look at what you're seeing recommended for the other utilities. Probably the most important differentiator for us that we'll continue to emphasize as we work through this case is the cost of capital from a risk profile for a utility like Tucson Electric has historically been 25 to 50 basis points lower than ours because we operate Palo Verde."}, {"role": "assistant", "content": "And so Palo Verde is an immense benefit to customers but it creates a higher risk profile, therefore, a higher cost of equity. And that has historically been recognized by the commission. It wasn't in the last case, and that was a point that we had tried to emphasize. And so again, we'll continue to emphasize that as we move forward here. But until we see the staff and intervenor testimony come in here next month or in the next little while, I don't want to speculate on what we think is reasonable for that. We'll work with what we get."}, {"role": "user", "content": "Totally fair. Understood. Sorry, I just had to ask that one as well. The original I wanted to ask on O&M. So following up on the prior question as previously mentioned, you continue to target declining O&M per megawatt-hour despite inflationary pressures. What level of inflation are you assuming relative to that guidance target when you said it? And then as a follow-up, how does actual inflation been coming in by comparison? And those are my questions."}, {"role": "assistant", "content": "Sure. Thanks, James. And when you think about our O&M targets in absolute dollars for this year, we've guided to a range of $885 million to $905 million. And that is relative -- if you take the midpoint of that range, it's relatively flat with the O&M number from last year, excluding RES and DSM expense, which was at $892 million. So just on that -- simply on a midpoint basis, you're talking about most of the inflation that we recognized last year trying to hold as flat as we can to that number."}, {"role": "assistant", "content": "And that's really the aim. We saw inflation start to come into our operating environment over the course of last year. And that was across O&M, capital, fuel, obviously, as well. And so on the O&M side, we've really been focused on all of the cost efficiency, customer affordability initiatives that we undertake. And we certainly always look at those at the end of the year after we've had the summer and make sure that we pull the levers that the team knows that they have to get to that range."}, {"role": "assistant", "content": "So we're expecting that the -- any further inflation, and we've seen inflation in Phoenix slow down on trend with the national slowdown in inflation as the Fed activity has picked up, still a higher level of inflation in our local operating environment and overall but still relatively low inflation compared to some of the areas where we're seeing people come into the service territory from. So we continue to monitor that inflation, and there's areas around wages and other things that we are monitoring, but we are -- we remain focused on our existing target, which is relatively flattish to last year at that midpoint."}, {"role": "user", "content": "Thank you very much!"}]}, {"messages": [{"role": "system", "content": "Your next question is coming from Alex Mortimer from Mizuho Securities."}, {"role": "user", "content": "Hi, Good morning! So many large customers coming online in the next couple of years. How do you think about the linearity of the long-term EPS CAGR as we look through 2023, 2024 and 2025?"}, {"role": "assistant", "content": "So you know I understand a lot of focus on the linearity of earnings. We do have a rate case before us, and that is certainly a critical contributor, given we've been relatively flat on rates for the last five years so that's an important contributor. The sales growth, though, certainly is a factor that helps us mitigate some of the zoning pressures."}, {"role": "assistant", "content": "And that's why we are focused on O&M per megawatt-hour as an inflationary measure because we want to be -- kind of keep ourselves to account as the footprint that we have of customers within our service territory grows, that we're not letting O&M drift upward with that growing service territory. But the sales growth itself is -- does have some large customers ramping up."}, {"role": "assistant", "content": "They are ramping up over the next several years. And so that long-term 4.5% to 6.5% sales growth range is dependent on the continued uptick of those large customers on the manufacturing and data center side over those years. It's not -- certainly, the first phases of TSMC are a big initial impact, but there are a number of customers in that mix, the TSMC supply chain, the data centers that are contributing over the time frame of our sales growth guidance range."}, {"role": "user", "content": "Okay, understood. And then just on the -- kind of circling back on the large customer side. How do you think about your exposure to a potential economic slowdown, potentially second half of this year or further out, given that so much of that investment is coming in? And then is there a good way to think about sort of quantifying your exposure to load growth where, for example, 50 basis points of load growth is worth $0.10 of EPS or kind of something along those lines?"}, {"role": "assistant", "content": "Yes, Alex, let me start and I'll let Andrew chime in as well. I mean, one of the interesting differences that we've seen, if you look at the Arizona market back in the last recession, 2007 time frame, we're very exposed on housing construction and residential growth. And so we are one of the hardest hit areas when that recession came in. It was kind of us and I think Nevada were probably the two hardest hit regions."}, {"role": "assistant", "content": "The change that's happened since then has been a really purposeful refocus on manufacturing and advanced manufacturing. And that maybe a little less exposed to the sort of near term, if we see going into recession. A lot of these companies are making investments here very focused on the long term. And TSMC, again, that's a strategic investment in the United States."}, {"role": "assistant", "content": "So I think that we have less exposure. Obviously, a downturn can affect some of the timing. But when you look at the long-term economic growth that's coming into the Phoenix region, a lot of them is just being driven by the attractiveness of this market for advanced manufacturing. And I think that, that's going to be -- we're going to be more resilient, certainly in the near term, than if you look back to a prior recession. Andrew, you want to talk about maybe specific guidance?"}, {"role": "assistant", "content": "Sure, yes. And Alex, also, if you look at this year in particular, we continue to monitor for signs of economic slowdown. The first quarter certainly showed that ramp-up of those larger customers. C&I growth contributed 4.3%, which was pretty solid and in line with the range that we have overall for the year. But on the residential side and the small C&I side, but really on the residential side, we continue to see despite that work-from-home trend being mature, in fact, some people going back to the office, we saw a sizable uptick in usage per customer this quarter."}, {"role": "assistant", "content": "It was kind of the -- a full robust winter tourism season, part-time residents, visitors to the valley here. So we continue to see strength in the economy. Those are the types of things that we monitor within a given year to assess the health of the economy. And certainly, as the inflation rate has started to come down here, that's been a meaningful contributor. From a customer growth is a big piece of that as well, that 2% customer growth, continuing to look at that, where the cost of living in Arizona remains affordable relative to areas where the net migration is happening from, which is particularly cities in California, that's another measure of economic vitality that we measure."}, {"role": "assistant", "content": "There's a rule of thumb that we tend to use around 1% of sales growth. Remember, the large C&I customers come in at a lower margin. So if you think about 1% of C&I sales, it's less than $10 million. It's in the $5 million to $10 million range of revenue from 1% of large C&I. Residential, it's in the $25 million-plus, 1% growth annually in residential would be $25 million-plus of incremental revenue."}, {"role": "user", "content": "Wonderful! Thanks so much! It's very helpful. Congrats on the quarter and good luck with the rest of the year."}]}, {"messages": [{"role": "system", "content": "Your next question is coming from Travis Miller from Morningstar."}, {"role": "user", "content": "Thank you, Good morning everyone. You've just touched on a lot of what my question was going to be, but in terms of that difference between the electricity sales growth and the customer growth."}, {"role": "user", "content": "Longer term, and again, you kind of mentioned this, but thinking about the residential side more, would you expect that customer growth rate and the electricity sales growth rate to somewhat match each other? Or are there trends you're seeing in terms of those growth rates changing, right, either people becoming more efficient or more use per household, something like that?"}, {"role": "assistant", "content": "Travis, we still see, and Coop can probably talk about the sort of specifics, but we still see very robust rooftop solar penetration. I think we have the highest per capita rooftop solar in the U.S. outside of Hawaii. And so that tends to offset some of that on the residential side."}, {"role": "assistant", "content": "The growth is still good. It also drives kind of multiplier effects as you get more C&I that comes in to support those residential customers, so it's still certainly a net positive. But yes, it's hard to make it a linear equation. That's typically what we see right through."}, {"role": "assistant", "content": "Yes. Jeff is exactly right, the 2% customer growth in that range is something that we see continuing, given the factors that I talked about. A lot of it is offset by energy efficiency, as Jeff described. We certainly look to the small C&I growing up around the new subdivisions and things as well. The area that we're starting to monitor this year, we don't have numbers around it, but it's EV, electric vehicle penetration."}, {"role": "assistant", "content": "That's one area where usage per customer on the residential side is forecasted to pick up over time. So that EV penetration is an important part of the calculus around the residential because as we've -- kind of we're starting to see last year, the work-from-home trend reached a point of saturation. In fact, as I mentioned, we've had people start going back to the office. So when you take that plus energy efficiency, it eats into quite a bit of the customer growth. So it will be the impacts of things like EVs, if you go out into the future."}, {"role": "user", "content": "And does that difference between the sales growth and customer growth and how that evolves, do you think that will become more of an issue of discussion in the regulatory realm in terms of rate case and rate design?"}, {"role": "assistant", "content": "No. Travis, if you dig into our stuff, you'll see we're -- and it's kind of partly because of where we're located in the country. But if you look at us in Salt River Project who serves the other half of Phoenix, we have the highest penetration of time of use rates. We have residential demand rates. We're very far ahead of the curve nationally on rate design."}, {"role": "assistant", "content": "And so a lot of that is really what's incenting customers to do things. We have an incredibly robust smart thermostat program that we use to help us get through the summer from a demand response perspective. And so a lot of the stuff that you might be thinking in other states is going to start hitting the commission, has hit the commission, and we're well ahead of a lot of our peers in those areas."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now begin the question-and-answer session with publishing analysts. [Operator Instructions] Our first question today comes from the line of David Palmer from Evercore ISI. Please go ahead, your line is now open."}, {"role": "user", "content": "Thanks. A question on growth spending. I would imagine, this is the year that you're getting past a lot of supply chains, both supply-chain issues, both upstream and within the company. And I'm wondering if you could just talk to where the biggest growth spending energy is being applied, whether that's advertising and promotion and innovation and areas of the world and parts of the business. Thanks."}, {"role": "assistant", "content": "Yeah, thanks for the question, David. I want to make sure I understand the question, but in terms of reinvesting in the business we are certainly investing in brand building. There's no question about that. We're investing in innovation and we're investing in capacity. And so we are obviously coming out of the pandemic and the supply disruptions, the bottlenecks and shortages as so many other companies are and we're investing for growth, and you see that, you see that in our upgraded guidance for the topline, you see that in the better service levels that we're delivering to our customers, you see that in Pringles expansion around the world, which requires capex. And so it's really in those main areas. And again, if I understood the question, that's essentially where we're looking to deploy those resources."}, {"role": "user", "content": "Yeah. I guess I'm just looking for examples in metrics with regard to the number of new products, the ability for you to get those things on the shelf and whether you're going to be layering in promotion spending as you go through this year. I think there is some concern that volumes in this space don't improve or don't hold up through the year as pricing rolls off. So, these types of things can help people feel better about those volume metrics as you get later in the year. So --"}, {"role": "assistant", "content": "I see, David. So, you know, I have heard some of the commentary around promotions and so forth, but brand building is up, innovation is up and this notion that merchandizing is returning to pre-pandemic levels, we're not quite there yet, but it's improving. And remember, merchandizing which some see is one element of the outcome of price promotion, gets your product out on the floor, gets your consumers interrupted in their shopping patterns and we see as a good thing."}, {"role": "assistant", "content": "In terms of just going forward, in innovation, the bar of innovation, I've said this in the past, has clearly gone up as SKU counts went down during the pandemic. So that's been raised and we are very pleased with our topline performance. We're pleased with our ability to raise that guidance and we're pleased with our margins where they are in the recovery of margins. So all that being said, I think the environment is a good environment. It's an environment that we're being successful and we're being competitive in and I think it's a positive environment as we look into the future."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Andrew Lazar from Barclays. Please go ahead, your line is now open."}, {"role": "user", "content": "Great, thanks, good morning, everybody. Steve, I guess I've got a bit of a higher level -- a little bit of a higher-level industry question for you. It looks as though we may finally be heading in earnest towards a more normal operating environment following three-plus years of all the anomalous dynamics. And I guess I'm curious how you think this transition for the Group to normalcy will look, not just for Kellogg, but for the industry as a whole."}, {"role": "user", "content": "I guess, in other words, do you think this transition to normalcy can be made in a somewhat orderly way or should investors have their expectations in check, maybe potentially for more uneven results for some time as pricing is lapped and perhaps it takes more time for volumes to pivot more positively. Basically I'm just trying to assess whether we see more of a like a hard or a soft landing, if you will, for food manufacturers as we kind of move into the a more normal operating phase, if you will. Thanks so much."}, {"role": "assistant", "content": "Yeah, thanks for the question, Andrew. I love some of the words you used in there, normal and predictable and soft landing. Clearly, we've come through the last three-plus years in, facing all these unprecedented challenges. We said at Kellogg that we would exit the pandemic a stronger company and many of our competitors said the same thing. And we certainly have. And I think that puts us and the industry in a good position to actually come into this next kind of era, if you like, in a much stronger fashion without some of the disruptions and challenges that you alluded to."}, {"role": "assistant", "content": "I mentioned to David in the earlier comment, the bar of innovation has been raised, that is unquestionable, there is no question that innovations have to be better, they have to be performing right out-of-the gate, shelf-space is more valuable than it's ever been today in my years in the business. Supply chains have had to become more agile, there's no question about that. Our supply chains have all been challenged to the degree they never had before, they have become more agile, but they've also used and utilized new technologies. We're deploying technologies like artificial intelligence and machine-learning, we're getting better and better at predictive, really end-to-end."}, {"role": "assistant", "content": "The relationships with our customers, I think again during the pandemic it was about how do we serve our consumers, our joined consumers in ways that we never had to face before. We had all sorts of challenges with respect to that, but now supply chains have come through stronger as well and the relationships with consumers I think are more end-to-end than they've ever been before. And so looking to eliminate friction is something that we talk to our customers all-the-time about joint business plans, start with how do you eliminate waste end-to-end, how do you grow the size of the price while we serve the common consumer."}, {"role": "assistant", "content": "And I guess the final thing I'd say is the whole world of marketing has changed like it never has before. The true promise of one-to-one marketing that we've been talking about for so many years is upon us with data and analytics, more sophisticated than they've ever been, first-party data, more robust and more available than it's ever been to really target consumers in a way that marketers have dreamed up for years. And so you put all these things together, and it's not 1987 anymore. I think it is a really -- it's -- not to be too rosy about it, but it's a new morning and it's I think a very-very promising outlook as we look towards how our industry and how Kellogg will perform in the future. We're very optimistic about the future for all of those reasons."}, {"role": "user", "content": "Really appreciate the thoughts. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Bryan Spillane from Bank of America. Please go ahead, your line is now open."}, {"role": "user", "content": "All right, terrific. Thanks, operator. Good morning, everyone. I wanted to just ask a little bit about inflation. I'm not sure, I may have missed it, but did you give us an update on where cost of goods inflation was in the quarter and what you're expecting, I guess, for the balance of the year. And maybe if you can just give us a little bit of color on kind of what's moving in each direction. I think we're beginning to see some relief, unlike resin, some packaging costs. So just if you could just sort of unpack for us a little bit, just kind of the COGS basket, where it stands and kind of what we should be looking at as we go forward."}, {"role": "user", "content": "Sure. So, I think if you look at -- COGS came in largely in line with expectations from our commodity standpoint. I think in our outlook for the year continues to be mid-teens inflation. So no significant change than what we had talked in our last call. Certainly there are some movement in some commodities. But like we've talked previously, we obviously have our hedging program. So some of that would flow through as hedges role across."}, {"role": "user", "content": "Very pleased with the performance in the first quarter. I mean if you look at our gross profit dollars, they were up 16% on a currency-neutral basis, so strong double-digit growth in our gross profit dollars. No question, aided by the fire and strike in quarter one. But even if you look at it from a full year standpoint, I think based on our quarter one performance we're now saying that our gross profit dollars would be slightly ahead of our net sales growth. So we've talked previously of flattish gross margins for the year. I think based on what we're seeing right now, we expect our gross margins to be up slightly for the year."}, {"role": "user", "content": "Okay, great, thanks for that. And just as we're thinking about the flow of that, does the inflation moderate as the year goes on or is it pretty steady through the year?"}, {"role": "user", "content": "I think the lap -- I'd say, overall, it's in the mid-teen inflation. I think the lap would moderate in the second half because that's when we saw commodities kept going up last year. So, you will start lapping that in the second half. So the year-on-year moderation will certainly be more back-half weighted."}, {"role": "user", "content": "All right, terrific. Thanks, Amit."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Ken Goldman from JPMorgan. Please go ahead, your line is now open."}, {"role": "user", "content": "Hi, thanks very much. I wanted to ask a quick question on LatAm. The volumes were down year-on-year, I think by the largest negative number in a few years. Obviously, a lot of that was to be expected given the pricing, but just sequentially pricing wasn't up quite as much as 4Q was and the volume comp wasn't I guess that burdensome. So I'm just curious how you think about that particular region, some of the tonnage numbers we're seeing there and how that relates to -- maybe the previous questions about leaning into promotions a little bit more."}, {"role": "assistant", "content": "Yeah, thanks, Ken. I'd start with overall very positively disposed to our results in Latin-America. When you look at the disruption and you look at from a macroeconomic standpoint and all the things that are challenging in emerging markets in general, Latin-America has been a pretty -- it's been a pretty kind of steady place to be for the last several years up until about two years ago where we started to see a return to some of the macroeconomic challenges, the geopolitical challenges and so forth. So with that, we're very pleased with our performance, but we are seeing a rise in elasticity in Latin-America."}, {"role": "assistant", "content": "And that's no surprise, you see very high price increases to overcome the input cost inflation and it's worsened by transactional forex over the past several quarters as well. It's been most pronounced in cereal, but we continue to perform well in cereal, in Mexico, especially big cereal business. And then when you look at our Pringles business in key markets, doing very well. Obviously, we added some capacity a couple of years ago in Brazil, put some lines of Pringles in. Pringles continues to perform very well in Latin-America. So our outlook from Latin-America remains strong. We're pleased with the performance there, but it's obviously an emerging market. So it comes with some volatility."}, {"role": "user", "content": "Great, thanks, Steve."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Jason English from Goldman Sachs. Please go ahead, your line is now open."}, {"role": "user", "content": "Good morning folks. Thanks for [Indecipherable] in. There was a comment you made early Steve about cereal co or WK Kellogg Co. I think, call-it maybe not the Co as yet. But as that business effectively being stood up and running independently in the third quarter, it was interesting. How much functional overlap will there still be? And I guess what I'm kind of angling out here is, it sounds like you may actually be -- we're all freaking out about like how big the stranded cost separation is going to be, what's the incremental cost looks to be. It sounds like you may actually be absorbing a lot of that in this year's guidance. Is that right? Thanks."}, {"role": "assistant", "content": "That is right. That is right, Jason, that is in our guidance, the incremental cost of standing that up. We're doing something called company and company, which is essentially running water through the pipes, so that we make sure that when we do spin-off the business, it's ready to go. And what I'd say in terms of stranded cost, stranded margin, obviously that's coming, but any kind of -- the way you portrayed that. I would say, we're very confident, very confident in our ability to stand up these two companies with strong capital structures and very strong outlooks."}, {"role": "assistant", "content": "And so I think many investors will be quite pleased when they see us come in the summer time during our Investor Day. We can't say much right now, but I'm very confident that those two businesses will be stood up, stood up strong with very strong outlooks and I think you'll see the value creation and the value unlock will be an aha moment for those who don't quite get it yet."}, {"role": "user", "content": "Great. I'll leave it there. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Alexia Howard from Bernstein. Please go ahead, your line is now open."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Good morning, Alexia."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Hi, I think you mentioned at the beginning of the prepared remarks that volume came through a little better than expected. I know it's still down, but it sounds as though that was stronger. Can you give us a bit of color about where it was stronger? And do you expect those -- that volume trajectory to improve as price growth close through the course of the year or how much do you expect to improve?"}, {"role": "assistant", "content": "Yeah, thanks, Alexia. I'll start and Amit may want to add. And so, volume was clearly better and if you look at it compared to historical elasticities, it's better everywhere. There's no question about that. And that's not unexpected in a world where inflation is across the board, right? So it's all relative. And you have to think about the relativity of our categories versus more discretionary categories. Having said that, very good performance in North America relative to historical elasticities, very strong performance in AMEA relative to elasticities I talked about Latin-America where we had elasticities rising a bit more. Europe, you see a lot of noise in there based on Russia and so forth, but a little bit more elasticity there. And so, across the board, very good performance, standout performance in North America and AMEA relative to over-performing versus elasticities."}, {"role": "assistant", "content": "When we think about the back half of the year, the remainder of the year, we are prudently assuming that elasticities start to increase and approach not quite historical levels, but on a march towards historical levels. And we think that's just a smart planning assumption. We'll see how it unfolds."}, {"role": "user", "content": "Great, thank you very much. I'll pass it on."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Steve Powers from Deutsche Bank. Please go ahead, your line is now open."}, {"role": "user", "content": "Great. Hey, thanks and good morning. I was actually going to ask a very similar question to the one that Jason asked. I think you answered that one pretty clearly. I guess the only thing I would tack-on to it maybe is, you mentioned or you cited that both Kellanova and WK Kellogg pro forma grew low-double-digits in the quarter and I realize you're constrained by giving us too much details, but just given that disclosure and I'm thinking about -- as I think about the 6% to 7% full year organic growth guide, is there any way you can frame for us a little bit about how you expect those two businesses to be contributing to that 6% to 7% on the year so we can get a little sense of expected momentum as we go into the new regime. Thank you."}, {"role": "user", "content": "Yeah, I'd say, Steve, we've got great momentum in both businesses. I think you've seen the results of Kellanova, good broad-based growth across all our categories, both in the US, internationally and across all categories as well. I think in our North America cereal, we're very pleased with the recovery that we're seeing there from a share standpoint. And you know that would continue to be the focus for the rest of the year. So there is good momentum across both the businesses."}, {"role": "assistant", "content": "Did we understand your question correctly, Steve?"}, {"role": "user", "content": "Sorry, I was on mute. I mean -- yes, thanks. I guess if there's any way to provide a little bit of quantification around sort of the contribution of each of those businesses to that 6% to 7% on the year, that would be helpful, but thank you."}, {"role": "user", "content": "Yeah, we don't have that, Steve. So I think what we will do is probably in the Investor Day we'll probably give you a lot more details of each of the two businesses. I mean, obviously Kellanova is about 85%. So the 6% to 7% that we're talking for the overall company is being driven by Kellanova. And I think like on North America cereal, what you saw in the first quarter, we were clearly lapping the fire and strike. So the double-digit growth was lapping the fire and strike. So, the double-digit growth was lapping that. You'd expect that to normalize as we go through the course of the year."}, {"role": "user", "content": "Yeah, okay."}, {"role": "assistant", "content": "And Steve, I think maybe if it's helpful, as you look at syndicated data, you can look at the North American cereal business and you see a lot there. And then as Amit said, 85% of the business is Kellanova. You look at the AMEA results, you look at the Europe and look at North America snacks, you can probably get a pretty good sense of what that looks like."}, {"role": "user", "content": "Yeah, no, I think that's all fair. I was just looking to see if you had -- if you -- I get it, thank you very much."}, {"role": "assistant", "content": "You bet."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Pamela Kaufman from Morgan Stanley. Please go ahead, your line is now open."}, {"role": "user", "content": "Hi, good morning. A question on -- the question on your EPS guidance for the year, just given the magnitude of the Q1 beat, why not raise your full year guidance by more than a percent? Were Q1 results more in line with your internal expectations versus where the Street was, or are there factors weighing on the EPS growth outlook over the rest of the year that tamper the flow through of Q1 upside?"}, {"role": "user", "content": "Yeah, I think like we talked earlier in the call and in the prepared remarks, obviously very pleased with the Q1 over-delivery. I think it's still early in the year. We talked a little bit about being prudent on our elasticity assumptions and price elasticity assumptions for the rest of the year. We're being prudent from a separation and spin standpoint. Steve talked a little bit about building into the guidance some of the costs associated with the spin in quarter three. So I think it's a balance of being prudent on our volume assumptions and our elasticity assumptions for the year and it's early in the year, but obviously very pleased with the underlying momentum in the business and the strong start."}, {"role": "user", "content": "Got it, thank you. And then just on Europe, pricing came in very strong there, but volumes did soften. What are you seeing in terms of consumer behavior in Europe. And have you finalized your price negotiations there?"}, {"role": "assistant", "content": "Yeah, Pam, so what we're seeing in Europe is, as I mentioned earlier, a little bit more elasticity, a little bit more channel shifting than we're seeing in some of the others. Obviously a big impact on Russia, which obviously we stopped shipping in Russia and we are divesting the business in Russia. But getting back to Continental Europe, shoppers are doing some channel shifting as I just mentioned. Hard discounters clearly growing their businesses. That has a disproportionate benefit to private label. Within our portfolios we're seeing a little bit more, and these are modest coming from small basis, but a little bit more private label growth in Europe, in Europe cereal than we would be in the rest of the world. So, no surprises. Europe is a challenging environment. But again, our results in that challenging environment are something we're very proud of, very proud of the way the team has delivered."}, {"role": "assistant", "content": "And as we said in our prepared remarks, when you strip out the effect of Russia, you see even better performance there. So one to watch, but one that we're -- we've got very-very good plans in place for the back half of the year and even indeed into next year."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Max Gumport from BNP Paribas. Please go ahead, your line is now open."}, {"role": "user", "content": "Hey, thanks for the question. In the release and the prepared remarks today you discussed supply bottlenecks and shortages that are beginning to moderate. This has been a key pressure points for the industry, both in terms of supply chain disruptions we've seen and also inflation given conversion costs associated with upstream suppliers in particular. So I was hoping you could double-click on the drivers of the improvement that you're seeing there and also how much recovery is still left to go. Thanks."}, {"role": "assistant", "content": "Yeah, so, Max, I'll start, and again, Amit can add. I'd say the easy answer -- the short answer to that question is supply constraints, bottlenecks, shortages are improving almost everywhere. And so everything from the driver shortages that we talked about, the ocean freight shortages, containers being in the wrong place at the wrong time, all these things that -- only a year-ago the entire industry was struggling with have become much more normalized. We still have the odd shortages, inventory not being in the right place from some of our suppliers, but I mean literally every day it's getting better."}, {"role": "assistant", "content": "We talked I know a couple of times on these calls about a control tower approach that we took and things that were elevated to the top of the control tower, if you like, it took manual interventions to get done. Those are down dramatically. So the type of automation and the type of supply chain that we had before the pandemic is much closer to being real today than it was. We're not back to just-in-time inventories, we're not back to where we were. I don't think anybody is, but we're much closer and the outlook going forward continues to be one definitely much more of optimism than what we saw up to this point. In the second half of the year we see continued improvement."}, {"role": "user", "content": "The only thing I'd add is, we are seeing that flow through into the P&L and I think that was one of the drivers of the improved margin performance in quarter one and certainly the reason why we have confidence in raising our guidance for gross margin."}, {"role": "user", "content": "Well, great to hear. Thanks very much."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question today comes from the line of Rob Dickerson from Jefferies. Please go ahead, your line is now open."}, {"role": "user", "content": "Great, thanks so much. Maybe just a quick question for you, Amit. Just around your -- I guess around Steve's comments about kind of the potentially very attractive momentum, the two separate businesses. Remember at CAGNY, you kind of [Indecipherable] incremental detail [Indecipherable] TSA agreement. So excuse my ignorance here, if everybody already knows this, but I just kind of looking for kind of maybe a clarification how the TSA agreement actually works because my sense is kind of what I feel is the -- there's actually a payment for the snacks co that provides you time to offset the dis-synergies. Does that makes sense. Maybe if you could just kind of clarify how that works. That's all I have. Thanks."}, {"role": "user", "content": "Yeah, so we're making good progress on the TSAs or the transitionary service agreements across a number of areas and we're putting those into place. I mean, these TSAs cover areas like IT services, global shared services, transportation, logistics. So those would be the bulk of the transitionary service agreements. They are varying in nature in from a timing standpoint but could extend up to two years. And obviously that provides a stability business continuity, as well as helps offset dis-synergies and gives both organizations time to address and put in place the right long-term structures appropriate for their businesses. So that's kind of where we are."}, {"role": "user", "content": "All right. Super. That's all. Thank you."}, {"role": "assistant", "content": "Operator, we have time for one quick last question."}]}, {"messages": [{"role": "system", "content": "Perfect. Thank you. The next question today comes from the line of Michael Lavery from Piper Sandler. Please go ahead, your line is now open."}, {"role": "user", "content": "Thank you and good morning. Just was wondering if you could elaborate -- good morning. I was wondering if you could elaborate a little more on the restoration of marketing spending. And specifically maybe if you're thinking of that in dollar terms or as a percent of sales, obviously with pricing-driven sales growth on a unit basis, the spend goes a little further, if you do it as a percent of sales, just curious where you land there and how to think about how that all evolves."}, {"role": "user", "content": "Yeah, so we are pleased with the overall level of spending. And we'd expect it to be up, overall SG&A to be up similar to what it was up last year, low-single digit rates. I think within the year obviously there's a lot of phasing. If you recall, last year we had pulled back in the first quarter and then even in the second quarter as we were restoring supply on the US cereal business. This year obviously we've got a full commercial plan. And so I think in the quarter, we were up double-digit against a low base. I think you'll see that reverse out in the rest of the year. But overall, when you kind of look at it and if you put aside the noise of the lap of the fire and the strike, we'd be very pleased with the levels of investment. As Steve mentioned, we are investing across the world, both in our brands as well as in innovation and we are pleased with the levels of spend that we have."}, {"role": "user", "content": "Okay, great, thanks so much."}, {"role": "assistant", "content": "Well then, thank you, operator, we are at 10:30. So, if you don't mind, we'd have to close it out right now. But if anyone has any follow-up calls, please do not hesitate to call us."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]."}]}, {"messages": [{"role": "system", "content": "We'll take our first question from Jon Block with Stifel. Please go-ahead."}, {"role": "user", "content": "Thanks guys. I appreciate it. Good morning. I'll ask both upfront I think importantly is the channel now normalized in the US, Kristin, and then some rough crude math, but if you were down 7%, US Companion Animal sales out were up 8% total like a 1500 basis point delta. And I sort of land at over $100 million in sales if you quantify that. So, can you guys bridge how you get there. I guess there is the $25 to $30 million of parasiticide last quarter. Are the [Indecipherable] is working down inventory by a week, whatever you can do to bridge that would be helpful. And then a quick one, an easier one, Librela, I think you said approval still expected [Indecipherable], is that the full launch call it before the end of the year and then again, Kristin, how do you feel on your ability to serve demand, we believe there's a lot of Solensia users that are chomping at the bit to get added. So do you expect US Librela supply to be an issue at all, call it [Indecipherable]. Thanks guys."}, {"role": "user", "content": "Sure, Jon. I'll start with your second question, it's pretty straightforward. Yes, we continue to expect approval of Librela in the first half with a launch in the second half. The timing of exactly that a full launch we would obviously, we've always said, do early experience first and then go to full launch. The full launch could be very late in the year, but as we continue to and I'll reiterate again the Librela is not in our numbers for the year, we do not include in our numbers for the year, a product that is expected to launch very late in the year for obvious reasons. So we would do early experience as we've always done with a full launch, and if we did a full launch very late in the year based on what we're saying and no we do not anticipate any supply challenges on a full launch in 2024, whether it's late this year or early 2024, we don't see any challenges there. On your second question on distributor, I think we'll spend a bunch of time on that today. Obviously, there's a lot of complexity in that one, but again, it is in-line with what we expected and we really don't think the trend you see in the quarter it's going to continue. Let me - let me get into all the details because I know this is probably the biggest question we've been hearing earlier this morning. So Wetteny is going to go through some of the details."}, {"role": "user", "content": "Sure, Jon, the start of your question was, are we at normalized levels so I start there first and yes we're at normalized levels here sitting here in the second quarter and then we just step back and give you a little bit more details here as Kristin said, we came into the year and as you may recall on the last call, we described how we saw increased buying in the fourth quarter, driven by promotions that we ran on parasiticides, given we have recovery of supply late in the year as we got through some of our supply constraints and there was more pre-price by and given the level of price increases were coming into 2023 with in the fourth quarter above what I would call normal levels [Indecipherable]. So we expected to see destocking in the quarter, which is why we said that the first quarter will be below the low end of the range of growth that we have for the year at 6% to 8%, so we've seen destocking in the first quarter down to I would say the low end of our normal range that we've experienced historically and as we step into - and by the way given rising interest rates that is not unexpected and then as we got into April we saw slightly more destocking as we started the quarter, but those have normalized and have been reflected in the guidance that we just reiterated today."}, {"role": "user", "content": "And so we're not - we're not anticipating a return back to normal levels in terms of inventories or our assumption in our guidance is that you will stay about where they are now. Now, to be clear, if you look at the end market demand dynamics they remain very strong. As we said in our earnings release sales out of distributors into clinics were up 8% on a volume basis in the quarter and if you look at retail sales out to pet owners were up 35% on the quarter. We've seen for the first time in about a year vet visits increased by 2% and if you look at derm patients for example visits increased in the quarter versus a year ago. And so again, we've seen normalization since then, by the way in International markets where we didn't see - we haven't seen and don't expect to see the level of destocking that we've seen in the US, you saw 10% operational growth in our International markets across livestock and Companion Animal. And so again, we don't assume a return to those levels and these are factored into our guidance and we're contemplated when we gave the initial guidance back in February."}]}, {"messages": [{"role": "system", "content": "And we will take our next question from Erin Wright with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Great, thanks. Two questions, one on livestock, one on Companion. So on the livestock side, was there a stocking benefit across livestock in this segment in the quarter can you quantify that for us and how much is the strength the US livestock should continue in the coming quarters given that you expect flat for the year end and you touched on derm a little bit on the Companion Animal side, but you mentioned Apoquel declined with no competitors in that segment and your direct distribution strategy what drove the decline and does that volatility that you're seeing across that retail channel for this product change how you think about leveraging that alternative channel and are you proactively shifting customers to Cytopoint ahead of competition? Thanks."}, {"role": "user", "content": "Sure, thanks, Erin. Again, livestock did grow 12% as you mentioned, which was in-line with what we expected, but the growth really was driven by resupply or increased supply of a lot of key products. As we reiterated in our prepared remarks, we continue to expect a flattish growth for livestock for the year. If you look at it, we saw, if you look at the US business we think you'll see it's really more of a one time sort of getting back into supply and some of this is it slightly up or slightly down. I think a lot of that is genuinely going to depend on China. With this return to travel and dining out in China will drive growth in a number of our markets around the world, in our export markets such as Brazil or Australia or even the US, so we continue to expect and built into our guidance for the year is to have a flat - flattish livestock number which obviously gets back to Wetteny's point which is we are expecting very strong double-digit growth in Companion Animal."}, {"role": "user", "content": "As you look at derm for the quarter, what it did decline, but this is largely due to the destocking of the pre-price buy-ins and promotions in the US and as Wetteny mentioned in his remarks, the one-time issue in Japan back to Q1 of 2022, in fact if you pull that out, International had double digit growth if you take out Japan. So again, this performance was in-line with our expectations, but really importantly, it is not indicative of our view or expectations for the year. We continue to expect double-digit growth for the rest of the year and for the overall year for dermatology, our sales out remain really strong, we're seeing a lot of uptake right now in Cytopoint, more and more pet owners are really seeing the compliance benefits of it, the efficacy of it, and [Indecipherable] it obviously stays in the clinic. As we continue to see the shift here, it was compliant, I think again will underscore our growth there. And the other thing I mentioned - that Wetteny mentioned is derm visits continue to grow in Q1 and we're not really seeing any pushback from customers on the price increases that we did do. So we continue to expect strong growth for derm for the year, for our last guidance double digit growth for derm."}, {"role": "user", "content": "Yeah. I would just add, the first quarter is not indicative of the year here, Erin, similar to the overall results and so to your point around retail channels, etcetera, we don't see us changing there. I think the fact that Cytopoint we expect to continue to lead the growth for key derm franchise, we will change the mix between those two, but but not changing the overall picture, and our expectations for derm remained the same for the rest of the year and we're off to actually a strong start in the second quarter for derm, both in the US and Internationally."}]}, {"messages": [{"role": "system", "content": "We will take our next question from Michael Ryskin with Bank of America. Please go ahead."}, {"role": "user", "content": "Great. Thanks, sir. Thanks for taking the question guys. First, I wanted to ask about the topline progression through the rest of the year, I think you pointed [Indecipherable] previously and you talked about just now Wetteny on what you saw distributors to start the second quarter, but any additional color you could give us a sort of we go through the rest of the year given there is a relatively steep ramp implied in numbers right now, just to hit your $8.65 billion and 68% operational growth. So just talk about the step-up in 1Q to 2Q versus 2Q to 3Q, 4Q and then as a follow-on for that, Kristin touched on Librela earlier, but I was wondering if you guys comment on the other product launch expected this year, the competitor to Simparica Trio. We haven't seen that yet. Obviously, can come any day, but just curious what you're hearing on that and if your thoughts on what's going on parasiticide market have changed regarding for that in terms of with some of your competitors are doing with stocking, with some of your competitors are doing with promotions of some of their products and sort of how that's impacting your view on power up through the rest of the year? Thanks."}, {"role": "user", "content": "Hey Mike. I'll start with progression for type - topline for the year and then I'll turn it over to Kristin, she will cover Librela launch and [Indecipherable] competition. So with respect to progression for the balance of the year, we expect normalized growth across the year starting with the second quarter which obviously we're already about halfway into the second quarter and as I mentioned just a little bit ago, we've got a strong start, particularly in derm, but across the board. So, what I'll call more normalized mix and normalized cadence for the balance of the year. One thing I would say is with - with respect to Q2 and that's normalized operational growth rate I am referring to. If you take a look at FX, for example, that was about three points of headwind in the first quarter based on where rates are right now. I would expect about two points of headwind on the second quarter. So when you map out operational growth to two reported growth, you should take that into consideration that - that turns around in the second half again based on where rates are now. And it ends up being slightly unfavorable in the year, year-on-year-on FX on the topline and slightly favorable at the bottom line. So that's how I would sort of think through the progression, but again starting with the second quarter you should expect normalized growth to get to the guidance that we just reiterated at 6% to 8%."}, {"role": "user", "content": "Sure and let me pick up your second question, which was the other product. We are continuing to expect competition in the second half of the year for Simparica Trio but I want to underscore that as you look at the first quarter, we actually gained share. So as we said, there's very strong underlying demand for Simparica Trio in the US and even with competition coming, if you look at our performance, it was in-line with our expectations. Again, we said it's not indicative of the year and we continue to expect strong growth for the remainder of the year even with competition in the second half. So we had been expecting this competition, the good news is that later than - than we did expect. As we think about it, we talked about this before, we're not expecting them to radically change any pricing if they would really I think given they are the leader right now with Heartgard NexGard they would really cannibalize their own business and I think it is important to keep in mind even if you look at the quarter, they ran very strong promotions ahead of their launch and even with those promotions we gained share in that quarter. So we remain very confident in the strength of Simparica Trio in the strength of our relationships with that, in the pet owner satisfaction of it, we do expect competition we - we think though bring a product as I said in the second half of the year, but we remain confident of strong growth for Simparica Trio as we said before for the year."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Nathan Rich with Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Great, thanks for the questions. Sorry to keep honing in on the destocking dynamics, but could you maybe just talk about how the first quarter US Companion Animal sales kind of played out month by month. It seems like January and February price saw the bulk of the impact from the pre-buying and pull-forward into the fourth quarter, it sounded like the destocking might have occurred a little bit later in the quarter. I think this is people are looking to get better visibility on the improvement in the second quarter. Could you maybe just comment on how March or April played out. Just as we think about kind of where the business is heading into the second quarter."}, {"role": "user", "content": "So look, I'll be happy to answer the question to the destocking. We saw destocking from the start of the quarter, just as we anticipated and as we discussed on the prior call, given the dynamics coming out of Q4, as we mentioned to in the last call, the timing of our supply recovery in terms of last year would have had an impact on the cadence on the year, which we are just playing out exactly as we thought. I'll give you a little bit more color perhaps that might be helpful, if you think about what the end market demand looks like. When we look at our sales out of distribution to clinics, we said it's 8% volume growth on the quarter. If you look at how those played out for March, the end of the quarter, they actually above that number. So we haven't seen anything towards the end markets are that would indicate a slowdown and as I said we've had a strong start to the second quarter and we're sitting in the middle of the second quarter and are saying that we would see normalized growth starting in this current quarter for the balance of the year."}, {"role": "user", "content": "I think I want to also reiterate what Wetteny said earlier which is they are at very low levels, the lower end of the ranges, but our guidance expects that they do not go back up. We believe that given the current interest rate environment, our expectation is that they will stay at this level. So again, our confidence in the guidance we're providing is assuming that they're not going back up, they will stay at the levels that they're at now."}]}, {"messages": [{"role": "system", "content": "And we will go next to Louise Chen with Cantor. Please go ahead."}, {"role": "user", "content": "Hi, thanks for taking my questions here. So wanted to ask you on your upcoming investor event what will you discuss here, what are some of the key things that you're going to be going over, it's been a while since you've had an investor event. And will you be disclosing more additional pipeline products longer time guidance anything from that front, and then I also wanted to ask you on your diagnostics business, what's the outlook for the remainder of the year on that business? Thank you."}, {"role": "user", "content": "Sure, we are excited for our Investor Day. We spent time talking to a lot of our investors over the last six months as to what they're looking about, our focus there will be really on building confidence in our medium to long term growth expectations. We've gotten a lot of questions obviously on our pipeline in R&D, so you'll see us, as we mentioned in our press release, Robert Polzer, our Head of R&D will be coming to give more detail on our R&D portfolio and we also look forward to introducing you to other members of our leadership team. So you get to meet them as well. We're excited to share - to share what we view as the short, medium and long term growth aspirations and give you some confidence in more detail around all of those. So, Wetteny, do you want to take her second question on diagnostics."}, {"role": "user", "content": "Yeah, happy to Kristin. So look, on diagnostics, we have seen increased productivity from our diagnostics team, particularly as you look at the US, where we made the change about a year ago into the second quarter. In this first quarter, we actually saw very strong placements across our instruments, including images as well, those will help drive growth from a consumables perspective as we look at the rest of the year, consistent with our guidance, we said we would expect to see improvements in terms of that. So productivity given the near field force and the change out that we did last year and we would expect to see return to growth in the US in the back half of this year and again we're lapping those changes that we made, which we believe - firmly believe are going to drive long term growth for the business in addition to innovation that we continue to work on in terms of diagnostics."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from David Westenberg with Piper Sandler. Please go ahead."}, {"role": "user", "content": "Hi, thank you for taking the question. So just to add on the Simparica Trio franchise and certainly distributor dynamic here, I usually think about the the parasiticide portfolio is being heavy in March to August season as we take a step-back or take a zoom outlook, do you think any other dynamics that have happened with some of the distributor destocking is going to be a net negative for the annual sales of the product. Put another way, do you think maybe this impact the timing of missing the flea and tick season in any of this kind of dynamic and then just to reiterate on the inventory question on the livestock portfolio. It doesn't have the same dynamics, right. So I mean like the price increases in and livestock were not the same as the price increases in companion, therefore you wouldn't see some of that same distributor dynamic and then if I could squeeze just one more, just I didn't see the inventory or the balance sheet yet, so just wanted to see if inventory levels trended up or down. Thank you, sorry for that one."}, {"role": "user", "content": "Sure, let me start with Trio and then I'll let Wetteny take the other two. I want to underscore, we said earlier, we have very strong demand in sales out and so what you saw in Trio in the first quarter was a stocking issue, but as we look at the demand for the product and where it's going, it has no effect on the flea and tick season, did we need it, we have full supply in. I think what makes it a little complicated and as unusual was the supply issues we had in Q3 - Q2 and Q3 of 2022 put us putting a lot more inventory into the channel at the end of Q4, trying to restock shelves against what we thought as you remember was going to be a launch in Q1 of a competitor. So I think there's obviously some quarter-to-quarter stocking dynamics, but I want to underscore demand for this product remains strong. We gained share in the quarter. We are now at normal inventory levels. So no, we do not see anything if you look at the Q2 to Q3 of the product in which we would agree, that is normally Q2 to Q3 is the strongest sales normally in parasiticides. So we continue to see very strong demand for the product. Obviously, there are some quarter-to-quarter stocking stuff that is relatively unique have you looked at the end of 2022 and the beginning of 2023, but we don't think that actually signals through anything in the demand for the product or importantly the strong growth we see for the product for the year, even as we said, assuming competition in the second half."}, {"role": "user", "content": "Yeah, look. I think there were a couple of other parts for your question, I'll touch on in terms of livestock, we're not seeing the same dynamics in livestock look. I think if you look at where we ended last year maybe we're in the middle of the range towards the bottom of the range might have been slightly increase in the quarter given the recovery of some supply for certain products as we mentioned in our prepared commentary. But overall, not any meaningful movement there to speak of and then with respect to our balance sheet on inventory, as you know we are ramping-up certain products, anticipating launch and approvals in other products that will continue to drive inventories up for us. If you look at operating cash flows on the quarter, they are actually favorable to last year because as inventories continue to increase we saw really strong performance on receivables and other entity. So, overall, operating cash flows look favorable versus a year ago."}]}, {"messages": [{"role": "system", "content": "And we will take our next question from Balaji Prasad with Barclays. Please go ahead."}, {"role": "user", "content": "All right. Good morning, everyone. Thanks for the questions. Couple from me. Firstly, could you give an update on the supply chain issues which impacted growth in 2022 a bit on the vaccine side or Trio [Indecipherable]. And would you foresee anticipate any supply chain issue impacting any of your key products this year. Secondly. I wasn't sure, I got the derm declined fully, this is not a distributor dependent segment, can you provide some numbers around the derm segment and help us understand what led to the decline? Thanks."}, {"role": "user", "content": "Sure, I'll start with your first question on supply chain and maybe Wetteny can build-on my derm answer from before. With regards to supply chain as we expected we have completely normalized the supply chain, we always have some small level of challenges as we mentioned before in the biologics, but the challenges we saw in 2022 have been resolved as we indicated they would be were back into normal supply on these products as you look at whether that's parasiticides or importantly on monoclonal antibodies as expected those are at normalized levels. We'll have some small number at buyers as we always have that all of our competitors generally have but supply chain has been normalized and we don't foresee any specific supply chain challenges in 2023 going-forward. But maybe Wetteny, you can build up my previous comments on derm and see if you can clarify some of these questions."}, {"role": "user", "content": "Yeah, I'd be happy to solve the derm story similar in terms of destocking from pre-priced buy-ins that we saw in the US into retail in Q4 as well as a year ago if you look at Japan, and if you look at our reporting last year in Q1, you would have seen a significant growth rate for Japan in the first quarter driven by those pre-price buy-outs in Apoquel. I think you saw that go the other way in the second quarter. So if you were to know, I would say pro forma, the results for the first quarter taking into account what I've just said, you will see double digit growth for the derm franchise in both the US and International."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Chris Schott with JP Morgan. Please go ahead."}, {"role": "user", "content": "Hi, this is a Katarina on for Chris. Thank you so much for taking our questions. So first on price increases, any feedback from the price increases in the beginning of the year. Are you seeing any pushback from veterinarians and pet owners and any initial thoughts of how you'll be approaching price increases in 2024; and then the second question is on diagnostics, any thoughts on the proposed Mars Heska acquisition and the impact that will have on the diagnostics market, does it change orders to plans on diagnostics or the investments you're making in that market? Thank you so much."}, {"role": "user", "content": "Sure, thanks Katarina. I'll take your second question first and I'll let Wetteny take your first question on the pricing. I really think the Mars acquisition of Heska confirms that the veterinary diagnostics market continues to be incredibly attractive investment area. Most importantly, it reinforces our strategy we think the sound [Indecipherable] around in the US specifically, building our reference lab network and continuing to invest in innovation importantly in our point of care. We've had a robust start to 2023, as we look at our images, our virtual lab, our reference lab offering, we really believe it's resonating with customers and really our focus is on leading with cutting-edge medicine, really rolling out our virtual average we really think is a differentiator, and we think that's what differentiates Zoetis overall is innovation in the space, innovation around point of care, innovation in customer experience and innovation in the reference lab. So no, we really see that acquisition is reconfirming our strategy and really we're going to accelerate our growth-focused on innovative diagnostics. So Wetteny do you want to take our second group of questions around pricing?"}, {"role": "user", "content": "Yes, sure, look, we have not seen any pressure in terms of end-market demand given our price increases, we took 5% price on the quarter that's up versus 3% last year. If you look at the end-market dynamics that we described earlier, you're seeing significant growth out from distributors to clinics, but also importantly you see significant growth from retail into pet owners and we continue to see increase patient visits for example in derm, etcetera. So we have not seen any resistance there in terms of price increase and by the way if you look at International, we grew 10% in Companion Animal in the quarter given our price increases as well despite some pre-price buy-in which is normal in the fourth quarter. So we haven't seen any signs of that. If you look at livestock that actually offset - some of the marginally offset, some of the price increases we would have seen in Companion Animal, we tend to see some impact on Draxxin but not meaningful at the - not at the level that we've seen previously as we previously said and actually we saw some volume offset to that positive - positively offsetting some of the price on the Draxxin side. So all told, good shape in terms of what we're seeing in terms of market reaction to our prices, and I think terms of what it means to 2024 too early, too early to tell. We won't - we won't go into that yet."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Brandon Vazquez with William Blair. Please go ahead."}, {"role": "user", "content": "Good morning, thanks for taking the question. The first one is just on guidance, you said last year is pretty strong despite kind of inventory levels creating a little bit of noise here, but if you kind of read-through that you're looking at, I don't like high single digits, maybe even double digits operational growth to start the year, reiterated guide for 6% to 8% operational growth. So the question being basically what would get you to that low end of that operational growth range given the strength you're already seeing in the year, if you kind of read-through the noise?"}, {"role": "user", "content": "Look, if you look at the end-market dynamics that we see, we see strength there, so I think that supports certainly the mid to high end of our guidance I would say. If you look at the what it means for the rest of the year and I'll reiterate this point which is we're already halfway through the second quarter and again we're seeing strong start to the quarter end and we'll see that normalized growth rate, including mix, by the way for the balance of the year and keep in mind, right our guidance didn't change including what we expect from livestock for the balance of the year where we went from seeing livestock could be minus one to plus one we're seeing it flattish, basically the same thing. So, how Q1 has played out exactly as we thought essentially, and therefore, the rest of the year is the same and so no point in our guidance range is any, I would say more power than - than the other we feel - we feel great about where we are on the year and how it's starting outflows in the second quarter in particular despite what you describe as the noise in terms of the inventory levels."}]}, {"messages": [{"role": "system", "content": "We'll go next to Steve Scala with Cowen. Please go ahead."}, {"role": "user", "content": "Thank you. A couple of questions. First, the new manufacturing facility in Georgia is the investment based predominantly on increased forecast for current products were positive late stage R&D progress for which we at least on the outside currently don't have visibility or is it some combination and in the prepared remarks, you referred to disruptive novel innovation in the pipeline, should we expect to get a window on that on during the May meeting and can you tell us if this is likely mainly directed at currently untreated diseases, more species, wider claims with an existing species, improved dosing or something else? Thank you."}, {"role": "user", "content": "Sure, the new manufacturing facility in [Indecipherable] outside of Atlanta, Georgia will be both to support current products and the growth in our current products as well as we'll target launching on some of our new monoclonal antibodies out of that facility as well. It's a very - it's a large facility. It gives us tons of flexibility which is what we found really exciting about the opportunity to be able to use it for lots of different things and really build a strong center in the south with a great labor market, really good access to workforce that we think makes a lot of sense. So we actually we see it, the facility's ability to do both and that is currently the intention. As I mentioned in my prepared remarks, we would expect it to be fully operational by 2026 and doing both at that point. With regards to Investor Day, we will be looking at the whole portfolio, will give you more details which we've been at or around the pain opportunity and what we're expecting there. We'll also talk about some of the new disease areas we've talked - we've mentioned before, will give you a sense of what we think those markets could look like. Lot of those markets are new markets that will help you size that market. We'll talk a lot about what our pipeline looks like and what we're doing. So we will give you information, both on species basis and importantly on sort of key technologies as we talked about our monoclonal areas, monoclonal antibodies and then also lastly, talk about some of these emerging big new markets that we think we can attack with some of our new novel technologies."}]}, {"messages": [{"role": "system", "content": "And there are no further questions at this time. I will turn the program back to Kristin Peck for closing remarks."}, {"role": "user", "content": "Thank you. So look just to summarize, we really see a very positive and sustainable demand for our products based on what we've talked about for a long-time, which is fundamental drivers of animal health. We are confident that Zoetis has the industry's most diverse and durable global portfolio and this is really fast on innovative science, as we talked about and supported by a high-quality supply-chain, will remain focused this year and going-forward on our five key growth catalysts, dermatology, pet parasiticides, pain diagnostics and emerging markets, and we're going to continue invest in the talent, the pipeline and the capabilities that support this future growth, while ensuring that we can adapt to the dynamic environment that we all operate in and we really look-forward to sharing more about this with you our vision, our pipeline, our strategies for growth at our Investor Day on May 25th, and there you'll hear more from me, Wetteny, our head of R&D Rob Polzer about the confidence we have in the animal health industry, and importantly our ability to grow faster than that market and the investments that we're making to create that value for our shareholders. So, we announced the event this week and I hope you can all join us virtually or [Indecipherable] change. As always, you can find more details about our Investor Relations information on our website. So thanks so much for joining us today."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Today's first question comes from Nate Crossett with BNP Paribas. Please go ahead."}, {"role": "user", "content": "Good afternoon. Thanks for the comments. I was wondering if you could talk about just deal flow U.S. versus Europe. What was the amount of deals you looked at in the quarter? I think that's a number you usually give. And then on cap rates, last year, the spread of like the cap rates in the U.S. and Europe was pretty low. I think it was almost the same. But this quarter, you're up 60 basis points wider I just want to know if there's anything to note there."}, {"role": "assistant", "content": "Yes. Thank you for your questions, Nate. Good questions. Let's start with the sourcing numbers. For this quarter, we sourced about $16 billion worth of product, 25% of which was in the international markets. I would say that if you go back to when we started going into the international markets, the composition of international versus U.S. has been roughly around 30%, 70% in that ZIP code, plus/minus 5%. So this is pretty much within that particular range. What you might have noticed, however, is the amount of closing more recently, both in the fourth quarter of last year,and the first quarter of this year. The contribution from the international side has been a little bit lower than what you have traditionally seen. I would say that the international business has contributed about 35% of volume in terms of what we end up closing versus closer to 20%, 22% this particular quarter."}, {"role": "assistant", "content": "And the main reason for that is we saw a delay in adjustments on the cap rate side in the international markets vis-a-vis the U.S. markets. We started to see cap rate expansion in the U.S. towards the end of -- middle of third quarter, fourth quarter and obviously through the first quarter of this year. But we didn't quite have the same experience in the U.K. market and some of the other international markets, till, I would say, towards the end of the fourth quarter. And what was largely making potential sellers reconsider the market was not so much driven by actual trades taking place, but more idiosyncratic to their particular needs. Around redemption issues or refinancings that were coming near term."}, {"role": "assistant", "content": "And that's largely what's driven these opportunistic transactions that we've gotten over the finish line in the fourth quarter of last year and the first quarter of last -- this year. And that's what's resulted in cap rates being substantially higher than what I would call the norm or what we are seeing in the everyday market in some of these international markets. So that explains the 60 basis point higher cap rate that we were able to achieve. And I might add, this is excellent product largely driven by idiosyncratic issues being experienced by buyers who wanted to get this off their books to meet some of the things that I've just discussed. So that's the dynamic we've seen that."}, {"role": "user", "content": "Okay. That's helpful. And then maybe just one quick one on development yields. Those are notably below the acquisition yields. Are those just on commitments before rates moved? Or maybe you can describe what's happening there?"}, {"role": "assistant", "content": "Yes. And Nate, you've hit the nail on the head. It's exactly that. As you know, development obligations have a much longer lead time. So a lot of what you see in -- you saw in the fourth quarter, third quarter of last year and the first quarter of this year, though it's starting to move up. It hasn't moved quite as quickly, largely because what you're seeing filtered through the investment numbers, but transactions that we had struck, I would say, three quarters ago or four quarters ago. But you should expect to see the yield on development creep closer to what we are actually experiencing in the traditional acquisitions market over the next couple of quarters. So it's just a timing issue."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Brad Heffern with RBC Capital Markets. Please go ahead."}, {"role": "user", "content": "Yes. Thank you. Christie, I was wondering if you could talk through some of the puts and takes on guidance and why only the $0.01 increase at the low end given the increase in the acquisition guidance and the expense categories moving in the right direction."}, {"role": "user", "content": "Absolutely, Brad. I think first, in terms of what Sumit had discussed and the increase of our acquisitions guidance to over $6 billion, we remain conservative in that front and really looking towards the second half of the year, while things remain strong. As Sumit has discussed, we're really -- wait and see here as things unfold. I think the other thing, too, in terms of guidance that we've articulated, and I mentioned some of this in my prepared remarks, is really the headwinds that we're seeing from a debt perspective, although we've been very focused on ensuring that we're derisking our balance sheet, and you can see that in the transactions that we've executed through April."}, {"role": "user", "content": "We're really looking at where that may unfold in terms of the second half of the year and don't believe that, that will alleviate over and above the competitive cost of capital that we've been able to generate vis-a-vis last year. And I think finally, in terms of the positive trends that you saw in terms of the tightening of the guidance with G&A, we remain particularly disciplined during this macroeconomic backdrop, and are focused on managing our G&A. But further to that, it's the benefits of size and scale. And you can see that over the years in terms of the trends of G&A to revenues. And then finally, from an unreimbursed property expense margin perspective and the tightening there, we're just following in on the positive trends that we've been able to execute on."}, {"role": "user", "content": "Okay. Thanks for that. And then, Sumit, just thinking about this EG Group deal, are you seeing more of these very large sale-leaseback opportunities versus what you would normally see? And then has the competition for those deals also thinned out?"}, {"role": "assistant", "content": "No, no, Brad. I wouldn't go so far as to say it's timed out. In fact, the momentum has continued, and we expect that momentum to remain strong. I don't know how many billion-plus deals, but these large transactions will be what drives some of the near-term financing issues that a lot of companies are going to have to deal with. And with what we are seeing play out in the banking sector with fewer banks out there to provide capital, the cost of that capital being what it is, given the interest rate environment, I do believe that sale leaseback will continue to be a very attractive alternative to raise capital to help address financing needs at these companies. Keep in mind, EG had never done a sale leaseback. They had that option for many, many years. And they chose to go down this path largely to address some of the leverage concerns that they had on the balance sheet. And we expect that trend to continue, and that's the reason why that's the impetus behind why we felt we should increase our acquisition guidance by $1 billion."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question today comes from Josh Dennerlein with Bank of America. Please go ahead."}, {"role": "user", "content": "Yes. Everyone, thanks for the time. Just a follow-up on the EG Group deal. Just curious how that deal came together and maybe your ability to partner up further with them?"}, {"role": "assistant", "content": "Thanks for the question, Josh. So EG is obviously a very well-established name in the U.K. market. Neil and I had been calling on them for a while, along with TDR Capital, they're capital providers for a while. And this is a relationship where we knew they didn't have a high level of interest in necessarily going down the path of sale leaseback financing, when we first started to have conversations with them. But I think that, that relationship ultimately played out to our benefit when we were awarded the deal when they did choose to go down the path of sale lease back to help meet some of their capital needs shorter term. This was a competitive process. It was run by Eastdil. We went through. We were obviously in close contact with EG directly as well. And there were three finalists, and we felt like we were awarded the deal based on our reputation, surety of close and the fact that we had spent time developing a relationship with them. So that's what really got us the deal at the end. And our ability to be creative and there were certain asks that they had and our ability to meet those certain asks also, I believe, accrue to our favor. So I think all of those factors went towards us being awarded the transaction despite us not being the highest bidder."}, {"role": "user", "content": "Okay. And then maybe changing the topic a little bit. How do you guys think about expanding or growing your exposure to lower credit quality tenants as a way to kind of widen the aperture and maintain growth?"}, {"role": "assistant", "content": "Yes. Josh, that's a very good question. I'm actually going to go back to the EG Group conversation we just had. If you look at the actual portfolio, 80% of the portfolio is Cumberland Farms. And I just want to remind the group that three years ago, when Cumberland Farms was available for sale, they were all of the natural operators that we're very, very interested in this very well-run private company. And what was being bandied about as a potential sale leaseback. The pricing was in the low 5s, high four ZIP code. And it ended up being EG Group that won the transaction, and they obviously didn't want any sale-leaseback financing to effectuate the buyout. But that was the quality of the real estate, that Cumberland Farms was demanding at that particular time. Fast forward today, the 4-wall coverages on these assets have only improved and improved, I would say, dramatically. So the assets remain exactly the same assets, and we were able to accomplish this transaction at 6.9%. Yes, if you look at EG Group, the credit that's operating these assets, they are sub-investment grade. But if you look at the quality of the assets, it's exactly the same."}, {"role": "assistant", "content": "And we believe that EG Group is a very good operator of convenience store business. We can see that in the history that they have established in the U.K., and we certainly see it in the performance of these assets. When you compare it to where they were performing three years ago and was warranting a price in the low 5s, high 4s to where we were able to accomplish. So now you fast forward and you say, okay, you're getting 150, 160 basis points of additional spread on this real estate. Are you being paid for the credit risk inherent in the operator, and that's where the concept of risk-adjusted returns comes into play for us, and it is so front and center in everything we do. The answer for us was a resounding, yes. We are being compensated. And so for us, we've said this before that investment grade rating is a byproduct of the actual underwriting. It is not something that we seek out. It gets taken into consideration on the collectibility of the rent flow over the 20-year or 25-year leases that we underwrite to. But ultimately, we look at every transaction on a risk-adjusted basis. And if it makes sense, despite the fact that it may or may not have investment-grade rating is something that we are going to continue to pursue."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Michael Goldsmith of UBS. Please go ahead."}, {"role": "user", "content": "Good afternoon. Thanks a lot for taking my question. So you started the call by talking about continued momentum in the business. Can you just talk a little -- REITs tend to be lagging indicators. So can you kind of talk about the visibility that you have into the business and this continued momentum? Just trying to better understand how long of a path that you have where you feel very good about the spreads and the backdrop? Because it seems like it's been -- everything has been pretty solid in the last several quarters."}, {"role": "assistant", "content": "Yes. That's a great question, Michael. Things are moving so fast. Every other day, there's a bank in the news. News is super fast. And so how do we think about our business and why do I use phrases like continued momentum. Even though this may be a lagging indicator, we are looking at transactions -- these renewals every day. And when we are seeing the fact that we can still continue to generate 102%, 103% re-leasing spreads, yes, it's lagging, but literally weeks, months. And it gives me continued hope that, look, for our product, where we play in the market, et cetera, there continues to be a fair amount of demand. And it manifests itself in some of the positive re-leasing spreads that we share with the market. The second piece, which is much more of a forward-looking statement is what are the continued discussions that we are having that then helps drive our pipeline on the investment side."}, {"role": "assistant", "content": "What are the kinds of discussions that we are having? What's the size of the discussions that we're having, what's the yield associated with those discussions. I think all of that gives us confidence that there continues to be momentum. The fact that we were able to raise $3.1 billion within a period of three months, in the fixed income market, the fact that we were able to close on $800 million of equity and have $1.5 million of unsettled equity available -- $1 billion, sorry, of unsettled equity again, continues to give me confidence that even on our capital side, for us, we continue to sit in a very favorable position. So we have the opportunity. We have the ability to raise capital. We have the ability to make spreads north of what we have historically achieved. And now with the international markets starting to reflect a little bit more of a positive movement for us on the cap rate side. That's what gives me confidence to say that we have continued momentum in the business."}, {"role": "user", "content": "Thanks for that. My follow-up question is, it looks like you've opened up an office in Amsterdam. Can you talk a little bit about the advantage that you get from that? Should -- does that mean that we should expect more international deals? Or does this allow you to source deals better throughout Europe? And are there any tax benefits from having an office there? Thank you."}, {"role": "assistant", "content": "Yes. The reason why we needed to open an office in the Netherlands was largely driven by the structure that we have created to allow us the flexibility to continue to grow in the international markets. And by international markets, I primarily mean the U.K. and Western Europe. This was largely driven by a substance question around having or needing to have employees based in Amsterdam to be able to satisfy this tax structure that we've been able to create to give us this flexibility. So that's largely what's driven a couple of hires that we've made. But most of the other hires will continue to be in the U.K. and potentially in some of these other countries as we begin to reach a core size in terms of our portfolio. So -- yes, that's what really drove setting up an office in the Netherlands and hiring a few folks who can help us manage our international business."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Harsh Hemnani with Green Street. Please go ahead."}, {"role": "user", "content": "Thank you. So we've heard from some of your peers that perhaps cap rates in the U.S. are closer to topping out. Is that something during the second quarter that you're seeing too? And then the contrast that perhaps in the -- in Europe, you mentioned cap rates only started moving there in the fourth quarter or the first quarter of 2023. Do you still see more runway there and perhaps that being a tailwind for you relative to peers? And the spirit of this question is not to say that as European cap rates going to expand over the 76, I understand that those idiosyncratic deals might not happen every quarter, but is the trend that you're seeing in Europe upwards? And can that benefit your spread relative to peers?"}, {"role": "assistant", "content": "Yes. Thank you for your question, Harsh. I wouldn't go so far as to say that we see cap rates moving even more in the international markets than they have here in the U.S. I mean, just look at where our 10-year bonds are the price is literally one on top of the other. So they're on those advantages today that we had a year ago. So I don't expect that to be a disproportionate movement in one geography or the other. Could we see situations, however, unique situations that present themselves that is largely driven by -- you used the word idiosyncratic issues, yes. And that could garner additional cap rates. But as a market, on average, I don't see there being that much more of an advantage in one market over the other in terms of cap rates. And you're right, you said it correctly that the movement in cap rates was slower in Europe than it was here in the U.S., but I think they've largely caught up. Like some of our peers, it is fair to say that we have not seen continued expansion of cap rates vis-a-vis what we've experienced over the last, call it, 1.5 months, two months."}, {"role": "assistant", "content": "But that's not to say that cap rates could not continue to move. There's just a lot of uncertainty in the market today with banks as soon as we start to believe that the banking crisis is behind us, there's another name that pops up. And as you know, a lot of these regional banks were the lifeblood of providing financing to developers and to other local real estate operators. And so is it possible that those situations could again manifest itself in for sales, where we could be the beneficiary, which could then have an impact on cap rates. Yes, it's possible. That is why I hesitate to say that the movements in cap rates have played out and it's going to remain where it is today. But I think just like our peers, there has been a settling out, if you will, of cap rates that we have experienced, but I'm not sure if I subscribe to the fact that this game has played out."}, {"role": "user", "content": "All right. That's helpful color. And then you've mentioned in the past couple of calls where vacant asset sales that your income have been going up. Past couple of quarters, all asset sales were weak in. And you said this is kind of going to be the normal course of business, where if that's the best use for those assets and we have better uses for the capital to go out and buy something accretive? That's going to be what you will do. Can you give us a sense for what the buyer pool for these assets look like? Has that changed at all? -- the demand for these assets over the past couple of years and say versus pre-COVID?"}, {"role": "assistant", "content": "That's a tough question, Harsh. What we are experiencing is there is a price for any asset. And if you are willing to accept the price, I think you pretty much can sell an asset. All of what we have accomplished in the first quarter were vacant sales because that's all we really needed to address. And it was about a 6% unlevered IRR, which is lower than what we have traditionally experienced, largely driven by one or two assets that we just wanted to get rid of because we felt like the long-term prospects or even the short-term prospects for that matter, didn't justify us holding on to these assets. But if you look back, it's traditionally been in that high single-digit unlevered IRR. So it gets into the double-digit levered return profile. And that's what we've traditionally experienced."}, {"role": "assistant", "content": "And I think we should be able to go back to that. In terms of the profile of the buyers in this market, I would say most of the buyers that are interested in buying these assets are folks who want to operate out of these assets. They don't want to enter into a lease. They want to control the assets. These tend to be not institutional quality buyers, but local buyers that want to run a business out of that location and want to own the real estate to do so. That's the profile. Now in the past, we used to have, I would throw developers in the mix. And of course, developers keep sniffing around. But given that the debt markets are a little bit more challenging, there's a little less perhaps demand from that ilk of potential buyers. But I would say today, it's largely owner operators that are driving the sales process."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Greg McGinniss with Scotiabank. Please go ahead."}, {"role": "user", "content": "Good afternoon. So just touching on sale leaseback again. I have to imagine there's more operators newly considering sale-leaseback financing. Can you just talk about the types of tenants you're having first-time conversations with, who you might be targeting? I don't know if that's cold calls or through brokers or whatever have happens to be and how you go about finding operators that maybe didn't consider sale leasebacks in the past, but would be open to it now."}, {"role": "assistant", "content": "Yes, it's a slew of avenues through which we source and I think it will be very consistent across the board. Obviously, we believe -- we have a curated list of folks that we've been reaching out to speaking with one of which we've already talked about, EG Group, that we didn't have expectations of sale leaseback in the near term, but it just so happened that, that became very compelling to them as a capital source. There are similar names like that. I'm not going to obviously go into the details, as you can imagine, Greg. But this is something that we do here in the U.S. We do this very consistently when we travel to the U.K. and to Western Europe. There are obviously well identified folks who own a lot of real estate who are not in the real estate business, and those are the folks that we've sort of identified and tried to reach out through -- the other channels are the more traditional channels, brokers, investment bankers, colleagues who may have worked in certain places who have an in into those places. All of those are avenues that we exhaust to continue to source our transactions. And those continue to remain the avenues of our sourcing."}, {"role": "user", "content": "Okay. And then I guess just talking about source deal volume a bit here, kind of a multi-parter. So first, when you're talking about source deal volume, does that include the deals where sellers just have unrealistic cap rate expectations. Secondly, do you have some idea or some sense of the level of sellers that maybe are just waiting on the sidelines waiting for financial markets to settle out a bit. And third, how much of the deal volume in the past, do you think it was driven by cap rates trending down, which was enhancing exit IRRs that now is probably a thing of the past."}, {"role": "assistant", "content": "So Greg, to answer your first question, yes, even when the cap rate expectations are unreasonable. If somebody is reaching out to us and we've sourced it as a deal, but have no interest in following up, it does get included in our source volume. I would say that a lot of folks, a lot of potential sellers of real estate are sitting on the sidelines. They recognize that the buyer pool is definitely a lot more discerning when it comes to cap rates because they are having to work in the same environment where the cost of that capital is much higher today than it was six months ago. So rather than tainting their product, they're just holding back. And I think look, I can't prove this 100%. But if you look at our sourcing numbers, it's $16 billion, $17 billion, $18 billion. Those were the three numbers that we had the last three quarters. But it is slightly lower than the $25 billion, $26 billion that we were experiencing in the first two quarters of last year and quarters before that. So some of it is obviously getting played out in the sourcing numbers as well. It's still a very healthy sourcing number."}, {"role": "assistant", "content": "But I think as people wait longer and longer and this turmoil continues, I think we are going to start to see some of these sellers come in and say, look, I have an event, either it be re-leasing -- refinancing scenario or what have you, that's going to push them to say, okay, we are willing to accept the fact that we need a higher cap rate. We've had a few of those occasions where five months ago or four months ago, we had a grocery operator that came in and they wanted a particular cap rate, and we said that was too rich for us. And we said, okay, this is where we think we could have done that deal. This was about five months ago. They've come back to us today saying, \"Can you meet that? And we said, no, we can't. Our cost of capital has moved, but we could do this. And they are willing to transact at that higher level today. So I know this is one anecdotal evidence of how it's taking time, which is why there's always a lag, but it is starting to play itself out. And I do expect sourcing numbers to start to go out. The longer this turmoil on the lending side continues, which obviously creates wonderful opportunities for us."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Eric Wolfe of Citibank. Please go ahead."}, {"role": "user", "content": "Thanks. I wanted to follow up on what you just said a moment ago and also your comments around the new banks sort of being in the headlines every other day. Just curious whether anything that's happening right now with regional banks has already started to open up new opportunities for you. I'm specifically thinking about industries that rely on their credit. I think you mentioned some local developers. But just anything that relies on regional bank credit where you might see some opportunities today that were historically available to you?"}, {"role": "assistant", "content": "Yes. I think, Eric, on multiple fronts, it opens up opportunities for us. Obviously, sale-leaseback as a comparative tool to raise capital especially when compared against the debt products that's available today, it's very compelling. The cost of that capital raise is lower than what markets are able to satisfy. So I think from the traditional source, it's going to create opportunities. it's also going to create opportunities because you don't have as many lenders today who would have traditionally participated in -- on the secured side of the equation. And there are users of that capital stack that still need to either refinance their capital or just want to raise that in view of doing a sale leaseback. And because of fewer participants, I do think you can position yourself to play in that area because it's very akin to your traditional underwriting with obviously a few more nuances around how you think about debt instruments as an investment. But I think it's going to open up opportunities on that front as well. And a lot of these alternative capital asset managers and capital providers, et cetera, I think they are very well situated to take advantage of those situations as are we."}, {"role": "user", "content": "That's helpful. And then just a question on theaters. I know small percentage for you. But I'm just curious what you think needs to happen for there to be a more liquid market for assets. And maybe for Cineworld, specifically, once their balance sheet and leases presumably restructured, do you think there will be a market to sell those assets?"}, {"role": "assistant", "content": "I think so, Eric. Look, this is consistent with what I've been saying specifically around in a world we remain in discussions. So I'm not going to get into that. There was some news this morning, which I think is very positive for the Cineworld name, where they've actually put out a date when they're planning on emerging. They've been able to attract new capital. So I think all of that is quite positive. But what I have shared on our specific portfolio is around inbounds. There are certain locations that are absolutely in high demand for alternative uses. So in some ways, this is playing out of what is the highest and best use of some of these locations. And going through this process accelerates that ultimate outcome. And so we are -- look, we think we're going to be just fine. It is, like you said, a very small portion of our overall portfolio. To be very honest, I'm very hopeful that by the time we have our next quarterly call that this will all be behind us. And these opportunities that I've been referencing about basically repositioning some of these assets to an alternative use can start to play out, and we can actually start speaking to you about what those opportunities are. But we feel pretty good about the Cineworld situation."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Haendel St. Juste with Mizuho. Please go ahead."}, {"role": "user", "content": "This is Ravi Vaidya on the line for Haendel St. Juste. Last quarter, you commented that your watch list is about of 4% of total ABR. Just wondering what that is right now? And what other categories outside of the theaters are you monitoring or have a negative view on?"}, {"role": "assistant", "content": "Yes. Good question. Our watch list today is right around 4.4%. As you correctly pointed out, it is largely dominated by the theater industry. Some of the other areas that we are continuing to look at. And keep in mind that our watch list is not always a credit issue. It is just our view on the real estate, the location of that real estate and what the ultimate outcome is going to look like. So it's a combination of credit. It's a combination of real estate underwriting. But ultimately, the watch list is dictated by the long-term desirability of those locations and operators. So along with the theaters, I would say, restaurants are in the some of the more discretionary type concepts out there like home furnishing. There are very few day care centers and some of the other businesses that are not very well capitalized that you'll find there. But that's the mists of what you will find on the on the watch list."}, {"role": "user", "content": "That's helpful. One more here. One of your peers sold movie theaters at [7.8], regarding your -- would you consider selling theaters in that range? Or what other -- what are your conversations been like in terms of pricing and regarding the theaters, as you said it was such a large component of the watch list?"}, {"role": "assistant", "content": "Yes. That's actually a very good pricing. And I suspect that the person that bought it is probably a developer. And we've done our own analysis. And for us, we feel like the best way to create value would be to hold on to these assets and then especially the ones where we have a view that can be redeveloped et cetera, and capture that view once we have full control of that asset. We truly told there is so much discussion that we are having with Cineworld at this point that I don't want to get into the details, but that discussion needs to be behind us. And my understanding is that a lot of these assets that are now going to be put out there for sale, et cetera, have already had their rents renegotiated, everything has already been priced in. And those cap rates that are being shared are being shared off of those new adjusted rent numbers. And in our view, if we feel like, hey, let's just hold on to these assets, we'd much rather get these assets back and reposition it perhaps with some additional capital, but create much more value for our investors, then that's what we choose to do. And we haven't engaged in trying to go out and try to find the market we've had a lot of unsolicited calls. I can tell you that, but we really haven't engaged in trying to sell any of our theater assets. We want to resolve the Cineworld situation. And I think with the news today, I think that date is certainly getting closer before we start to figure out what the best economic outcome is."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question comes from Ronald Kamdem with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "A couple of quick ones. Just going back to the opening comments on the international portfolio at 11.7%. Just thinking about where could that number go? Obviously, there's different tax it so forth. But in your mind, how can that number trend in the next couple of years, obviously, opportunity driven."}, {"role": "assistant", "content": "Well, these last couple of quarters, they have still represented 20%, 25% of our transaction volume. So clearly, that 11% over time should continue to drift up. It was drifting up at a much higher clip when we were doing a lot more transactions. And I do expect for us to get back into that more normalized 30%, 35%, maybe even more if certain situations play out. So I'm hopeful to keep growing our pie. Look, we continue to look at new geographies, and especially at a time like this, new geographies that seemed a bit out of our reach are starting to become a little bit more within our reach and more compelling today. So as we keep adding new geographies, as we continue to enhance our relationships, et cetera, I see this number 11% continue to grow and be a bigger part of the overall portfolio."}, {"role": "user", "content": "Great. And then if I could just touch on sort of two verticals: one, consumer-centric medical to gaming, which I don't think has been mentioned before, but just a quick update on what the opportunity set is looking like? Has it slowed down with the events over the past couple of weeks and so forth? And how are you guys thinking about those?"}, {"role": "assistant", "content": "So gaming continues to be of tremendous interest to us, Ron. It's just hard to replicate what we got with the Boston asset. And we have an amazing partner in Craig at win, and we will continue to try to work on trying to find new transactions that I don't know if we'll ever be able to replicate the one in Boston, but of a similar type of a similar dominance in particular markets. So we are looking at transactions. We are looking at transactions every day. And the pricing expectations is perhaps something that we are still trying to work through. And if we can get to an understanding which works for parties involved, I think, and I hope we are able to grow that part of our business, but it's not a fait accompli. I mean it is -- the bar for us is higher. But the good news is there is a product out there that meets that bar. So we are very hopeful. With consumer-centric, we -- that's a business we love. We've been in that business."}, {"role": "assistant", "content": "We've just coined the phrase to sort of define an area of our portfolio that we've obviously been very interested in. And with the dental transaction that we did in the fourth quarter of last year, that helped accelerate that part of the business. Look -- and I don't want to get into the thesis again. I think we've shared that already for a variety of reasons, we like that business. And I think in some ways, this is a business that is getting defined right in front of our eyes, and we want to participate in the potential upside that I see on the real estate side. And so again, partnering with the right operators, forward-thinking operators who share a similar philosophy of delivery of healthcare, I think will, I hope, result in a slew of transactions for us on the consumer-centric side. So both those areas remain of high interest to us, Ron."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question comes from John Massocca with Ladenburg Thalmann. Please go ahead."}, {"role": "user", "content": "Good afternoon. Both on the our market here. So I just have one question. Obviously, there was a same-store decline in Cedars, which was kind of explained, but there was also a same-store decline in your QSR portfolio. I'm just kind of wondering what was driving that. Is that some of the credit issues certain franchise operators had earlier this year or something else that's kind of idiosyncratic?"}, {"role": "assistant", "content": "No, no. It's -- look, the overall same-store decline was largely a function of what Christie touched on to explain why our AFFO per share was flat. It was basically -- if you look at the reversals we took in the first quarter of versus the reversals that we took in 2023 first quarter. There was a net $9 million reversal that was very positive in the first quarter of 2022 that we didn't have we had to compare against in this quarter. And when you look at same-store calculation, obviously, that's what drove that very benign same-store growth number. Absent that, if you were looking at just the core portfolio, our growth would have been 1.5%. The specifics around QSR is more driven by a couple of concepts that are not doing very well. Boston market continues to be in the news. It's a very small portion of our overall allocation, I think, basis points at this point. But that is what drags the same-store sales numbers same-store growth numbers for that particular industry. So it's very specific to a couple of names. But overall, like I said, we were around at 1.5%, had it not been for these reversals in the first quarter of last year."}, {"role": "user", "content": "Okay. And maybe what's the overall view on kind of the franchise restaurant base that kind of rough turn of the year, but have things stabilized at all given kind of the continued strength of the consumer? Or just kind of when you talk to tenants when you look at new deals, what's the outlook there for that specific tenant industry?"}, {"role": "assistant", "content": "Yes. It's what you would expect, John, Casual dining is depending on the concepts, some concepts continue to post very good results. Like Outback, I saw the results not too long ago. They had positive same-store growth. I think [Indecipherable] has had a similar story. But then you look at other concepts, they're not doing as well. Thankfully, the two that I mentioned are our two largest exposures. But we do have some smaller concepts. And it's a smaller concept that if they don't have the balance sheet wherewithal to increase prices or pass through some of the costs, et cetera. they're going to struggle. And again, it's not -- none of this is a big part of our portfolio and all of which there are areas that we are focused on. It's already part of our watch list. But that's where I expect to see some level of disruption, but nothing new is expected based on what we see today."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question comes from Linda Tsai with Jefferies. Please go ahead."}, {"role": "user", "content": "Just a quick one. Just a broader question on the overall market. When you look at the amount of dry powder available on the sidelines to deploy towards net lease, which industries are you seeing the most demand?"}, {"role": "assistant", "content": "That's an interesting one, Linda. If we just look at it and I look back, I think it's convenience stores and grocery. Those are the industries that we we're able to do the most deals in and -- but that's a selective selection bias that we have. Those are the industries we like. And so I can't answer that across the board. But what I will tell you is, yes, you're right, there's a lot of capital, but that cost of capital is not uniform. That's one of our biggest advantages that we have a cost of capital that continues to be incredibly competitive and lower than almost everyone. So in some ways, we find ourselves in a very favorable position to take advantage of what we are seeing in the market. But we are very focused on areas of interest to us."}]}, {"messages": [{"role": "system", "content": "And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn it back over to the management team for any closing remarks."}, {"role": "assistant", "content": "Thank you all for your attendance today. We look forward to meeting with many of you at the upcoming NAREIT conference in June. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your first question comes from the line of Josh Waldman with Cleveland."}, {"role": "user", "content": "Good morning, guys. Thanks for all the detail and thanks for taking my questions. One for Shawn and then one for Patrick. Shawn, I wanted to start on the near-term organic growth guide and the implications for the quarterly cadence for the full year. Curious how the 3% local currency guide for Q2 compares to what you had previously penciled in for your full year assumptions? And then are there factors beyond destocking that have come into play since your last guide, they're leaving you more cautious on the second quarter?"}, {"role": "assistant", "content": "Yeah. Sure. Thanks, Josh. So, hey, I think as we mentioned in the prepared remarks, destocking is a factor in Q2. So, if you look at our 3% -- the decline that we expect in pipette, specifically in the second quarter, reduces our growth by about 2%. So, excluding that headwind, our growth would be 5%."}, {"role": "assistant", "content": "And I think another important thing to comment on for the second quarter is that I think it's important to look at the multiyear comparison. So, if we look back the last couple of years, our three-year CAGR with the 3% is about 13% growth. So that's a CAGR of 13%, and that's actually very similar to what we did in Q1 of this year with the 7% growth. So, again, to put that in perspective, that we grew on top of 10% last year, but that 10% growth was on top of 27% in the prior year. So, that very much is weighing on us as we think about the business."}, {"role": "assistant", "content": "And then maybe to just kind of like walk through our typical guidance by business area and region. I can kind of go through that kind of quickly. So, when we look at the Lab business, we're looking at low-single-digit growth in the second quarter. Keep in mind, of course, Lab is dealing with this headwind in the pipette business. So, that headwind for Q2 is probably estimated in the 4% kind of a range for the Lab business, so it would be high-single-digit, excluding that. And then for the full year, we're now looking at mid-single-digit for the Lab business, and that's down a little bit from what we were thinking before because this headwind was a little bit more than expected. When you look at the first quarter results of 7%, that includes about a 2.5% headwind from the decline in the pipette business."}, {"role": "assistant", "content": "Product inspection, we're looking at low-single -digit in the second quarter and then low- to mid-single-digit for the full year. One of the things we're seeing in PI is we actually had a very good start to the year in PI in the Americas, but we are seeing maybe some more challenges and caution in investment activity in packaged foods. And as you can appreciate, there's a lot of headlines in that regard for that industry."}, {"role": "assistant", "content": "For core industrial, low-single-digit for the second quarter and then mid-single-digit for the full year. That's on a full year basis a little bit better than what we were expecting. We're just very -- continue to be very impressed with the resilience of that business and how well we've been executing there."}, {"role": "assistant", "content": "And then Food Retailing, we're looking at mid-single-digit for Q2 and then high-single-digit for the full year, obviously got off to a better-than-expected start with very strong project activity."}, {"role": "assistant", "content": "And then for the regions, we're looking at low-single-digit for the Americas in Q2 and then low to mid-single-digit for the full year. That business is a little bit more disproportionately hit with this headwind in the decline in pipette. Europe, we're looking at low-single-digit for Q2 and then low- to mid-single-digit for the full year, a little bit better than what we were looking for the full year last time we spoke, given the very strong start to the year in Q1. And then for China, we're looking at mid-single-digit for Q2 and high-single-digit for the full year, which is consistent with what we were looking at the last time we spoke."}, {"role": "user", "content": "Got it. Appreciate all that, Shawn. And then Patrick, I appreciate the comments on China. I wondered if you could provide a bit more context on the cadence through the quarter, maybe what you're seeing by end-market and I guess, whether or not you guys are seeing the stimulus benefits show up in the order book yet?"}, {"role": "assistant", "content": "Good morning, Josh. Look, at the cadence in China, as you have seen, we started off strong in Q1 with 9% growth in China, so very solid results. And that, of course, was a quarter where, as you know, we had the COVID rate at the beginning of the quarter and yet our organization really executed extremely well and delivered strong results."}, {"role": "assistant", "content": "As Shawn mentioned, the plan of schedule right now for Q2, mid-single-digit growth for China. And that is, of course, also based on the fact that we have very strong compares for Q2 and then for the full year, we have China still at high-single-digit growth. So, that's kind of the outline in terms of growth."}, {"role": "assistant", "content": "Now what we are seeing there, again, we have seen very strong growth for the Lab business, specifically, for analytical instruments. The analytical business is performing really well for us and also benefits from the hot segments. Shawn made a comment on the Industrial business, the growth has moderated against really difficult comparisons. Again, a reminder, we grew almost 60% in Industry in Q1 '21 and over 20% in Q1 2022. So, those compares, of course, will also account for Q2 moving forward."}, {"role": "assistant", "content": "When we break it down, say, where does the growth come from, we still see a lot of interest in solid growth opportunities in the hot segments like the battery manufacturing, for example. It's really impressive how China is putting emphasis behind building out the industry beyond car. And I mentioned also the power grid and how they start producing large modules that it will place long power grids next to solar power plants etc., to take up excess energy and give it back at night, etc. So, I think there will be continued"}, {"role": "assistant", "content": "Investment. And that goes along with the overall investment that we see in automation solutions across Lab industry. China continues to look for productivity gains. They are facing an aging workforce and the fact that they will not have enough workforce moving forward. So, they're proactively really looking for automation and productivity solutions, where our portfolio plays really well. That's where, again, our overall confidence in the China business comes from."}, {"role": "assistant", "content": "We are extremely well-positioned with the team we have. And we are confident that the long-term trends that the government wants to follow up on them and drive growth and invest in a longer five-year China growth plan, whether it's the healthcare, whether it's stronger research and development in China, all plays very well into our portfolio."}, {"role": "user", "content": "Thanks for all the details, guys."}]}, {"messages": [{"role": "system", "content": "You next question comes from the line of Jack Meehan with Nephron Research."}, {"role": "user", "content": "Thank you. Good morning. I was wondering if you could update us on how much pricing contributed in the quarter? And how is your full year expectation for that changed at all?"}, {"role": "assistant", "content": "Yeah, thanks, Jack. So, pricing came in pretty much as we expected in the 6% kind of a range. We expected to get off to a good start this year given all the different actions that we took last year when we were kind of mitigating inflation. And as we look to the full year, we're still expecting about 4% growth for the full year. And as we look to Q2 specifically, we're looking at 4% growth."}, {"role": "assistant", "content": "And so, the reason why Q2 would be lower than Q1 is because of the timing of some of the actions we put in place last year."}, {"role": "user", "content": "Great. And either Shawn or Patrick, can you just elaborate a little bit more on the pipette destocking that you're seeing? Just to be clear, like, how much of this do you think is specifically related to COVID and just how much visibility do you have into improvement in the second half of the year?"}, {"role": "assistant", "content": "I can take it. Look, I mean, the destocking effects not only the testing, COVID testing related markets, to be honest. I mean, when there was this huge demand in the market last year, you should also appreciate that also the pharma, biopharma customers and others really loaded up inventory, because there was a shortage in the market, and I think the whole industry, when I try to say the whole industry, I see everybody who's using pipettes actually is suffering from the fact now that they still have quite some inventory that they're working down."}, {"role": "assistant", "content": "We do expect, as we said, this to be reduced in the second half. So we will get more back to normal volumes in the second half, but it will definitely be still a topic for Q2."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Dan Arias with Stifel."}, {"role": "user", "content": "Good morning, guys. Thanks for the questions. Shawn, maybe just following on Jack's question on pricing there. Can you kind of put a 1% volume year that's implied here with the guide in the context of prior years or prior periods where you had some macro or end market factors moving around. How often did you see flattish volume growth?"}, {"role": "user", "content": "And as we move through the year here, what about this year makes you think that that's most likely to be true?"}, {"role": "assistant", "content": "Well, I think what stands out this year, Dan, is we're just coming off of an unprecedented period of growth. I mean like the CAGRs that I mentioned before, 13% CAGR for the last three years is much higher than our -- how we envision ourselves for the longer term in terms of our algorithm. So, we've always expected to see some level of moderation at some point during this year."}, {"role": "assistant", "content": "It's hard to compare it to maybe a historical precedent, but of course, in 2020, we had a slower start to the year when it came to volumes during COVID and then that kind of like reversed in the second half of the year. So, I think we'll see how it plays out, but I think we have the comparisons, we've been kind of in a weak macro environment for quite some"}, {"role": "assistant", "content": "Time now, with PMIs below 50. It's hard to -- while we're -- while we've been resilient and executing very well, specific, particularly in our core industrial business, which has been historically more susceptible to the economy, we're also not resilient, right?"}, {"role": "assistant", "content": "And so, as headlines continue to come out, in our end markets, in particular, with some of the challenges that our end markets are facing, whether it be food manufacturing companies or chemical companies or other industries, like biopharma, we do have a little bit of that on our mind as well."}, {"role": "user", "content": "Yeah. Okay. And then maybe just as a follow-up, small and emerging biotech is obviously getting a ton of attention these days. What would you call your exposure there? And can you kind of just describe your sensitivity to spending by that portion of the customer base? And then anything you would add to the conversation, Shawn, on how that's likely to evolve this year? Thanks so much."}, {"role": "assistant", "content": "Yeah. I think our overall exposure to small biotech is relatively small. Of course, that affects a little bit of our rein in pipette business, but it's a -- it's generally a very small part of that business. So, nothing in particular that I would call out."}, {"role": "user", "content": "Operator, next question, please."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Patrick Donnelly with Citi."}, {"role": "user", "content": "Hey, guys. Thanks for taking the questions. I just wanted to follow-up on -- I think it was Jack's question there on the pipette side. Patrick, can you just talk about, I guess, the visibility into the normalization in the back half? Is it a comp dynamic? Is it customer conversations that give you some level of confidence on a normalization just given the chatter across the market about this sector."}, {"role": "user", "content": "I just want to make sure we have a good feel as to what gives you guys the confidence in terms of that second half ramp?"}, {"role": "assistant", "content": "Yeah. Look, I think, the truth is, it's part of -- it's both, right? We, of course, look at historical data, the growth rates and the volumes we have come from. But we also, of course, are in conversations with customers, and we have clear signals that Q2 will be another destocking quarter, and then they should get back more to normal inventory levels, put it that way."}, {"role": "assistant", "content": "And the overall volumes that we expect, again, will then get back to, if you would normalize the growth rate over the last three, four years, we would get back to that volume that we would expect for Q3 and Q4."}, {"role": "assistant", "content": "So, it's a mix of calculation saying, okay, what was the underlying market growth and what is our anticipated market share gains that we have. We have a very strong pipette and pipette tips portfolio, but even unique also -- the rainin business that has very strong market share, especially in the U.S. And if you take all these factors into account, then we basically look at a picture we say, yes, we will see more headwind again in Q2, but then in Q3 in Q4 getting back to normal growth rates again."}, {"role": "user", "content": "Okay. Understood. And Shawn, maybe one following up on the pricing piece. On the margin side, can you talk about the expectations for 2Q? Obviously, the earnings came in a little light of where the Street was. And then just that similar to that ramp in the second half, just the moving pieces on the margins would be helpful."}, {"role": "assistant", "content": "Yeah, sure. So, I think one of the things to kind of keep in mind is that if we're looking at our gross margin, we grew about 130 basis points, excluding currency. Actually, I think it was 140 basis points, excluding currency in the quarter. So, that wasn't that much different on a currency-neutral basis to what we were guiding. So, currency clearly had an impact. We also had a little bit of unfavorable mix in the quarter between the different businesses. Of course, pipette is a more profitable business and retail is kind of on the other side of that."}, {"role": "assistant", "content": "As we kind of like look towards the rest of the year, we're looking at our guidance for gross margin would be about 60 basis point improvement in the second quarter. And if you exclude currency on a currency-neutral basis, that would be about 100% improvement. And then for the full year, we're looking at a 70 basis point improvement, and again, on a currency-neutral basis, that's about 110 basis point improvement, which is just down slightly, like about 10 basis points from the last time that we spoke."}, {"role": "assistant", "content": "And then on operating margins, we're looking at -- we got off to a very strong start to the year as we kind of expected. We're looking at about a 90 basis point improvement in the second quarter. And again, on a currency-neutral basis, that would be about a 180 basis point improvement. So again, another very good number to start the year. And then for the full year, we're still looking at about 130 basis point improvement, which is similar to last time, but what's a little bit different is that we, on a currency-neutral basis, were up about 200 basis points. So that's gotten a lot better."}, {"role": "user", "content": "Understood. Thanks for the color."}, {"role": "assistant", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Vijay Kumar with Evercore ISI."}, {"role": "user", "content": "Hey, guys. Thanks for taking my question. Maybe my first one Patrick here. I think you've made some comments on the macro environment. It seems like a bit more cautious tone on this call, but I see your industrial outlook did not change. So when you say, macro taking a more cautious tone, can you give us a sense for -- is this specific regions or perhaps end markets, because industrial is where I would have expected perhaps some change, but when you look at the guidance all of the change came from Labs, so how should we think about the macro commentary?"}, {"role": "assistant", "content": "Sure. Good question, Vijay. So, if you look at the macro economy in end markets, a couple of things I want to highlight to you. First, as you probably watch also the PMIs continue to really be very soft. And that's historically has been an indicator for us that the industry business might slow down. But We are not yet fully in sync with that fortunately, because we have a strong portfolio, but it's a concern for us that the PMIs stayed pretty low."}, {"role": "assistant", "content": "We have seen also more, I would say, negative headlines, for example, in the packaged food market, we said in Q1 that Europe is already a problem. Now, we're hearing also in the U.S. that some of the customers actually are slowing down their investments and also their results are not as good as they used to be. Those headlines are also not too promising."}, {"role": "assistant", "content": "And then, the overall comment that we already was made about biotech, why they're not broadly exposed in biotech, but as there's still, in terms of end market, who commented out there. There is concerns about biotech. And we, of course, factored it in our total macroeconomic pictures as well."}, {"role": "assistant", "content": "When you look at the regions, I think, Shawn outlined it before, Europe in the first quarter performed better than expected from our prospect. It was really strong, but we're still cautious about the impact of the war in Ukraine and what it might mean for the economy moving forward. So, also there we -- again, we keep our forecast for you still quite moderate. And then, the U.S. with potential recession ahead, I think, it's also you need to be a bit cautious about the outlook in the U.S. overall."}, {"role": "user", "content": "That's helpful, Patrick. And one follow-up here on -- I know, the customer base that you serve, it's pretty large. So, when you look at your daily run rate items like pipettes in order rates, did you do a survey of your customer base on when this order rates might pick up. I'm curious on when you thought about 2Q and the back half assumptions, what kind of customer feedback have you gotten that gives you confidence in the back half guide?"}, {"role": "assistant", "content": "I think, I mainly refer here to number one, the compares will of course be easier for us all in the second half in terms of growth rate. We certainly had very strong growth last year in the second quarter. That's why we see a stronger decline this year."}, {"role": "assistant", "content": "And then, in terms of customers we talk to, a lot of them are, in pharma, biopharma research areas, they use pipettes quite intensely. And from them actually -- from some of the customers that we can really get good indications that overstocking issues will be less of an issue in the second half."}, {"role": "user", "content": "Understood. Thanks, guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Tim Daley with Wells Fargo."}, {"role": "user", "content": "Great. Thank you. Just quickly, I know a lot of talk on Lab here, but can you guys just help us with the underlying regional forecasts that are rolling up to that growth guidance for the year within Lab?"}, {"role": "assistant", "content": "Yeah, sure. Hey, I think, as we kind of like look at Q2, so we had low single-digit growth for Lab as a division. And I think we're kind of like looking in that low single-digit range for the Americas and Europe. Again, Europe -- I mean, Americas is going to be the most impacted region by this decline in pipette. So we'll probably see the softer growth in that region versus the other ones. And then, China will probably be in the kind of mid- to high-single digit kind of a range there."}, {"role": "assistant", "content": "And I think in a lot of the Lab business too, it's also important that we -- if you look at like the first quarter as an example, we had actually double-digit growth in most of the other product categories. And we are still seeing good growth in a lot of these hot segments. It's just these multi-year comps and then this topic that we talked about with the headwind in pipettes as we kind of enter the rest of the year."}, {"role": "user", "content": "All right. Great. And then, just wanted to dig into the service and consumables line. How did, I guess, service grow in the quarter? Can you help us understand how you're thinking about that contract versus value-add services growth for the year? And just, kind of, general commentary. I don't think we touched on that much in the earnings call today."}, {"role": "assistant", "content": "Yes. No, great question. I mean, service is kind of really good story. We featured it on our last call. We grew last year at 12% and we got off to a really good start this year with 15% growth. We continue to see great opportunity here when you kind of look at the overall installed base that we serve. And when you kind of put dollars to that in terms of what it could mean to our service business, it's a very significant opportunity. We have a very strong value proposition here with helping companies with uptime and compliance and accuracy of their results and reducing waste."}, {"role": "assistant", "content": "And that -- those value propositions really are resonating very well in the marketplace. And we can also do a lot of very value-added activities like validating and certifying processes. And as we kind of go after these opportunities with our big data analytics program and how we penetrate that iBase or whether we have gotten better at selling service at the point of sale by embedding these into our quotation process. We've seen very good traction in terms of the ability to capture this opportunity."}, {"role": "assistant", "content": "And then maybe one other final comment on services like our Net Promoter Scores have continue to be at like all-time highs and they were already high before. And so it just shows you how well our team executes around the world. And as we kind of look towards the rest of the year, we continue to be positive here. I wouldn't be surprised if we're in the 10% range again for Q2. And then for the full year, we'll see how it plays out."}, {"role": "user", "content": "Great. Thank you for the time. Appreciate it."}, {"role": "assistant", "content": "Yeah. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Derik de Bruin with Bank of America."}, {"role": "user", "content": "Hi. Good morning."}, {"role": "assistant", "content": "Hey, Derik."}, {"role": "user", "content": "Hey. Apologies if I missed this, but can you remind us what your FX assumptions are for the revenue impact in Q2 and for the full year now? Has that been updated?"}, {"role": "assistant", "content": "Yeah. Just a second. So -- okay, so FX on Q2 is just under 1%. And then for the full year -- so that would be a detriment. And then for the full year, it's about neutral maybe up modestly, yeah."}, {"role": "user", "content": "Great."}, {"role": "assistant", "content": "I think -- but, Derik, just to make sure you got this one the bigger one from my perspective is the FX impact on EPS. And so, that's a 4% headwind we mentioned I think in the press release for Q2 and it's about a 2% headwind to EPS for the full year. In our previous guidance, it was like -- that's like a 1.5% worse than prior guidance."}, {"role": "user", "content": "Great. Yeah. Got that. And can you remind us the split in PI versus core industrial and also just sort of like the margin differentials between Lab and Industrial. Just trying to once again sort of like think back about the margin activity -- the margin progression for the year?"}, {"role": "assistant", "content": "Yeah. So, in terms of the -- yeah, in terms of the split our core industrial business is about 60% of our industrial exposure and PI is about 40%. It might be a little bit more than 60% and a little bit less than 40%. I don't know the exact math, but it's probably in that kind of a range."}, {"role": "assistant", "content": "And then as we kind of think about the margin differentials. Our Lab business does have higher margins than the rest of the business. And then within that of course pipettes is a higher-margin business."}, {"role": "user", "content": "Right. Great. And have you seen I guess any cancellations? I mean, I know your business is more short cycle and quarters are sort of build a backlog. But have you seen any sort of cancellations particularly in any of your instruments, people not buying PH meters, just hesitation at all in buying, or does the -- are things still looking relatively healthy?"}, {"role": "assistant", "content": "Not seeing any cancellations. Q1 was actually quite good. Of course, hard to talk about if they're hesitant or not, I think we'll see all those types of things play out, but in terms of cancellations, not seeing anything like that."}, {"role": "user", "content": "Right. And then just one final one. What was the actual growth percentage in pipette and process analytics in the first quarter?"}, {"role": "assistant", "content": "So, for pipettes our business was down high-teens and pipettes is just over 10% of our business."}, {"role": "assistant", "content": "And what was the other part of you question? Process analytics?"}, {"role": "user", "content": "Process analytics. Yeah."}, {"role": "assistant", "content": "Process analytics actually had a very good quarter. I think they were up double-digit in Q1. And if you kind of like get into the -- if you're trying to like look for insights on bioprocessing there, because a lot of that business is bioprocessing."}, {"role": "user", "content": "Yeah."}, {"role": "assistant", "content": "A lot of the business is holding up actually quite well. Of course, there are some vaccine production comps that we have to deal with in that business. But the one area where we have seen weakness is in single-use sensors and -- but that of course is a much smaller part of our business and portfolio."}, {"role": "user", "content": "Yes, that's exact -- and that is exactly where I was going with that process analytics question."}, {"role": "assistant", "content": "Thanks, Derik."}, {"role": "user", "content": "Sure. Absolutely. So, thank you very much. See you next week."}, {"role": "assistant", "content": "All right. See you, Derik. Take care."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Catherine Schulte with Baird."}, {"role": "user", "content": "Hey, guys. Thanks for the question. I guess, first, you talked about services growing 15% in the quarter. How did consumables perform both overall and then excluding pipette tips?"}, {"role": "assistant", "content": "Yeah. So good question. So our -- let me just make sure I get the right number here. So, our consumable business was down about 12% and that was almost entirely due to the decline that we saw in pipette. I think we had growth in all of our other consumable categories."}, {"role": "user", "content": "Okay. And then it sounds like core industrial is trending better than you expected coming into the year. Can you just talk to what kind of trends you're seeing there? And any order book commentary that gives you confidence to raise that full year despite some of the macro weakness that we're seeing?"}, {"role": "assistant", "content": "Yeah, I'll take that Catherine. Good morning. Look, again an industry comes down to our portfolio and solutions to help customers automate processes. And we see still a very healthy investment and interest in our product portfolio and I think we compete extremely well. Especially, also with the new products that we released last year with the IND360, I think we talked about it at the Investor Day, a very successful product and also the overall OEM business for us is doing really well."}, {"role": "assistant", "content": "We see strong demand. I think again around the world, there's still a lot of interest in building out automated solutions. And we play a significant part as a supplier in this segment. So, that gives us quite some confidence moving forward that industry will, besides a very negative PMI trend, will not be affected as badly as the PMI looks but again, we are pointing to low-single-digit growth in Q2, because it's also tough compares. Don't forget we are really looking at super tough compares on a three-year basis here for industry. We have massive growth in China over the last three years in the industry. We had very good investments in Europe in the U.S. And of course, these compares, to put additional positive growth in it, means quite something."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Matt Sykes with Goldman Sachs."}, {"role": "user", "content": "Great. Good morning. Thanks for taking my questions. Patrick, maybe the first one for you. Just as we're going through this pretty significant normalization, particularly in the Lab business, and then looking at your comments on services and the growth that you've shown last year and then obviously, this quarter, could you maybe help us understand a little bit more the historical three-year CAGR or longer on services, just so we can understand essentially the algorithm post this normalization and the contribution that services could actually make to the overall group growth algorithm, meaning if it's services are sort of 20%-ish, please correct me if I'm wrong on that, but growing at a higher rate without the comp difficulty that the rest of the business has, could that actually change the longer-term growth algorithm for Mettler, if services were to continue to grow at the rate it's growing at?"}, {"role": "assistant", "content": "Yeah. Actually I forward you to Shawn on this question, because he has the growth numbers right in front of him."}, {"role": "assistant", "content": "Yeah. Thanks, Matt. So, hey, I mean of course, we're very pleased with the growth we've been seeing in service. And as I mentioned before, we see that as a really good opportunity. If we kind of look at how we started the year, it's like a 10% three-year CAGR. And -- but we were kind of exited last year with maybe a 7% CAGR in Q4. So, I don't have the full year number in front of me. But I certainly wouldn't want to characterize this as a double-digit business going forward although we're pleased with it and we're going to challenge the organization to do well this year."}, {"role": "assistant", "content": "But I think kind of going forward, I would just characterize it as above corporate average and -- which would imply high-single digit. And it certainly will have -- should have benefits and upside to our overall algorithm over time. But nothing that I would highlight differently than how we've thought about historically other than we're just executing very well at the moment."}, {"role": "user", "content": "Got it. Thanks for that. And then just on automation, that space. You guys typically compete against within fragmented markets. Is automation any different from that? I'm just thinking of sort of the larger European players or Japanese players in automation as you sell into China and other regions. Is that a different type of competitive landscape that you guys are facing in automation, or is it similar, or are you going to find other ways to compete?"}, {"role": "assistant", "content": "I think it's different. And maybe I'll start and let Patrick jump in. But like a lot of our automation, we're selling to system integrators. And so, there's a whole business model that has to do with not only quality and all that kind of stuff but how easy are you to integrate into their solutions. And so, that's an area where we have a lot of competitive advantage as well."}, {"role": "assistant", "content": "I agree. I mean, it's about how easy our sensors and our terminals plug in and -- both into the system but also the overall software environment that the end user has. And I think we have a very strong portfolio there and very up-to-date portfolio that resonates very well with these system integrators."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Liza Garcia with UBS."}, {"role": "user", "content": "Hey, guys. Good morning. Thank you so much for taking question. So, I guess just talking about customer types even if you -- just more broadly, on the pharma, I think, there's like a lot of questions on pharma more broadly. I know you spoke a little bit earlier on the sensors. But could you just talk about kind of what you're seeing in the pharma environment more broadly and the growth trends there even if qualitatively?"}, {"role": "assistant", "content": "Yeah. I can start with that, yes. I mean -- and when you look at pharma and biopharma, the first thing you should appreciate is our diverse exposure, given the broad portfolio there, so we serve customers in R&D with broad-based analytics portfolio, also with pipettes. But when you go downstream with solutions to scale up manufacturing, other Autocam business is pretty strong in pharma as well. And then the whole pro business, bio-processing that we have, plastic industry portfolio when it comes to downstream in industry."}, {"role": "assistant", "content": "So, I think we have a really broad-based exposure. What we are seeing I think is continued investment -- long-term investment anyway into pharma, biopharma. Yes, there was a slowdown in of course vaccine manufacturing, that's -- and we see -- we saw some of that exposure in biopharma and I think Shawn related -- referred to this as well. But for example with PendoTECH, where we saw for single-use sensors with acupressure that is used in biopharma process, we saw a slowdown there. But we see still really healthy demand on the R&D side, healthy investment and also on the QA/QC side, there's a huge installed base of instruments out there that we also serve. And there's a continuous replacement business that we also addressed on our portfolio that addresses pharma on a broader scale."}, {"role": "assistant", "content": "Regionally, I would say, we see no big slowdown at the moment of pharma, biopharma in the U.S. In sales in Q1, and in China it looks similar. We had actually quite good sales in Q1 into the segment. Now, what it means moving forward, whether there will be a change in biopharma, which could be one of the segments in China that you could look at and says that on a more pressure. But again, given the broad portfolio we have, I think we are very well-positioned to capture the growth opportunities."}, {"role": "assistant", "content": "And just to clarify his comment on U.S. was excluding the pipette business."}, {"role": "assistant", "content": "Excluding pipettes."}, {"role": "assistant", "content": "We talked about that."}, {"role": "user", "content": "Okay. Helpful. And then just -- you talked about lithium-ions, and sustainable polymers in that business and I know it may be a bit of a smaller. But can you talk about kind of, how you think about -- a bit of a longer-term question like, how you think about the runway there? And how many -- how we should think about the growth outlook there?"}, {"role": "assistant", "content": "Yeah, absolutely. Look I mean, there's a lot of investment in that area and a lot of research going on in the area of sustainable polymers, and new materials that we serve with a broader portfolio. Again, a lot of it is on the Lab business. If you look at our material characterization portfolio, we are very closely working with our customers to understand the demand, and the workflows that you see and what solutions they are looking for."}, {"role": "assistant", "content": "Given where we are in terms of the overall market trend, I think it's still in the early innings. There's a lot of demand and opportunities to come up with solutions to, I would say, standard plastic for example, and also more sustainable materials moving forward. So, we are confident that will be while, it's still a small segment for us, it's one of these hot segments similar to what we see -- what we have seen in and continue to see with lithium-ion batteries that if we are early enough there to customers and provide them with the right solutions and the right workflows, we can be a leader participating in that growth as they build out research, later on manufacturing and of course also QA/QC."}, {"role": "assistant", "content": "That's what we have done in for example, with the battery segment. We have been very early with all these customers to understand what their needs are and now we are participating really nicely in the growth opportunities, both on the R&D but also now on the manufacturing side in terms of the tools they are using."}, {"role": "user", "content": "Thanks so much, guys."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Brandon Couillard with Jefferies."}, {"role": "user", "content": "Hey, good morning. Thanks for squeezing me in. Just one for you, Shawn. Do we split out the Lab versus Industrial business in China in the first quarter? And any update on the forecast for those two subsegments for the year."}, {"role": "user", "content": "And then Patrick, any change in local competition or dynamics on the ground there that you care to call out?"}, {"role": "assistant", "content": "Okay. Good. Hey, Brandon, I'll take the first part of that question then. So, for Q1, we actually had a really good start to the year in our Lab business. We were up mid-teens. We saw a lot of growth throughout the portfolio with the exception of they also have a pipette headwind, but it's a smaller part of their business. In the Lab business in China, we -- like a lot of our other businesses, we also have been benefiting from a lot of these hot segments that we were just talking about like lithium-ion batteries, is a good example, in which really felt a very strong growth in our analytical instrument business."}, {"role": "assistant", "content": "And then on our Industrial side, we grew low-single-digit in the quarter and I think that's important to put that in context, with the comparison. So, that's on top of about 24% growth in Q1 of last year, but on top of 63% growth in the year before that. So, China is lapping some very, very challenging comparisons in the first half of the year for their Industrial business."}, {"role": "assistant", "content": "And as we kind of like look towards Q2 and the rest of the year we're kind of looking at low-single-digit again in Industrial for Q2, given challenging comps also in the second quarter, but we're expecting better results in the second half as the comparisons improve. So, probably still thinking of that business is low to mid for the full year which is kind of similar to how we were thinking before."}, {"role": "assistant", "content": "And then Lab might have some moderation also because of some comp topics on a multiyear basis in Q2. Maybe, it's more in the mid or mid- to high-single-digit kind of a growth range, but still optimistic for the full year, especially, given the strong start in Q1. So, still thinking that double-digit for the full year on the Lab side."}, {"role": "assistant", "content": "I think a topic there like a lot of other regions, but especially in China, it's going to be how to -- with all the investment that they've had in COVID, what is that looking like for the rest of the year, and given the fact that they just went through the reopening, we'll kind of see how that plays out."}, {"role": "assistant", "content": "Great. Thanks. And Brandon, maybe from my side you asked about the competitive situation in China with the market, whether there's a significant change. I would say no. Look it's a very competitive market. We have local players there as well but you have to -- I want to remind you we have a really strong history in China. We have a strong R&D and manufacturing base there. We -- as I said in my remarks we manufacture a lot of the products locally in China and also tailor some of the applications to the local market needs."}, {"role": "assistant", "content": "That helps us to really effectively compete with the product portfolio and our sales and marketing team uses the very same cynical sales and marketing approach to really go after the growth opportunities, identify those in the China market. I mentioned that example about the battery segment and they have been very successful to do those."}, {"role": "assistant", "content": "So, yes, the market is competitive, but I would say it hasn't changed dramatically for us. We -- our team is well-positioned to continue to compete and we made from my perspective also a lot of good investments to make sure that we have the right portfolio to compete effectively in the market."}, {"role": "user", "content": "Very helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] First question today comes from Lee Horowitz with Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Great. Thanks so much. So you've talked about continued improvement in royalty and app usage. But can you maybe help us quantify sort of all in direct bookings and how if I'm not sure [Indecipherable] you view advertising leverage, particularly in financial year and next year. And then I want to follow-up."}, {"role": "assistant", "content": "Sure. Thanks, Lee. It's little hard to hear you, but I think I got it. So basically the way we think about it is our business we said it last quarter, it's running at a similar level. About two-thirds of the business comes from direct. That continues to grow as a nominal number, but as a percentage is fairly similar to where it was a quarter ago. And basically, yes, we are investing in app and these longer -- and royalty and these longer term payback products. But remember we're only taking a portion of our quarterly spend, if you will, and putting it into these channels."}, {"role": "assistant", "content": "So it's not like we reversed the model and it's all into these long-term channels. We are peeling off a portion of it, fairly modest, but sizable portion and putting it into these longer channels. It means we give up some short-term payback and it means we stack up these customers over time. But given that it's not our full spend, it takes a while for this to stack up. Then you add to that, that we are now getting back to the conversion levels we used to have and accelerating through them as we get HCOM on the back stack, as we get Vrbo on the new stack and we're accelerating stacks itself because -- Brand Expedia itself because we are just upping the velocity of testing massively."}, {"role": "assistant", "content": "So we're getting a lot of improvement and lot of it's coming through this year and coming even as we speak. And so the reason we have confidence in the leverage that will come in the back half of this year and the future is we're both stacking up the royalty and app usage and all of these more direct channels. That's what we're doing with the money that we can tactically spend differently, but we're also changing and improving the product and the conversion in the product so that every dollar will work harder in the future."}, {"role": "assistant", "content": "So all of that's coming and then One Key launches in July, which is yet again another sticky product feature that will add millions of people from Vrbo -- customers from Vrbo into the mix and allow more of our loyalty members to spend across more products. So all of that is coming in kind of at the same time, not that it's going to be a moment in time inflection, but it's building on itself and that's why we said second half of this year will be stronger. And obviously, going forward beyond that once we get past the One Key roll-out, etc, we'd be even stronger. So that's what gives us confidence in the marketing leverage. It's not like one tactical change in spend changes it all. It's a combination of building that up over time plus adding the product benefits and getting all the technical work behind us."}, {"role": "user", "content": "Great. Thanks. And then one more. With travelers seemingly shifting back towards areas where you guys are incredibly strong, urban, international and the like, can you give us an update on how you think U.S. hotel share progressed in the quarter and what your expectations are here for the rest of the year, particularly with HCOM accelerating at this point?"}, {"role": "assistant", "content": "Yeah. I think broadly, we feel like from a share perspective in hotels in North America, we essentially held share maybe slightly better. We're not over-investing the problem. Again, it's a balance. This journey is a balance of how you spend versus how the technology comes online. We could have spent a lot more on Hotels.com last year, but it wouldn't have been as effective. As Hotels.com gets better, we can spend more. So all of these capabilities give us more weapons to fight better in the fight. And so we feel like we've held maybe slightly better and we should see acceleration from that."}, {"role": "assistant", "content": "And equally importantly, we did pull back as you know in the past few years from some international spots where we were not as effective and as efficient. But as we now feel like the products improved, we have a marketing model that we believe and we feel like we'll be in a position to start rolling out more aggressively, not on the North America story. It has been for a while, but this is really how do we grow beyond that as we get past these technical hurdles and are in a position to roll more quickly across the world."}, {"role": "user", "content": "Helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Kevin Kopelman with Cowen. Kevin, please go ahead. Your line is open."}, {"role": "user", "content": "Hi. This is Jacob Seed in for Kevin Kopelman. Just a question on One Key launch. So with the launch in July, how are you thinking about some of the smaller brands that are not going to be included in the launch and how are you thinking about managing them going forward? Thanks."}, {"role": "assistant", "content": "Yeah. Thanks, Jacob. I think we've talked about it a couple of times before, but by and large, we have somewhat de-emphasized and not invested as strongly in the smaller brands as we continue to put more heft behind the big three brands. One Key will envelop the big three and we certainly aren't going to take our brands away from people right away or anything. But we do believe that over time, people will migrate to our big three brands where the latest product features are, where One Key is, etc."}, {"role": "assistant", "content": "So essentially the way to think about it and that's why we've talked about how Brand Expedia is doing, how Hotels.com is accelerating is we've got a drag on the business, which is sort of our other brands going sideways to slightly down as against the businesses they are growing more quickly where we're investing and where the product is accelerating faster. So it's essentially -- there's a little bit of the big brands have to eat the sideways or slightly flow degradation of the other brands, but that's something we've planned for in terms of the guidance we've given this year and certainly is something we planned for our long-term."}, {"role": "user", "content": "Great. Thanks, Peter."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Anthony Post with Bank of America Merrill Lynch. Please go ahead, Anthony."}, {"role": "assistant", "content": "Anthony, you might be on mute. Our next question..."}, {"role": "user", "content": "Great. Thank you for taking my question. I guess, a couple of things. When I see the B2B growth versus outpacing the core retail, how do you think about that business as a margin versus your core business? And should we expect to see more of the retail accelerate as you kind of fix the platforms at Expedia and Hotels.com? And then secondly, as you think about the overall use of cash, anything to stop you from deploying cash flow to buybacks? Anything on the debt side we should be thinking about? Thank you."}, {"role": "assistant", "content": "Yeah. I'll take the first part and then leave the capital side to Julie. So I think the B2B business has been growing terrifically. As I mentioned in my our prepared remarks, we haven't had to do any big technical migrations. In fact, we've added to the capabilities over the last couple of years and we've seen the benefits of that in many of our business lines. That business saw great growth in part because it is more exposed to some of the geographies that came back last quarter. So the opening of Asia is more impactful for our B2B business, Latin America, etc."}, {"role": "assistant", "content": "So some of it is geographical mix that you're seeing there. But definitely, we expect our B2B business to continue to grow. I think I've said a few years ago, this was an area we saw lots of opportunity that we were going to push into. So we expect and we'll be driving as much growth there as we can again to fill in the pockets of demand that we would not otherwise reach through our B2C business. But absolutely, we expect our B2C business to accelerate as we get through this major surge we've done over the last few years, which has taken a long time and is painful."}, {"role": "assistant", "content": "But as we get across, we are in a better and better position every day to accelerate. We've got a few of these last lifts to get through for sure. But hopefully, we're on the back nine and we're close to the end of that and we can put all our resource, technical product design resource against accelerating growth once we are across these things. So we do expect -- I'm not going to say I expect B2B to slow down to B2C. I expect B2C to accelerate and I expect both businesses to grow well in the coming periods."}, {"role": "user", "content": "And from a capital allocation perspective, our approach hasn't changed. We did sort of lay out the targeted leverage ratio this time just to sort of give disclosure to what we internally are striving for. And we will make progress towards that this year and going forward and we can make progress towards that with EBITDA growth and potentially some small pay down of debt. And it won't take much given how much we've already reduced our debt level. So all that to say with strong EBITDA and strong free cash flow, we have a lot of cash available to be able to deploy to buybacks as we have done with our largest one to date -- our one of our largest ones to date that we've done about $600 million this year. So there's still ample room and availability to be able to buyback. And as long as our stock is trading at the levels it is relative to what we know the long-term performance of this company is going to do, we will continue to do that opportunistically."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Eric Sheridan with Goldman Sachs. Please go ahead, Eric. Your line is open."}, {"role": "user", "content": "Thank you so much for taking the question. So much of the focus with investors tends to be on the North America market and you made some interesting comments about some of the international markets on this call so far. Can you give us an update on your view on where you sit competitively and how you think about the investment cycle to drive growth away from North America and maybe through the lens of some of the B2B and B2C initiatives and some of the refocused brand initiatives? So we have a better understanding of that. Thanks."}, {"role": "assistant", "content": "Sure. Let me kind of work backwards. I think B2B is a great business, a great tool for us to reach pockets of demand as I said that we don't otherwise reach or reach well. That might be geographical like China, for example, where we have -- where we expect a good rebound there and we have a nice book of business with partners in China and -- or it might be our loyalty program in a market we're already in, but that has a captive audience that's burning points and a bank credit card program or something. So that business definitely gives us ways to participate in travel economies that we are not otherwise sort of going head to head in the B2C side."}, {"role": "assistant", "content": "But as we talked about the B2C side, we've had presence in many markets around the world, some of which we are just as leading into as we've ever been and some of which we -- as we've talked about in prior periods, we've pulled out off because the economics just weren't worth it. We were losing money and not gaining retainable share, I would say, without having to continue to spend and lose money. We believe what we had to do and what we've been doing is building a better model, a better product, a better go-to-market marketing strategy that helps us acquire the right kinds of customers who value what we have, which is the best product, the best loyalty program, the best service in the category and that may or may not be every customer in the world, but we believe we can target those customers in lots of geographies."}, {"role": "assistant", "content": "There are big pockets of them that we don't touch right now that are opportunities. And there are also pockets of them that we used to touch less efficiently that we think we can go back to with strength. So I think you'll see us -- it's not going to be a huge story in the numbers this year, although we have seen a great comeback in EMEA, in Asia, in Latin America where we do participate, but that's a bigger story over time as we get our One Key launch done, as we get our product complete and as we can start to move our strategy more holistically into new markets and target the right customers for us."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Lloyd Walmsley with UBS. Lloyd, please go ahead. Your line is open."}, {"role": "user", "content": "Hi. Thanks for taking our question. This is Chris on for Lloyd. Maybe the first question on just as we think about the '23 double-digit growth guides on both the top and bottom line, just philosophically, how are you -- how do we think about potentially showing letting upside flow through on either the top line or bottom line for this year? And then second, just -- it sounds like things are turning around in the air product. Just can you talk a bit about how you think about air as a separate funnel potentially for driving room night growth from here? Thanks."}, {"role": "user", "content": "So as far as the guidance, I didn't hear all of what you said, but I think basically the question is, is what gives you the confidence to be able to hit the top line and the bottom line guidance, which does include margin expansion. I mean, it's several things. Peter alluded to many of them, but I mean, obviously, it starts with the travel industry and the strength of travel is really strong. Everyone's reporting great numbers. And so clearly, the consumer is prioritizing their spend on travel. We're seeing it in our own business with the success we're seeing with the Brand Expedia business with a 30% growth in gross bookings and then Hotels.com getting on that platform and at post migration now driving 20% increase in gross bookings. We have a B2B business that's growing 55%, which is a halo for the rest of the business."}, {"role": "user", "content": "We have Q2 where at the moment where we got to address this tougher year-over-year compare and we're going through the Vrbo migration. But when we come out the other side, Vrbo will be on the same platform that is delivering that same sort of double-digit growth. And so we're excited to see that. And then on top of everything else, we're doing with the growing loyalty member base, the growing app user base and all of the goodness that, that will drive in the back half along with all of our tech and product initiatives. That's what gives us the confidence that we're going to be able to hit this guidance on the full year."}, {"role": "assistant", "content": "And I'll just take the second part on air. We've been innovating a lot on air now. It's important to remember since if you go back pre-COVID, we sold Egencia, our corporate business into Amex GBT and we got out of the air business with our partner Chase. So there's some weird comps if you go back in history. But if you look at the air product, I think we've made huge progress on it as a product. You will find we have price tracking and predictions now in most of the world. That's been a great engagement product. It's helped with conversion. It's helped with attached sales of hotels and other things."}, {"role": "assistant", "content": "We've increased our speed. We've got smart shopping, which is a new capability of comparison shopping, looking at the best seats and the different economy -- basic economy, etc, and comparing more easily. We use AI to suggest the best option for each customer. So all of these things are in the works. We've improved our search speed considerably recently. So there's a bunch of work going into to make that product the preeminent product in this space again. And I think we definitely look at it as an opportunity. It's a unique capability. It's something we've always been strong in, something we can drive traffic through."}, {"role": "assistant", "content": "We have a lot of opportunity to improve our attach rates and our packaging, if you will. We have terrific package rates for many of our partners and we've just started deploying as part of the run up to One Key flight member discounts, which we've never had before, which is a great opportunity for airlines to use their pricing to help get the best customers out of our marketplace. So I think there's a lot of things that have been in the works and coming. And again, this is just one of the areas where I say the technology has been evolving through this period and it's all getting to a place where it can be much more effective and we haven't spent much time on it."}, {"role": "assistant", "content": "But obviously, once everything is on the same stack, we start to have a unique capability to start moving more products across brands. So things we've talked about before like better selling our Vrbo content on our OTA brands and through those points of sales becomes a reality, selling Vrbo content through our B2B partners. There's some vacation rental content in our OTA brands that isn't on our Vrbo stack. So we will have that consolidated. So there's lots of opportunities that come from this migration that are all in -- air is one of them and we've done a lot there, but there are many."}, {"role": "user", "content": "Okay. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from John Colantuoni with Jefferies. Please go ahead, John. Your line is open."}, {"role": "user", "content": "Hi there. This is Chris on for John. Thanks for taking the question. Can you double click on the commentary from last quarter around delivering margin expansion throughout the year and maybe just give us this [Indecipherable] on what line items we should expect that to come from? And then help us size things you are anticipating as well? Thank you."}, {"role": "user", "content": "Yeah. I mean, as far as margin expansion as we move throughout the year, I mean, certainly, as we deliver more top line growth and right now, we're in sort of more of the mode of driving gross bookings where we don't get the benefit of that to revenue and to earnings until the stays. And in the back half with this outperformance that we're seeing today, we expect to have that benefit to P&L. And of course, we're expecting marketing leverage as we move throughout the year based on all the things we talked about that we're going to benefit from. So it's really those two lines. We're going to be obviously working on efficiencies across the company as we deliver on our tech stack and start to be able to repurpose individuals and cut costs and things like that and that will also drive some efficiencies, but it's really the top line revenue growth and the marketing efficiencies in the back half."}, {"role": "assistant", "content": "Yeah. And I'd just add one thing, which is the shape of the curve this year as we have a lot of work to get done and that involves a lot of people being dedicated to these big lifts. But as we get towards the end of the year, a lot of that work subsides so that we can stick those people and that great talent on growth initiatives that are more near-term generative. So that's part of what happens is every time we put something to bed, we get more resource available to drive conversion growth, to drive improvement in the customer experience that turns into money."}, {"role": "assistant", "content": "So that -- the efficiency we get going forward once we're over these big lifts is much bigger how much of it's this year versus future years TBD. But that's the journey we're on is we've got to get over these big comps and then we start that. We've seen it already, when we did the Hotels.com conversion -- migration. We freed up a lot of talent to work on near-term conversion wins and it's been hugely productive for us. Again, every time we do one of these, we get more capability back to put against more near-term uplift in the business. And so that's where we start to get more separation relative to the cost base and that's partially this year, but it's obviously more going forward."}, {"role": "user", "content": "Very helpful. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Tom Champion with Piper Sandler. Tom, please go ahead. Your line is open."}, {"role": "user", "content": "Hi, good afternoon. Thanks for the questions. Peter, just any interesting observations behaviorally on the GPT plug in, may be too early, but just curious any comments. And then I think this is self evident in your implication, but the tech re-platforming will be ostensibly complete in the U.S. in July with the launch of One Key. Just curious if that's the case. And then maybe just a final one for Julie. I was a little surprised by the outsized impact of FX on EBITDA in 1Q. Curious if you could elaborate on that or add any details. Thank you."}, {"role": "assistant", "content": "Thanks, Tom. I'll try the first couple. So you said the ChatGPT plug in which is that is where we have made a plug in for their environment so that when people are searching thinking about travel in their environment and want to see if there are hotels near the Eiffel Tower, what flight leaves from LA to New York on Tuesday. If they have our plug in, we can provide that. That is still only available in the paid and the developer environment. So it's not like out in the wild. So it's small still, but interesting to see how people behave."}, {"role": "assistant", "content": "People are using it and obviously, it's not materially changing our numbers, but it's definitely a lot of interesting learnings for us. We've also deployed it, which may have been -- which meant into our own iOS app and that's to allow people to essentially use the capability in our app to do a similar thing, what hotels are near the Eiffel Tower or whatever they might be searching for. And what we do then is if ChatGPT provides answers and it's a series of hotels, we will take those hotels, save those hotels for people so that they can then go shop, comparison shop, look at images, do whatever they want."}, {"role": "assistant", "content": "Again, early days, but people have engaged with it. It's been interesting to people, not a huge driver yet and that's why I say we don't know how big a driver it's going to be in behavior, but it's definitely interesting. And I'll just add we wouldn't be the only company in the world, but we are on the forefront of looking at other ways that large language models can help other parts of our experience, whether it's with our partners, whether it's turning descriptions into -- property descriptions making that easier for people."}, {"role": "assistant", "content": "There's a lot of ways we think we can look at using AI in this construct, but we use AI and machine learning and a lot of other constructs as I talked about, whether it's optimizing pictures or anything else. So it's interesting. It's early and we'll see and we'll see when the plug in is available to a wider audience, what it drives and we'll see what ChatGPT does to the search environment. We'd love to see more competition in global search. So we're rooting for more competitive search environment and we think we're staying on the absolute front of what anyone is doing in travel with large language models."}, {"role": "assistant", "content": "As far as the tech re-platforming goes, yes, the answer to your question is yes. The last of the big things in the U.S. is really to launch One Key. Now a launch is a launch and sometimes it takes a little time to harden that and make sure everything is working perfectly. But yes, essentially, once One Key is done in the U.S. that's the last of the sort of big boulder lifts we had. Now we want to launch One Key in more places. There's work to do to complete the set, if you will, as we complete the geographical set of capabilities and so forth. But in terms of the really big lifts on the biggest piece of our business that will be the last of the lifts. And that's why I say I think we have a lot more talent available to drive other things once we're over that hump."}, {"role": "user", "content": "And as far as FX, obviously, it just really depends on which currencies we are transacting in and their relativity to the strength of the U.S. dollar and the difference between the delta on the top and the bottom line is really just a function of Q1 is our lower earnings quarter. And so it has a more pronounced impact on the lower level of earnings relative to the top line that's obviously a much bigger number. So it's just a -- it's a function of math."}, {"role": "user", "content": "Got it. Thank you both."}, {"role": "assistant", "content": "Thank you."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Mario Lu with Barclays. Mario, please go ahead. Your line is open."}, {"role": "user", "content": "Great. Thanks for taking the question. So the first one is follow-up on One Key. You mentioned it's rolling out in July, just is that a global roll-out or just U.S.? And then is there like a rough time frame we should think about in terms of when we should see the benefits of the joint loyalty program? I understand that take rates will take hit initially one points are redeemed, but just curious how we should think about the expected payback period. Thanks."}, {"role": "assistant", "content": "Sure. Thanks, Mario. So yes, the -- we are rolling out in the U.S. first. We will roll-out in the rest of world more -- later in the year and next year. And you should keep in mind, there are differences in the rest of the world where in some cases not all brands are present. In some cases, we have a different brand and we will have one of our brands. So it will take on slightly different flavors across the world, but the U.S. obviously is the biggest proof point and the biggest place in which we think the installed base gets the biggest lift."}, {"role": "assistant", "content": "And as far as that payback goes, obviously, loyalty is a thing which drives future repeat, future royalty, future engagement. And as you know, we've been focused on signing up as many even before One Key on getting way more of our customer base signed -- being signed up and engage with our products, not least of all because they see the best prices that way. They get rewarded for their travel and they have reasons to come back. So we've modeled it a lot of different ways. It's difficult to say how quickly it pays back given that travel for most people is a 1.5 times a year kind of endeavor on average."}, {"role": "assistant", "content": "Now obviously, there are people who will go 20 times a year like everybody on this call probably, but so we will see. We've modeled in a series of ways, but we don't expect a huge payback in this year. We think some of it will come back this year and some of it will come back in the future and it will keep building on itself. And as we've said before, our intent is between all of the levers we have of spend be it direct sales and marketing, paid search, discounting, loyalty and everything else, we view that as one pool of capital and we intend to balance between those pools."}, {"role": "assistant", "content": "So as we provide more loyalty, which will drive again some longer-term payback than the short-term paid search stuff, we will pull it out of other spots to accommodate that and we have within an envelope of spend that we think is right in terms of what we should be spending all up against buying that future business. So again, it's a little bit a timing dislocation compared to that quick twitch muscle of performance marketing, but we think well worth it. And again, we are going to envelop a whole millions of customers in Vrbo that used to live outside our loyalty plan that will all of a sudden be able to spend into our loyalty plan, whether it's for a different kinds of trip or something else."}, {"role": "assistant", "content": "And likewise, all of our existing loyalty members in Expedia and Hotels.com will be able to use their points against vacation rental. So there's a lot of things that could be shorter. There are a lot of things that will be longer and we've modeled it a bunch of ways, but we'll see. We don't have too much of the benefit coming in this year."}, {"role": "user", "content": "Got it. Thanks, Peter. And just one for Julie. In terms of the 2Q commentary on the top line to mid-single-digit, any color in terms of the drivers to get to that in terms of what level of bookings growth or take rate we should expect? Thanks."}, {"role": "user", "content": "No, we don't go into that level of detail. I mean, obviously, it's a tough comparison for a lot of companies for next quarter given the immediate rebound in travel post Omicron. So that's the biggest driver that's bringing us down to the single-digits. And of course, as we've been talking about, we're doing the Vrbo migration during the same time period. So those are the two real big drivers and so I wouldn't think about anything else specific at play there."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "Our final question today comes from Jed Kelly with Oppenheimer. Please go ahead, Jed."}, {"role": "user", "content": "Hey. Great. Thanks for sneaking me in. Just two questions, just on the verbal migration you called out. Are you seeing any pressures from sort of the vacation rental markets having call it three record years and now people being able to travel to other destinations? And then just my second question relates to supply. Can you just give us a sense how your verbal supplies trending and then your supply in some of the international markets like where we are in supply? Thank you."}, {"role": "assistant", "content": "Yeah. Thanks for the question, Jed. So if you missed it, I mentioned it, but yes, we have seen a little bit of flattening in demand in VR and that is largely because of length of stays have shortened. People are going to cities more than they're going to long extended beach COVID era, beach vacations or mountain vacations where they took a month and went wherever. So that's definitely changed, hybrid work has exchanged. So all of those things are impacting macro demand slightly."}, {"role": "assistant", "content": "Now much of it's going back to cities. In our VR business, we don't participate as much in the urban market, though, we do have good product there. I mentioned that before, but we actually have good urban market product in our OTA brands, but it's not in our Vrbo brand. So one of the things that the Vrbo migration brings us is the ability to get all that content together and that actually will help a lot. And as you think about supply because we've had kind of in pockets as opposed to all available everywhere and that makes a big difference."}, {"role": "assistant", "content": "By having said that, we've grown supply well in our Vrbo and again in our core product, which is for home or apartment and is focused not on shared spaces or any of that, but we've had good solid growth throughout the period and we continue to add product there principally focused on places where we've seen the most compression overall in the world. We're not trying to break brand new ground where we don't have demand. But we have seen solid growth and supply will continue to push into that."}, {"role": "assistant", "content": "But I think the biggest unlock for us will actually come when we get the Vrbo migration done and all of our supply can move really to any point of sale and any endpoint in our brand system and that's -- it will take us some -- a little while to optimize. I don't think that's like a moment in time inflection point, but that's the biggest opportunity for us to amp up our supply and reveal it better to the demand in the market."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Sure. Thank you. And with that thank you everybody. I think that was our last question. Thanks for joining us. We'll see you next quarter. Take care."}]}, {"messages": [{"role": "system", "content": "The floor is now open for questions. [Operator Instructions] The first question is from Tim Long with Barclays. Your line is open."}, {"role": "user", "content": "Thank you. Yeah, two if I could here. First, just looking at the second half, I know Jason you mentioned tough comps, but hoping you could just give a little commentary around moving parts given those pricing benefits and pretty healthy backlogs still. So what are the moving parts in that second half. And then second, more specifically on video, Greg or Jack, if you could talk a little bit about, it's good to see above the full year growth rate in Q1. Could you talk a little bit about where we are with cross-sell opportunities and also opportunities in video from NDAA and ARPA state schools and things like that. Thank you."}, {"role": "user", "content": "Tim, so on second half, so you'll recall that last year in the second half is when the pricing actions that we implemented really began to show up in the P&L and those really helped last year's growth and profitability expansion in the second half. So our position today, as we look at those 15% comps is that we're still in a supply-constrained environment. We have lead times from our suppliers. We have expectations to grow and with opportunities ahead of us for the second half, with the continued demand that we have. Where the pricing actions benefited us particularly in Q1 and expect similar for Q2 is last year's comps, in the first half did not include those same pricing actions. So as we start to enter July, we're anniversarying those pricing actions and still expect growth on top of those."}, {"role": "assistant", "content": "Tim, specific to cross-sell, what I would do is highlight four specific verticals starting with government. As we have attested to before, government was a nascent business when we acquired Avigilon. We made subsequent acquisitions. But just to put it in context, we've kind of put that marker out there this year for our video security business that we would grow approximately 15%. We expect government to grow in the high-teens. And we think we've got opportunities to move that."}, {"role": "assistant", "content": "Specifically, I'd also call healthcare, we're really-really pleased. We won -- we secured a $16 million deal with a large-scale hospital system. This was an add-on and the beauty of that is they're not only a video user, but they're also a radio user. Education has been, we've attested to the fact that numerous school systems are upgrading. Some are going with Avigilon Unity on-prem systems, large-scale urban schools. But what we're really seeing is acceleration in growth in the cloud there and the ability to do radio alert and integrate access control LMR, our command center software portfolio -- product called Compass into school systems is a game-changer."}, {"role": "assistant", "content": "And then lastly, is the industrial space, namely utilities. We've talked about the fact that we've secured a large-scale utility in the past. We've done in the area of $50 million of utility and I think as utility start to fortify their power grids and their substations, we will have incremental cross-sell opportunities there, Tim. But I think the highlight is, we tie it all into making sure that we incent our sales force to go and cross-sell and that's just part of the DNA now."}, {"role": "user", "content": "Okay, thank you very much."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of George Notter with Jefferies. Your line is now open."}, {"role": "user", "content": "Hi guys, thanks very much. I guess, I think you guys mentioned ARPA in the last question or maybe Tim did, but what are your expectations for the ARPA benefit this year. I know that you've got about $400 million in orders from ARPA-related projects last year. I would imagine some of that converted to revenue last year, but what do you think that might look like for 2023, any sense? Thanks."}, {"role": "user", "content": "Yeah, so, George, I'll -- I would say ARPA, anytime there's federal stimulus dollars are conducive and I would say beneficial to the business. But to kind of put it in context, it's approximately 5% of our orders in North America last year and that's not to diminish it, but I would take it to a higher level. I've actually gone and looked at in Salesforce. It contributed to deals that were secured but they want the sole purpose of deals that were secured. I think at the end of the day, when you think about mission-critical communications or even a school, we think we're in an area of prioritization in areas we've said before, it's a need-to have, not a nice-to-have. So I think it's generally conducive, but I wouldn't necessarily say it's the largest attributor to our success."}, {"role": "user", "content": "Got it, great. And then just as a quick follow-on, I think the question everyone has been asking is, you know, on supply-chain, many companies I think are going through inventory corrections now. I mean, any sense that your customers have been inventorying products or is there any risk of supply-chain corrections or inventory corrections for you guys as you look forward? Thanks."}, {"role": "assistant", "content": "The demand from our customers remains very strong. Our backlog position is at a record level and that includes backlog that customers are having to wait a bit longer than they'd like and we're working through those delays in getting them products. With the results in Q1, we were able to obtain a little bit better supply. We had a good quarter across LMR, public safety, had a good quarter with PCR."}, {"role": "assistant", "content": "So we're getting after this backlog position and fulfilling the customers demands, both demand they placed on us in backlog, it is also the demand they placed on us within the quarter. So -- and our inventory position, if I shift to our balance sheet, it has helped us mitigate a choppy supply environment and we continue to be mindful of inventory and its utility in serving what remains a challenging supply environment. It's been a helpful tool and we do have expectations for inventory to reduce in the second half, that's in our cash flow expectations. But it remains an important tool to navigate this environment."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] The next question comes from the line of Meta Marshall with Morgan Stanley. Your line is now open."}, {"role": "user", "content": "Great, thanks. Maybe just a question on APX NEXT. You had mentioned that being targeted towards the high-end and then introducing kind of the mid-tier product. I just wanted to get a sense of adoption trends of the various pieces of the portfolio and where they kind of following the customer, adoption types that you expected. And then just maybe an update on Rave integration would be helpful. Thanks."}, {"role": "assistant", "content": "Sure, Meta. Maybe I'll start with the APX NEXT and Mahesh will speak to Rave. First of all, we're in the early innings as we've said before and I think it's most important to point out that it's a multi-year introduction for the APX NEXT. What typically happens is we have -- we run the APX originally, APX NEXT line in tandem for the foreseeable future. In fact to point that out, 80% in Q1 of our device revenue was actually APX original. So we've got a coexistence strong pipeline for both of them. We've got $410 million of orders since we introduced the APX NEXT."}, {"role": "assistant", "content": "But we've just recently, last fall, introduced the N-Series radio, which starts to fill in the portfolio and now we're bringing out international P25 units to bear, that will be targeted in Australia, New Zealand and Israel. All-in, with the new product what we're seeing is kind of high single-digit ASP increases as well."}, {"role": "user", "content": "I'd also mentioned other parts of the portfolio, TETRA, PCR are areas where we've focused and have exciting products coming to market and receptive customers to those as well. So we're in an important point and the targeted investments we made in and through COVID that are now producing those exciting products are also an important part of our growth drivers."}, {"role": "user", "content": "And on Rave, Rave has exceeded our initial expectations for performance. We see strong traction in education, especially higher ed, but also K through 12. And as we previously talked about Rave bridges enterprise security with public safety and with some of the initiatives that we've undertaken recently, we're making that -- the bridge wider, effectively allowing for more data and at a faster rate to go from enterprise security to public safety."}, {"role": "user", "content": "So, two specific examples worth mentioning there. First, with every one of our new VESTA 9-1-1 orders, we're actually bundling Rave 9-1-1 suite. And what does include is two-way texting, caller profiles, this is information about individuals who perhaps need special assistance, facility info which is blueprint of facilities so that responders can respond with greater information as to what they will see when they get to the facility. And very importantly caller location, and that is going to be part of our Rave VESTA 9-1-1 offer going forward."}, {"role": "user", "content": "The second is, we're integrating more closely with our enterprise security solutions. So, Orchestrate is a key enabler for that. And as part of our global safety reimagined program we're bringing Rave much closer in terms of the ability to detect and the ability to alert using Rave Alert and the ability to bridge into 9-1-1 as appropriate. So those two together is really augmenting our path forward in terms of taking advantage of our strength in education, along with our presence with [Indecipherable]."}, {"role": "user", "content": "Great, thanks."}]}, {"messages": [{"role": "system", "content": "The next question comes from the line of Sami Badri with Credit Suisse. Your line is now open."}, {"role": "user", "content": "All right. Thank you. I had a couple of questions. Some of them modeling, some of them business dynamics. I'll start with business dynamics first. So, one on the backlog. So there, obviously are a lot of big deals and maybe you could give us a characterization of how many of these bigger deals are expected. And then maybe taking that question a step further, if we excluded FX impact and excluded big episodic activity, are you still seeing the backlog step up with more of these your standard business motion? And then I have a follow-up."}, {"role": "assistant", "content": "Sami, I think I'd address your inquiry. We've seen strong demand, it's not only big deals, but also the usual type and profile of our business. And I'd point to duration. While our backlog is up and at record levels, the duration of our backlog is similar to slightly better than it was last year and than it was last quarter. So not only are we growing backlogs, the opportunities we have to convert that backlog within the year are slightly better. So that's one of the reasons that, again, with our expectations going up for the year, it's driven by that backlog position."}, {"role": "user", "content": "And backlog is up in the -- unfavorable effect, to your other point of $370 million. By the way the other thing, Sami, is even when we have a large prospect, much like the year four -- [Indecipherable] earlier on the call, so $340 million 10-year order, only $11 million of that is logged in backlog. So, I like the composition and the duration of the backlog in addition to it being absolute and at record levels as we exit Q1."}, {"role": "user", "content": "Got it, thank you for that. Also, Greg, Jason, if you guys could give us any kind of idea on all video revenue growth targets for 2023 and also we appreciate the new breakout of individual segment."}, {"role": "user", "content": "So our expectations for total video remain approximately 15%, that's consistent with our last cll. And as Jack mentioned, that growth will be even better in some of our power verticals which represent over half of the composition of the revenue. So, video is performing to our expectations. And then, Sami, to your observation of Greg's comments around our portfolio around Alta and Unity, that's a market-facing change that we will represent the brands and Jack's sales team is positioned to sell video. We're in a great position to sell it either in an on-prem version, which is the way most customers buy today, but also in a cloud version. And as markets move, we're positioned extremely well."}, {"role": "assistant", "content": "I think a great example, I got a phone call yesterday Sami on that, specific to a large-scale metropolitan school district, they had three finalists, two of the finalists were Avigilon Alta and Avigilon Unity. And I think that's the power that we can meet a customer for their specific needs that no one else in the marketplace has today."}, {"role": "user", "content": "Great, thank you very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "This concludes our question-and-answer session. I will now turn the floor over to Mr. Greg Brown, Chairman and Chief Executive Officer, for any additional comments or closing remarks."}, {"role": "assistant", "content": "Sure, thank you. I would just say in closing, it was a great Q1 and I think it highlights the fact that what we do has never been more important. Both the demand environment and execution is strong. I'm really proud of the people, I'm really proud of our channel partners that achieved record Q1 orders, record Q1 backlog. At the end of the day, as we exit Q1, I like our position."}, {"role": "assistant", "content": "More importantly, I like our momentum. And then this is despite the ongoing supply-chain challenges that still have to sort itself through for the next several quarters. The fact is the intersection as Mahesh talked about of public safety and enterprise security, it's critical and we're building a safety and security technology ecosystem that connects public safety with private institutions, as you heard Jack reference in those key verticals. I couldn't be more proud of this team and I'm optimistic and enthusiastic about the opportunity in front of us. I appreciate you joining and I look forward to connecting up with you in a quarter from now."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question will come from Robbie Marcus with JP Morgan. Your line is open."}, {"role": "user", "content": "Good morning, everyone. And thanks for taking the question. Maybe to start, I wanted to ask on guidance. This is the second quarter in a row where you guys have had a really good performance on the top line, beat and raised guidance, But on the bottom line, we're seeing guidance go up again by a little less than the beat on the bottom line. So maybe spend a minute and talk through some of the puts and takes and how you're thinking about managing the rest of the year in guidance to be able to offset any headwinds. And it'd also be great, it looks like FX isn't changing on the top line but it's getting worse on the bottom line. So maybe throw that in there as well."}, {"role": "assistant", "content": "Yes. Thanks, Robbie. It's Chris. Appreciate the question. I think this is pretty straightforward. So first, just look, another strong quarter and our second increase in guidance, to your point. On revenue, we increased from 6.5% to 7% or 50 basis points on our base. So at the midpoint, that's 6.75%. And I think important to note, right, our two-year average growth is now 8% or even 7% when you strip out the benefit from tuck-in M&A, so on a pure organic basis. So really strong, well above our 5.5% profile."}, {"role": "assistant", "content": "As you think of the increase, basically the increase in revenue 100% matched the outperformance in Q2. The way to think of that, if you recall last quarter, we communicated that our second-half growth rate would be 6.6%. That stayed intact. So we're holding it to 6.6% Importantly, as you think of the first half to the second half, actually, the organic revenue growth accelerates from 5% to 6%, and again, nicely above our 5.5% plus. So really strong revenue story following a strong FY '22."}, {"role": "assistant", "content": "On earnings, where I think the core of your question is, so, one, building on the strong growth. We continue to execute against our margin goals. Hopefully, that hasn't gotten lost in this macro environment where you're seeing many in multiple industries with margins declining. So we're committed to the 100 basis points of margin improvement. We had slight improvement in the quarter. So that holds intact. So basically, the way to think of the raise, you have to kind of break it down and really understand the base business. So on the base business, as we noted in the presentation, we raised by $0.115 [Phonetic]. It exactly equals kind of margin drop-through on the $90 million increase on our base revenue. And then you noticed we slightly modified our -- the midpoint of our tax guide."}, {"role": "assistant", "content": "So revenue accounts for about 60% of it, the tax accounts for the best. I think also important to note, we're not getting any year-over-year benefit on tax. It's actually still a year-over-year headwind that's absorbed in our full-year guidance. So I think it reflects really strong base performance. And I think another important reminder -- so anyway, that $0.115, it basically absorbs two factors. You noticed that we moderated down the COVID-only testing by about $25 million. That has a strong drop-through in the margin because there's very little commercial investment. It has a higher GP, as we've shared in the past. So we more than absorbed that."}, {"role": "assistant", "content": "And then we did absorb some FX pressure on EPS, which was pretty modest. That was $0.05 in lieu of actually dropping for FX like we normally do and adjusting our guide range. It was $0.05. We absorbed that on the strong base performance. FX, there was a little bit if you remember in the quarter, the dollar strengthened significantly and the euro recovered. So you actually have to look at the average in the quarter. So there was a little bit in the quarter with the euro. You also had the yuan and the yen were the other two currencies. So just modest impacts there."}, {"role": "assistant", "content": "Net-net, it's a raise by $0.015 at the midpoint. And then I think the most important thing for everyone to keep in mind, when you just look at our base EPS growth year-over-year, knowing that we're absorbing significant year-over-year declines in COVID-only testing, our actual EPS growth on the base business is nearly 15%, well above our double-digit EPS. So we feel really good about where we sit halfway through the year. We haven't changed any of our kind of core commitments around margin. With that said, we want to make sure we solidify the future. We want to keep investing. We continue to invest in R&D at higher levels. And this isn't about one quarter, one year. We think this is -- what you're seeing here is a great growth story play out that will happen over multiple periods and will be durable."}, {"role": "user", "content": "Really helpful. Maybe just a quick follow-up. I could probably anticipate your answer here, but given the focus, any updates on Alaris or upcoming data points or catalysts we can be looking out for on the pathway to approval?"}, {"role": "assistant", "content": "Robbie, Good morning. This is Tom. Obviously, as we've discussed many times, getting Alaris back on the market is our number one priority. And we are confident in the resources that we have invested in our submission and the team and leadership tasked to prioritize this. As you expected and as we've said before, we're confident in our process and that we will get clearance, and we have been and want to remain prudent and thoughtful about the process with the FDA. And so therefore we continue to not try to predict exact time lines just given how inherently complex these submissions are. So obviously, once we get clearance, we'll immediately communicate at that point, and that has been and remains our strategy there. But we're fully focused on making sure that our number one job is making sure that the FDA has all the information they require to clear the product. Thanks for the question."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Larry Biegelsen with Wells Fargo. Your line is open."}, {"role": "user", "content": "Good morning. Thanks for taking the question. Tom, I think two for you. One, I just wanted to start at a high level, and congrats on a nice quarter here. The super cycle of new products you talked about, how are you feeling about your target of 5.5% organic growth beyond 2023? Chris mentioned a few times that the two-year CAGR for organic growth is 7% this year. So could that 5.5% be higher beyond this year? And I had one follow-up."}, {"role": "assistant", "content": "Okay. Good morning, Larry, and thanks for the great question. Great to connect as always. We're extremely excited about the pipeline that we have and our outlook going forward. We're not looking to adjust our long-term commitment at this time, but we are feeling very positive about the momentum that we have as you described."}, {"role": "assistant", "content": "I think as we look at where we are today, what stands out and hopefully it became clear in our discussions this morning, are the number of high-growth platforms that we've built and that we've continued to systematically progress across the company. And we talked about a few of those. Whether or not it's Pharm Systems, which is now the 11th quarter in a row of double-digit growth, and the macro environment of now biologics being -- more biologics being in pharma's pipeline and small molecules today, first time in history, and some big blockbuster products coming down the pipe. And we are well positioned as the leader in injectable drug delivery to benefit from that trend with the significant capacity we've added as well as the innovation pipeline we have, both for professional delivery but also enabling wearables and self-injection products that we've been investing in are coming to market now as well."}, {"role": "assistant", "content": "Pharmacy automation, right now, a $500 million-plus platform growing in the teens, huge trends that are going to continue to fuel that going forward, labor shortages, the need for pharmacists to move more front of the -- front off to be serving patients doing wellness checks, etc. We're going to continue to see strong demand for pharmacy automation, and we're really pleased with that platform that we've built."}, {"role": "assistant", "content": "B2B, huge super cycle of innovation there. The FACSDiscover, we've started shipping to the early adopter sites and really a tremendous opportunity to help bring new insights and new discoveries in the areas of cell therapy and immuno-oncology and just understanding the immune system overall. When you think about who is getting Nobel Prizes in those fields that I just described, almost all of them were using flow cytometry. And I'm convinced you're going to see a whole new set of discoveries being uncovered with the new technologies that we're rolling out there right now. Really excited. And of course, that's complemented not only on the capital side with FACSDiscover. And the product we're launching now is just the first in a whole family that we're going to be continuing to roll out."}, {"role": "assistant", "content": "We're rolling out the high-end sorter first, but we're going to be offering mid and lower-end sorters or cell analyzers, utilizing that same technology over the next several years. That's complemented by our new dye portfolio and expanding antibody portfolio as well as informatics technologies that we have launched and will continue to launch."}, {"role": "assistant", "content": "BD Interventional, you heard us talk about a number of great growth platforms that have been developed there, and we're seeing good strong growth out of the BDI segment. This was another strong quarter there. And you're seeing a number of the acquisitions that we've done over the last few years or had done just before BD and Bard came together, things like PureWick and the [Indecipherable] innovation that's happening there at tifA [Phonetic] which we acquired over the last few years and how we're expanding that into new applications. We gave an example of umbilical hernia, Straub Medical and how that's being expanded globally. And you're seeing the benefits of that in the PI business. We're really pleased with the growth momentum that's happening there."}, {"role": "assistant", "content": "And of course, medication delivery, a continuing strong growth in our portfolio there from catheters to picks and eventually through our planning horizon and our aim to get Alaris back on market. So we're really pleased with the momentum. We're really pleased with the launches we've done to date. We've had about 10 key launches so far this fiscal year. That's coming off of 25 key launches last year. And we continue to be on track for about that same number again this year and pretty much every year as we look forward. Thanks for the question."}, {"role": "user", "content": "That's super helpful. Just one quick follow-up on Robbie's question on Alaris. It's great to hear the confidence you expressed today. My question is, are you confident you can get it within the -- I know you're not talking about specifics, but within the BD25 plan? And I know you have 80 basis points of margin improvement in the -- for Aleris in the BD25 plan, if you don't have it within that time line, can you -- do you have other ways to offset the margin leverage you're expecting from it? Thank you."}, {"role": "assistant", "content": "Yes. Thanks, Larry. I'll take that one. Yes, to your point, if you recall, given that we made the decision to maintain investment in service, field support, etc., there was about that 80 basis point headwind to our margin as part of Alaris. We've been very clear, while we haven't been -- said we weren't going to predict timing, we did say as part of our FY 2025 plan. The good thing about margin, and just if you step back again, we delivered 50% of our goal, right, through FY '22. We're on track this year. That would put us 70% towards our goal. We have multiple levers to deliver both. In essence, the way we think of it is how do we get to double-digit EPS growth on a consistent basis."}, {"role": "assistant", "content": "We're not dependent on one variable. And given 70% of the way there, we feel really good between the strong growth profile that we expect to continue and natural leverage you get. The RECODE initiatives we put in place, that will continue to accelerate through the back half of the year. We just announced kind of the third leg of Project RECODE, operating model simplification. Those have been announced, continuing to drive portfolio mix as we've been doing."}, {"role": "assistant", "content": "So there's a host of things that I think give us confidence and the ability to actually sort of navigate the balance between top line growth and margin improvement as we continue to progress through the back half of the year while delivering on both commitments, the 25% margin and double-digit EPS growth. So I think we're really well positioned when you think of it that way, gives us a lot of flexibility."}, {"role": "assistant", "content": "And just to add to Chris's good comments is. So Alaris is included in our strategic plan. There's many other levers we have as mentioned. But we have been, as we've shared before, preparing so that when we do get Alaris clearance eventually, that we'll be well positioned to serve our customers, right? And so we've talked about that increased inventory levels that we've done on certain components, etc. We've talked about the continued investments we have, kept in service in our selling organization so that when clearance eventually comes, that we can both remediate the pumps that are on the market quickly as well as support additional customers. So thanks for the question."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Vijay Kumar with Evercore ISI. Your line is open."}, {"role": "user", "content": "Congrats on the nice sprint here. And thanks for taking my question. My first one is for you. appreciate all the colors, I think, on Pharma, new product cycles. But can you just simplistically outline what are the categories here that BD is gaining share? It looks like in a Pharma, Life Science, flow cytometry, surgery within hernia, vascular. There's a number of categories. It feels like BD is gaining share. Is that true? And how sustainable is that? And within Life Sciences, any concerns are emerging biopharma funding cycles?"}, {"role": "assistant", "content": "Yeah. Great question, Vijay, and I appreciate the comments. So we'll go around. We've got the segment presence here in the room. I think you're right. What you're seeing is outperforming market growth rates in a number of categories, and we're really pleased with that, driven really through strong innovation, capacity investments that we've made and strong execution. Why don't we start with the Medical segment and Mike can speak to what we're seeing in both Pharm Systems but also Pharmacy Automation and Medication Management overall."}, {"role": "user", "content": "Yes. Thanks for the question. There's three sorts of growth drivers that we've built in Medical. First, Pharm systems, as Tom mentioned in the opening comments, 11 straight quarters of double-digit growth. And both the combination of our capacity investments, which we built a few years ago and continue to implement, plus our innovation really to support the sensitive biologics and the requirements that those -- that pipeline has coming towards us. We feel really good about that durable growth continuing."}, {"role": "user", "content": "In MMS, we're really happy with the way that the teams have come together in Pharmacy Automation and our dispensing business. That connected med management and the tie around clinical efficiency both in the hospital as the hospitals start to shift care outside of the hospitals and how that ties into the retail markets, the long-term care markets. This is just a really ripe area for innovation, and we're really well positioned now with that acquisition. It's going really well."}, {"role": "user", "content": "And then in MDS, the Vascular Access Management strategy continues to do really well. Continues to resonate with customers, especially those aspects where it makes both the patient experience and the clinical experience a positive one. And so we see -- we don't necessarily look at it in terms of market position. We don't really comment on that. But we do look at it in terms of our WAMGRs. And we tend -- we're showing growth over WAMGR. So we feel good in that area as well. I'll turn it over to Rick or Dave."}, {"role": "user", "content": "Great. So thanks, Mike. Thanks, Vijay, for the question. And Tom, for the opportunity to talk about BDI. So first off, really pleased with the results in the quarter, 9.3% growth overall with all businesses contributing. And like you said, you pointed out surgery at almost 14%. And so this strong performance across the segment really reflects the execution of our growth strategy across those key end markets that Chris pointed out, advanced repair and reconstruction, PVD, oncology, incontinence, and our newer innovations in higher growth areas are all really contributing nicely to growth."}, {"role": "user", "content": "So in UCC, we continue to see the growth of the PureWick franchise, aided by the recent launch of PureWick Male. PureWick continues to have really a strong presence in the acute and the alternate care setting for us for chronic incontinence and surgery. Like you said, growth is really driven by continued market adoption of Phasix, our hernia resorbable scaffold."}, {"role": "user", "content": "Biosurgery growing double digits, aided by Arista. So really good there. And then finally, in PI business, we're really -- we're seeing improvements across our global supply chain as well as benefits of a lot of the strategic investments that we've made in the past. We have strong global penetration of Rotarex. We're really pleased with the relaunch of Venovo. And then our global expansion strategy is paying off, oncology in China is really strong. So, we feel confident with the overall external market conditions, including the recovery of elective procedures, improving their supply chain. And then you combine that with the success of, again, the strategic investments we've made, whether they be tuck-in M&A or products like as Tom mentioned, Rotarex, Phasix or with our new product launches such as PureWick Male. Team is executing extremely well, and we believe we have the right strategy to drive continued success."}, {"role": "assistant", "content": "And maybe just to add to Rick's good comments there. I think something that stands out for particularly the PI business is a number of the investments and new launches that are happening there are in entirely new markets for BD. And so they're almost exclusively share gains that are happening that are driving growth, right? So you think about atherectomy and thrombectomy, that's 100% share gain, think about the Venclose acquisition that we did and the growth that's coming from that, that's all share gain because we hadn't been in the category. And of course, Venovo stent, we have been off the market. And so the relaunch of that is regaining -- is all regaining market share. And just to more specifically address that question very as well, and maybe, Dave?"}, {"role": "user", "content": "Yes, for sure. Vijay, it's Dave. Great question. So again, I mean, just to reiterate for the segment. So I mean, as you saw in the release, just a tremendous strong quarter for BDB at 18.7% and even good core growth in IDS, if you strip away the headwind from the 800 bps of respiratory climber from same period last year. I'll maybe pick a couple of highlights. I mean, in BDB, we continue to see really strong growth across the board, whether it's the Life Science research reagents, clinical reagents the demand for the new instruments. Actually, from a Life Science research reagent perspective, so this is the dyes, the Horizon dyes that Tom talked about, that's actually our tenth successive quarter of double-digit growth now. You've heard us talk about BD MAX before, which was obviously instrumental in the COVID sort of pandemic from a respiratory perspective."}, {"role": "user", "content": "But how do we now leverage the BD MAX for take-up of IBDs and assay utilization and assay penetration? And again, we continue to see really good growth in molecular reagents, eight successive quarters of IBD double-digit growth, which is great. And then maybe on the automation side, we -- when you think about the staffing challenges that the labs are facing, we're really starting to see the traction for BD Kiestra, BD COR that Thomas talked about."}, {"role": "user", "content": "If you think -- you asked a specific question on the sustainability and the customers relative to BDB. The good thing about BDB and just the breadth of platform and reagents that we have is we've got a very strong diversity of customer base, so not just biopharma, for sure biopharma, but academia, large academic medical centers, big research institutions. So I think the diversity of base really helps us there and the types of research that they're doing. So you think about cell therapy, gene therapy, immuno-oncology, all the stuff in terms of fighting that chronic disease in oncology. So I think we feel really good about that base."}, {"role": "user", "content": "And then from that sustainability, I was just reflecting back as we were getting ready for today, and when you look at the segment overall, even for the first half of this year, we've actually had two PMA supplements approved and eight 510(k)s in the first six months of this year. So that all builds to the momentum as we go forward here. Hope that helps."}, {"role": "user", "content": "Thanks for that answer. And just one quick on gross margin. Chris, is a gross margin performance in the Q despite 200 basis points of inflation impact, should we think of back half or third quarter being at or above second quarter levels?"}, {"role": "assistant", "content": "Yes. So a couple of things. One, if you remember, from a full year standpoint, we're absorbing over 200 basis points. It's a second consecutive year of inflationary pressures. It was actually more prominent in the first half of the year. It will abate some combination of some moderation of inflation, coupled with, of course the cost improvement actions and mitigation actions that we're taking in the second half. So we expected modest improvement in GP through from a full year standpoint."}, {"role": "assistant", "content": "So I think you would expect basically similar, to be slightly ahead of our Q3 FY '22 gross margin, which was 52.6%. So you'll see slight improvement. And then that will further expand as we move into Q4. But we're right on track. And I think the other thing to point out is, remember, we have about five months of inventory that flows through our sales. So we have a strong line of sight to basically the inflation that is sitting in that inventory, all the cost improvement that has actually been driven that's part of that inventory cost. And as that sell-through in the back half of the year, it gives us strong confidence in our cost base to achieve those goals."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Matt Miksic with Barclays. Your line is open."}, {"role": "user", "content": "Hey, good morning. Thanks so much for taking the questions. And congrats on a strong quarter here. I wanted to just -- I want to go back to the guidance, Chris, if we could, just because there had been some changes. And I know, Robbie, touched on this earlier. But maybe just to clarify a bit further on the bottom line just because a sensitivity around beats and raises this quarter is so significant, it seems. So if I remember correctly, last quarter, a significant part of the raise was sort of an FX tailwind. There was also the lower COVID -- higher margin COVID headwind as well. But sort of a big part of that lift, offsetting that was FX tailwind. In this quarter, you've actually got another FX headwinds that you're absorbing. Is that the right way to think about sort of the relative puts and takes last quarter or this quarter?"}, {"role": "assistant", "content": "Yes, that's correct. Just one comment on FX which is interesting. Our fiscal period starts earlier. We actually -- our original guide started at the peak of the strength of the U.S. dollar. So we had significant FX pressure when we gave our initial guide."}, {"role": "assistant", "content": "To your point, in Q1 the dollar weakened a bit. We adjusted up similar to most companies reporting sort of their first fiscal year. And so we reversed a lot of that unfavorability in the quarter, gave that back. The base was strong, the base EPS actually expanded, and to your point, offset, we had a takedown in our COVID-only testing in Q1."}, {"role": "assistant", "content": "This quarter is a little bit different. Again, you had strong base EPS. We actually raised $0.115. It was offset by two things. Again, another $0.05 on the COVID-only testing dynamics, taking that down a bit to how we see the full year given that those dynamics and market has softened significantly, and then a little bit of FX pressure for the reasons I noted previously. So net of those two items, it's $0.005. But I will go back to just what I shared. So again, when you look at our base business, absorbing all the COVID-only year-over-year testing impacts, our base EPS is growing almost 15%, and that's while absorbing over 200 basis points of inflationary pressures. I think it's somewhat unprecedented performance in this environment. We're delivering really strong growth. And we want to make sure that we're maintaining investments to also continue this type of performance well into the future. So that's how to think of it. Hopefully, that helps."}, {"role": "assistant", "content": "I think just to add to Chris' comment, obviously, the update here has COVID essentially out for the balance of the year. So the number that we have now in COVID guidance is basically the COVID number that we have year-to-date."}, {"role": "assistant", "content": "The other, just given those FX dynamics, when FX improved, we only had three quarters to go. So when we cycle into our fiscal Q1, which is calendar Q4, there will actually be FX tailwind based on where spot rates are today. There's a lot of moving parts to calculate that directly. But on top line, it could be $75 million to $100 million. So when you look at other people's guide that has a full true calendar year, that's included. We picked that up next year in ours."}, {"role": "user", "content": "Got it. That's super helpful. And the slides are also really helpful material to sort of walk through this stuff. The other -- again, on guidance on the top line. So you did make a change, as you pointed out, you're expecting a heavier contribution, positive contribution from your inorganic adds, if you will brought up specifically. And so I know that last quarter, you controversy, but there was this question of you have inorganic adds and you have a portfolio exits, which are basically distinct products not sold to another company, but coming out of the -- coming out of your revenue build. And the way I think you were describing it was those things are kind of offsetting each not exactly organic, but we're thinking about it organically. And I would agree with that."}, {"role": "user", "content": "Now you sort of shifted back to more traditional organic description, but you're still sitting those 100 basis points of portfolio exits. So even though it's 5.25% to 6.25%, it seems to be a little bit stronger on the base business on the organic side. Is that a fair way to read the strength on the top line?"}, {"role": "assistant", "content": "Yes, yes, exactly. The simple way to think of it is, so our all-in guide that includes the negative impact of portfolio exits and the positive impact of organic is 6.75% [Phonetic] at the midpoint. But even if you strip out just the M&A contribution, we're still at 5.5 at the midpoint. Now that's not taking any credit for the strategic portfolio exits. That was purely just to make sure you guys had context to -- we were taking that bold action, it's helping improve margin given the strong growth profile we have. So when you think of pure underlying against all the businesses we're investing in, if you want to adjust for that, that's about a point that would take it back up to that same range. But even if you get 0 credit for that, our organic growth is 5.5%. And more importantly, our two-year, right, coming off a really strong year, we're 7% organic. None of those numbers give us a positive adjustment for those one-time strategic portfolio exits."}, {"role": "assistant", "content": "And I think we're seeing the benefits, obviously, given the strength of the business, taking those actions on that portfolio is exactly the -- it's the right time to be doing that. As a reminder, those products that we're just exiting have less than half of the average GP of the company. They're growing much less than the average of the company and are in areas that are just not strategic in terms of relevant growth platforms as we go forward. And so they also come with operational efficiency benefits, organizational efficiency benefits, etc. And so they're just going to make us that much stronger as we go forward and make sure that we're focusing our resources and investments in those areas that move the needle the most for customers and for us."}, {"role": "assistant", "content": "Yes. And the other just one last comment. You mentioned Parata and the strength there. This is a little unique. You get the sort of one-time adjustment for what you acquired. This is a great example of us just strong execution and revenue synergies and taking up that forecast. So again, I think it's just illustrative of how we're managing kind of tuck-in and the benefits we're generating from that. As we anniversary Parata, the contribution from all the tuck-in acquisitions we will do on an organic basis, it will add about 50 basis points of growth to our portfolio as we exit this year."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Joanne Wuensch with Citibank. Your line is open."}, {"role": "user", "content": "Good morning. And thank you for taking the question. A couple of miscellaneous things all at once. What was the impact of price in the quarter? If you stop planned exits, does that mean your organic revenue growth rate goes up 100 basis points? And is there a plan to stop planned exits? And then bigger picture, there were a lot of BD Veritors and BD MAXs, etc., placed or sold during the pandemic for testing. What happens to all of those now? And how do you increase utilization on them for other things?"}, {"role": "assistant", "content": "Okay. Great question. Why don't we start on the first two with Chris and then Dave can take for the Veritor, MAX."}, {"role": "assistant", "content": "Yes. So pricing, Joanne, so the Q will come out this evening the aftermarket, and pricing will be disclosed in there as we consistently have. What we've shared is it's the last thing we think about, right, as it relates to inflation mitigation. And so what we're really focused on is driving cost improvement, portfolio mix, the strength of growth and volume leverage. All of those dynamics are significant contributors to mitigating the 200 basis point inflation. You'll probably see something consistent in terms of what we've done last year. If you think of how last year played out, it accelerated through the year. But you'll be able to see that at the end of the day."}, {"role": "assistant", "content": "In terms of portfolio, I mean, the simple answer to the question is these were one-time in nature. There's always smaller adjustments you make in your portfolio, but we made a decision to really take a deep look at our portfolio this year, as Tom described. These weren't strategic products. There's market alternatives. The GP profile is significantly reduced. Removing these freeze up capacity and other costs. All of those products, not being sure they still require quality support, regulatory support, there's a lot of tie-up as it relates to shipping and thinking of other infrastructure support."}, {"role": "assistant", "content": "So there's benefit beyond just the GP lift you get. But to answer your question simply, yes, if we stopped doing that, our results would have been better by roughly 100 basis points this year. This quarter was a little light. It was closer to 50 basis points in the quarter. But from a full year, we're still estimating about 100 basis points. We do view these as one-time in nature this year. We don't anticipate doing that in the future beyond smaller things that we would just absorb and not even talk about."}, {"role": "assistant", "content": "Yes. And obviously, we continue to focus on delivering on our 5.5% plus, but as Chris said, we do not have plans to do that again. These are very discrete products. We've given some examples before things like vasectomy bras or washing instruments for orthopedic procedures that, again, we just don't have a relevant role in those spaces and so we've exited those revenues. And we would not see that repeating in the future."}, {"role": "assistant", "content": "Just one thing as you see price after the close of the market today, just to reinforce a comment that Chris made in the opening comments is that we did see very strong volume this quarter as we think about price and volume and the role of those two together. As we look at volume, we look at it organic volume, and then we take out flu-COVID sales as well. Because that's something that's not really indicative of kind of our ongoing business. And when you look at that organic volume growth, excluding COVID-flu, it's strong mid-single digits, nearly 6% overall volume in the quarter. And so that's something you'll also see as those further reports come out, something very positive that we're continuing to see across the business."}, {"role": "assistant", "content": "When it comes to Veritor and MAXs, I know David made some earlier comments about the very strong double-digit growth that we continue to see in MAX reagent absorption. But why don't you share some more color on that?"}, {"role": "user", "content": "Yes, Joanne, thanks for the question. And you're right. I mean, through the pandemic, obviously, Veritor and BD MAX installed base did increase. We've not given specifics around exactly what those numbers are. We're very pleased. We continue to ship those platforms today. And if I break it down, so for Veritor right now, a lot of our focus is actually on converting the emergency authorizations that we got for COVID and our combination assays to 510(k). And obviously, once that is done, that would leave the Veritor, if you like, with approved assays for flu A, flu B, COVID, RSV, Strep A, which will really create a really nice anchor point of care clearway platform for infectious disease testing. So that is our focus there."}, {"role": "user", "content": "For BD MAX, one of the big benefits of that platform that lab sees an attribute is its complete sample-to-answer automation and integration within a two- to three-hour window from sample to result. We placed many MAXs during the pandemic just for COVID and combination testing. And then when you think about the rest of the menu, we're now starting to drive adoption of our regular IBD assays. So there are really two strategies. One is to increase asset utilization and assay penetration of our regular IBDs onto that BD MAX installed base and where we got emergency use authorization on BD MAX during the pandemic, like our quad assay for BD MAX, moving those EUAs to 510(k) as well. And it's that IBD traction and momentum that you've seen us sort of perform eight quarters double-digit growth."}]}, {"messages": [{"role": "system", "content": "Our last question will come from Rick Wise with Stifel. Your line is open."}, {"role": "user", "content": "Listen, I'm just listening to everything you're saying today, and I keep hearing you both say in many different ways that and Chris said it, you're well on track to hit your fiscal '25 long-term targets. Gosh, I accept it. I believe. I think this quarter supports that notion. So my question is it right for us to believe, and I feel like everything you're saying today is suggesting it, that you're now approaching sustainably perhaps a 6% plus top line territory? Is it right for us -- again, I accept that you're going to hit the 25% in '25 on the operating margin."}, {"role": "user", "content": "My question on operating margin is more how are you getting ready, Tom, it's a crazy question, for the next target, which I think it's going to be 30%? I don't know if it's -- if that's going to take another five years. But is that conceptually the wrong way to think about what you're trying to do, where Becton is going? And maybe just as part of that, you're role in your -- just your latest thoughts on the role that tuck-in M&A is going to play. You're doing all these great things internally. What role is tuck-in M&A going to play in this journey?"}, {"role": "assistant", "content": "Thanks for the question, Rick, and it's a good question. We're focused, obviously on continuing to execute our strategy, and we are very pleased with our progress, both on our portfolio and the reshaping that we've been doing. Of course, that includes an Embecta spin just not that long ago as well, which we're pleased with how that's turned out and is allowing each organization to focus."}, {"role": "assistant", "content": "As we look ahead, I'll just go back to the growth platforms that we've been systematically building and are continuing to gain momentum in. We talked about areas like farm systems like pharmacy automation, like BDB flow cytometry, innovation super cycle, like Interventional Solutions, our medication delivery solutions and our continued innovation focus, our continued outperforming of WAMGR and how we've been supplementing that with strong tuck-in M&A that, as Chris mentioned. As Parata anniversaries this summer, we'll be contributing 50 basis points of underlying growth."}, {"role": "assistant", "content": "We continue to have a very strong funnel, we continue to be exclusively on tuck-in. M&A has been part of our strategy. And obviously, we've been very focused. Mike and team have been heads down executing the integration of Parata exceptionally well to see revenue synergies this early in the game is quite unique. And just as a reminder, that was accretive to our operating margins right from the start, and they're getting expense synergies going now as well, too, right, which only improves that dynamic. So we're really happy with how we've been executing tuck-in M&A, the capabilities that we've -- and track record that we've developed there, which gives us the right to continue to make that an important part of our strategy as we go forward."}, {"role": "assistant", "content": "And I think we've talked about in the past, this is really a new lever for BD. We're a 125-year-old company. And tuck-in M&A had not been a systematic part of our strategy historically. Obviously, back in 2015, you saw the beginning of two large transformational M&A deals. We obviously did not do tuck-in M&A during that period of time as all the cash was going to pay down debt. And so this era where we've done quite a number over the last three years, how you're seeing those build systematically stronger business profiles and growth platforms and how we're going to continue with our focus on cash and profitability to drive that going forward is a new part of our equation that's complemented by our strong organic innovation."}, {"role": "assistant", "content": "One thing we didn't mention on this call is -- although we've been talking about historically is that when it comes to innovation, we've made really strong progress in improving our on-time launches and our on-time milestone delivery, getting into the top quartile. And we had exited FY '22 with our best ever performance. We're beating FY '22 again in the first half of this year. So we're hitting new records and on-time milestone delivery and on-time launches. And so we're getting that productivity out of our organic investments as well, which is really positive as we look ahead."}, {"role": "assistant", "content": "When it comes to margin, and Chris can jump in further to this yes, we feel confident in our 25% margin by '25, and we've talked about that. It could be opportunity to exceed that, and we would make decisions on do we let that flow through? Or do we further invest that. I think our first priority will continue to be making sure that we invest in strong growth. We have a lot of exciting opportunities and markets that we participate in. We've described a number of them the day on the call and have been discussing them for some time. We're going to continue to invest behind that, creating a durable growth organization that's supporting, transforming the future of health care in the areas that we've consistently talked about around smart connected care, around enabling the shift, the new care settings and around improving outcomes for patients with chronic disease. And so that's our focus. Let's get to 25% margin first, and then we can look at optionalities from there. Chris, any other."}, {"role": "assistant", "content": "Yes. Just maybe a few small adds. I mean, one, look, I do think the value proposition that BD offers is unique. And we're not changing in our commitments. We talked about 5.5% plus. But to your point, what's been clear, right, our two-year growth, 7% organic. We're clearly in the plus side of the equation. I think for all the reasons Tom noted, we have a portfolio that has the ability that we want to continue to try and drive the plus. But our commitment is 5.5%. I think the nice thing about that is that it may be underappreciated. There's very few companies in med tech that can deliver that outsized growth but still have this nice durable profile. It's very derisked. So you get this benefit of strong mid-single digits, it's extremely reliable, while we're posting outsized growth and improving margin in a very complex environment and haven't even fully capitalized maybe on some of the levers Tom talked about, like the firepower we'll have with tuck-in M&A going forward, or margin, really, I'll go back to -- we're committed to double-digit earnings growth, which isn't easy to do. Obviously, we can moderate that depending on the growth profile, what we want to make sure we do is consistently invest in the right areas to drive that growth."}, {"role": "assistant", "content": "We continue to increase R&D, et cetera. So all those factors would be sort of contemplated, but certainly confident in double-digit EPS growth, being able to consistently do that. So I think it's a nice balance of you're seeing an inflection in growth and really strong growth that's differentiated. You're seeing differentiation and execution and you have a derisked portfolio. It's hard to find all those pieces. It should make people feel good."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your first question comes from the line of Umer Raffat of Evercore ISI. Your line is open."}, {"role": "user", "content": "Hi, good morning. This is [Indecipherable] on for Umer. Thanks for taking the question. So first on Humira biosimilar, [Indecipherable] reported $50 million in the first quarter, and the majority of it is inventory. So just wondering what is your expectation on the end-user demand for Humira biosimilars? And secondly, next one, what is the trend now on Roe v. Wade impacts on the state level? Thanks."}, {"role": "assistant", "content": "Thank you for the question. I can address that. So first question in regards to our HADLIMA launch. We believe, again, as I mentioned a number of times in previous settings, that 2023 will be a modest ramp-up year. It's a year of essentially competition to get on formularies. In our discussion with various PBMs, they still hold to the fact that there will probably be two to three biosimilars for Humira on formulary during this period of time. And so I think they're playing a wait-and-see game as we speak right now. And so 2024 and 2025 will be the formative years where we see more and more kind of HADLIMA uptake and essentially the market for biosimilars for Humira will start to really form in that sector."}, {"role": "assistant", "content": "So we're still fairly conservative in our view in terms of what we can do this year because it's really getting on formularies and then the years past that, we'll start to see a more aggressive robust ramp up. Now in regards to your second question about NEXPLANON, right now, what we see is essentially a focus on expanding demand generation for NEXPLANON. We see good physician growth in terms of overall demand. We see a lot of bright stars in terms of ability to be able to continue to drive this product. We mentioned already that 2025 will likely be the milestone point where we reach $1 billion in overall."}, {"role": "assistant", "content": "So it's really essentially our blockbuster product. We continue to see a lot of signals that this product is gaining a lot of momentum throughout the country in terms of some of the demand signals that we're seeing out of physicians in various other sectors. So we feel very, very, very enthusiastic, very bullish about what's going on in terms of consumer demand, consumer market access and what we see going forward with NEXPLANON is really a healthy product. As you saw, the trailing 12 months, it's double-digit growth as we look backwards, and we still feel that this is a product that will be very important for us."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Jason Gerberry from Bank of America. Your line is open."}, {"role": "user", "content": "Hi thanks for taking our questions. So, I just had a couple. So, OB/GYN has a couple of Phase II readouts from your in-licensed endometriosis asset. How important are the 2024 pipeline updates to driving BD strategy as those assets will hopefully replace NEXPLANON when it goes LOE. And then the second question, you mentioned the year-over-year decline in 1Q gross margins due to product mix and inflationary cost pressure, but the guidance for the full year is flat. So, do you expect any pressures there in the upcoming quarters? Thank you."}, {"role": "assistant", "content": "So I can address the first question, Jason. In regards to Ebopiprant, as well as 6219, our endometriosis product, as you know, we -- last year, fourth quarter, we essentially initiated our Phase II trial. We'll see what happens in 2024. But so far, that is a product that we believe strongly in, new mechanism of action, treatment of endometriosis in a way that hasn't been essentially achieved before. Endometriosis continues to be a major, major issue across the world with almost nearly 200 million women of reproductive age suffering from some of the debilitating effects of endometriosis. The field needs innovation. It needs a new mechanism of action that does not work centrally, it's more locally acting. And so we'll see what happens. But clearly, that's one of our strategies."}, {"role": "assistant", "content": "If that product makes it across the finish line in the 2028 timeframe, we'll be able to deal with that. But on the other topic of NEXPLANON, the LOE in the United States is 2027. But as I mentioned a number of times before, the entire kind of erosion model for NEXPLANON, I would probably look and start to look at benchmarking, say, for example, Mirena from Bayer as kind of the situation because it's a device that has a drug-eluting device. It's a very difficult product to manufacture. And all of the other downstream investments that need to be made in terms of training, in terms of pharmacovigilance, in terms of all the other things that go along with the complexities of managing something like an NEXPLANON in terms of your own applicator device."}, {"role": "assistant", "content": "So we still believe that NEXPLANON is not going to essentially resemble what you might have in your models in terms of the standard kind of historical erosion rates. And so those two together, I think, kind of signal that we're on the right path going forward. Matt?"}, {"role": "user", "content": "So, for the gross margin part of your question, the -- just to elaborate a little bit more on the commentary. Just due to the production timeline cycles for our products, most of what we sell in the first half of the year is -- was actually manufactured last year. So any inflationary impacts from 2022 are already in inventory. It comes out in COGS as we sell product. Any product that we're making this year is likely to be sold next year. But anything that happens within the year, where it's made in the year, sold in year, would continue to reflect the inflationary cost that we've been seeing."}, {"role": "user", "content": "But as we think about the gross margins for the rest of the year, obviously, the biggest driver of our gross margins is going to be product mix. And so we think we have reflected, based on the revenue forecast, everything appropriately the gross margin line. And all -- what all that boils down to is that gross margins are likely to be net-net lower than last year by 100 or 200 basis points, most of that driven by inflationary cost pressures that were either already reflected in inventory when the year started, or we will continue to realize our activity this year."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Navann Ty at BNP Paribas. Your line is now open."}, {"role": "user", "content": "Hi, good morning thanks for taking my question. On women's health, could you tell us more about the change in customer mix and discounts in the U.S. for FOLLISTIM? And on NEXPLANON, were the distributors buy-in, buy-out patters more pronounced than expected? And how do you see demand during the year on both FOLLISTIM and NEXPLANON. And then another one on established brand, if you could tell us which drugs drove the strong performance in China? Thank you."}, {"role": "assistant", "content": "Yes. So let me try to take those questions, Navann. So first and foremost, in regards to fertility, we continue, as I mentioned in my opening remarks, see the fertility business ramping back up for the second through the fourth quarters of this year. The first quarter we started to see essentially some COVID effects in China that were coming through. We see February very strong and March very strong and ultimately Q2 strong. So we'll ramp very nicely back up. And when you look at the FOLLISTIM business in the U.S., as we start to expand our share, and believe me, we're starting to expand our share in terms of our volume share in the U.S., we're having to get into some competitive pricing scenarios in regards to some of the accounts that we're putting on board."}, {"role": "assistant", "content": "And so as a result of that, there's more pricing competition. But everything we see, again, in Q2, right now, and we're midway through Q2, shows me that it's being very -- it's going to be a very successful year for our overall fertility business, as I mentioned earlier, in the high single digit, low double-digit rate for the intermediate period in terms of the coming few years, it's not going to be any different in 2023. So all the signs, all the signals that we see our fertility business in our two most important markets, that being the U.S. and China, continue to be, I think, very, very solid, very, very solid. In regards to the second question in regards to NEXPLANON, specifically in the U.S., the NEXPLANON business continues to act in a very kind of a predictable manner in the sense that typically in the fourth quarter of any given year, we have the buy-in."}, {"role": "assistant", "content": "And then, ultimately, in the first quarter, we kind of work through that process in terms of the buy-out. So typically, when we see NEXPLANON on business in the U.S., Q1 is always kind of our lowest quarters. Everything that we see though in downstream demand, what we see from physician demand, which is essentially sales from the distributors over to the physicians, shows us mid to -- actually growing higher digit demand growth. So everything that we see from NEXPLANON tells us that in 2025, we'll surpass $1 billion. Physician demand continues to be very bullish, very strong in the U.S. Ex-U.S. business is coming along as well."}, {"role": "assistant", "content": "The buy-in, buy-out, I think, noise that you see can be rationalized when you look at the kind of the moving annual total of the business. And what's happening to those dynamics, we still see some very, very good solid growth and has been the case since we took over the product, and we feel very strongly about that. In terms of established brands, specifically in China, retail growth continues to do very well. We have really good opportunities with our Cerazette and respiratory. It's been a strong respiratory season. We do see the retail sector. As I've mentioned a number of times, we're kind of working through all the various stages or the rounds of VBP, and we start to see the business now almost 60% in the retail sector for our established brands business."}, {"role": "assistant", "content": "So we'll go through -- we'll kind of funnel through all of the rounds of VBP sometime in 2024, and then you'll start to see really more bullish growth coming out of China as we work through all the various rounds. Currently, by the end of this year, we'll have seen probably about close to 70% of our brands kind of gone through the volume base procurement process, and it will be essentially fair sailing thereafter when we start to see both the retail sector really take over and do very well for us."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next line -- sorry, your next question comes from the line of David Amsellem from Piper Sandler. Your line is now open."}, {"role": "user", "content": "Thanks, So I had a question about Biz Dev M&A and the cap structure. I think in the past, maybe a few months ago, you talked about potentially adding commercial stage assets. So, I guess the question is, how do you think about that in the context of also debt pay down? And maybe it's not an either/or, but what are you prioritizing in terms of bigger acquisitions versus cleaning up the cap structure? Thank you."}, {"role": "assistant", "content": "Well, I think Matt and I will kind of tag team on this. What I will just, from a high level, point out, David, is, as I said, we made a $250 million pay down of our debt in the first quarter. So we are clearly focused on kind of some balance sheet hygiene actions that we need to take. But it never kind of detracts away from what we're doing now in terms of building out a pipeline of assets for Organon, especially in the women's health space and biosimilar space. We continue to look at and we'll continue to open, and we'll continue to field a lot of incoming as well as us kind of reaching out to various parties."}, {"role": "assistant", "content": "We are focused on more near term, more accretive tuck-ins that I've said earlier, and that's what we look at. For example, the Claria Medical System, if all things go well, which we believe very strongly in this device, we're talking about a second half 2025 launch. So it's not a long-term kind of proposition. And so as time goes forward, you'll start to see more and more of our opportunities to talk about the things that we're doing in BD. But we are open to all various forms, whether it's large deals that we're looking at. But obviously, given the current environment that we are competing in, we've got to be obviously very careful in terms of what we're doing in regards to what we're bringing into the company. So I'll turn it over to Matt for any additional comments."}, {"role": "user", "content": "That's a very complete answer, Kevin. I have nothing to add."}]}, {"messages": [{"role": "system", "content": "Thank you. Your last question comes from the line of Greg Fraser at Truist Securities. Your line is now open."}, {"role": "user", "content": "Good morning everyone thank you for taking my question. On the fertility business, how are you thinking about your business in China bigger picture in terms of the commercial organization portfolio? Is your footprint there sufficient to drive the high single-digit to low double-digit growth that you talked about? And are you interested in BD opportunities that would expand your business and your portfolio in China? Thank you."}, {"role": "assistant", "content": "Yes, Greg. Look, I've said on a number of calls that the future of our fertility business is really the growth component is going to come -- a lot of it will come from the Asia Pacific region. You start to look at the overall fertility rates in the Asia Pacific region, China doesn't publish it much, but we understand that it's somewhere around probably one when it should be 2.1 per couple -- per women. When you look at Korea, another very large market. It's less than 1. When you look at Japan, it's around 1, 1.2. This is becoming a major issue for many countries in the Asia Pacific region. Now let's kind of drill down on your question in regards to China."}, {"role": "assistant", "content": "China, we do have -- we've stood up, and we do have a fertility sales force. We've got a good footprint in China in terms of especially the provinces that we believe have the highest return of investment in terms of what we're doing there. Two, we're the second leading product -- group of products and fertility in China, and we're competing there. We see an opportunity to really do well there. The China fertility market is clearly still not reimbursed within the China market, but there are signals that reimbursement is not so far off in the not-too-distant future. So that will really kind of signal that there's opportunities to really expand and grow our business in China."}, {"role": "assistant", "content": "The first quarter was characterized by kind of working through the COVID lockdowns, but February and March were much stronger sequentially. What we're seeing right now in the second quarter is even stronger double-digit potential expectations in the second quarter and going forward for the year. So China will be a key market focus for us. We've got the right footprint there. We're looking at also, to your point, we're looking at business development tuck-ins within the fertility sector in China, and we're also looking for China for China as well because we see opportunities there given the size of the market, given the growth of the market, given the expectation that potentially we're going to see potential some form of reimbursement potentially coming down the pipe in the not-too-distant future."}]}, {"messages": [{"role": "system", "content": "There are no further questions at this time. Mr. Ali, I'll turn the call back over to you."}, {"role": "assistant", "content": "Very good. Thank you. Thank you. Today, we've conveyed to you that we're focused on two things: balance and execution. We remain committed to creating sustainable long-term business with growth from value-creating business development. This will be balanced against good financial hygiene, which, for us, means maximizing profitability and lowering our debt leverage. I'm proud of the continued business execution and our growing track record of delivering on our commitments. Thank you. We'll speak to you soon."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question comes from Pete Christiansen with Citi. Please go ahead."}, {"role": "user", "content": "Thank you, and good evening. And Tom, welcome aboard here, great to have you. I had two questions here, there's a lot to dig into. But Ron, I guess now with the new segmentation, how should we think about long-term kind of normalized growth for the fleet business now that we've added some other things to that segment? I know in the past, you've talked about the segment being kind of like 4% to 8%. Does that change with the new classification? And perhaps maybe we could also address Brazil in that same vein? Thanks."}, {"role": "assistant", "content": "Yeah. Hey, Pete, it's Ron. So I'd say kind of in the base business based on how we're allocating sales and marketing investment, we're probably still in that target range kind of mid-single digits. But I think the couple of wild cards on our AEV, right, as that thing, particularly with the early view of getting of the economics, does that help accelerate it along with that consumer leg. And then B, do we get the cross-sell thing to hunt a bit more? So I'd say, the wildcard is those two things. If those two things come in, obviously could accelerate quite a bit."}, {"role": "user", "content": "Okay, that's helpful. I know the toll businesses in Brazil, switching to free flow. I know it's been a benefit to some toll payment administrators here in the U.S. when E-ZPass went free flow. Just curious, your take on how that could impact the business nearer term. Thank you."}, {"role": "assistant", "content": "Yeah, that's a good question. So, so far, it's good news. It's -- for those who don't know, it's pretty early days in Brazil in terms of trying to make the transition to free flow. So they're actually testing it in one region. So the good news on that for -- obviously for the total operator is hey, there's, no more gates and stopping people. The bad news is that whatever, the 20% to 30% of the people that don't have electronic have good value, way of paying after the fact. So it will help us. It's a tailwind short term because it makes the electronic blast right through even more attractive than today because, again, it's more difficult for people to follow up after the fact."}, {"role": "assistant", "content": "So we're actually seeing that, Pete, in the test region. So in the one place where they put it in, we're actually doing a bit better. So I'd say the only reason and I get super excited is it will probably take quite a while, right? There's a lot to test. There's a lot of infrastructure and stuff to move, that post payment thing to work out. So I don't think it's going to be super duper immediately, but I'd say over the midterm, helpful to us."}, {"role": "user", "content": "Super helpful, Ron. Thank you."}, {"role": "assistant", "content": "Yeah. Good to talk to you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Andrew Jeffrey with Truist Securities. Please go ahead."}, {"role": "user", "content": "Ron, I wonder if you can update a little bit on the selling motion as you move up market in fuel. It sounds like you've met with some pretty good early success. But can you just kind of elaborate on what that looks like? Can you continue to go to market using primarily digital means? Is it more kind of feet on the street? Is there a pricing or yield difference on some of those bigger fleets? Just want to try to understand how that might compare to how the fuel business looks prior."}, {"role": "assistant", "content": "Yeah, Andrew, another good question. So point one is we already sell a market, so although we don't say it, call it, I don't know, 40% of the sales even in the U.S. business are kind of not digital, 40% to 50% so we're already kind of in the business is point one. And point two is, I'd say, even more so, internationally. We have way longer time and see there with universal networks, so we sold a bigger account for a lot longer. But back here to the U.S., so the two ways that we'll kind of drift up market is one is re-pointing of our digital engine. So we basically kind of reworked the algorithm there to look for different kind of search characteristics."}, {"role": "assistant", "content": "So we let through the door, if you will, we bid in a way basically to encourage bigger accounts that come to us and obviously kind of shun smaller down. So that's underway. We made that pivot or call it, last October, November so that's already started to work. And then second, what you said, we're starting to grow now the feet on the street that would go into the scene. And what we're working on is what I mentioned to Pete, Andrew, a few minutes ago of maybe go to market with not only the fuel card, but going to market with this Corpay One that kind of has the corporate payment stuff built into it to see if that might be a little bit more compelling."}, {"role": "assistant", "content": "So we're kind of in test mode now of putting some people against a bit larger prospects and giving them something a little newer kind of interesting to say. So those are the couple of ideas."}, {"role": "user", "content": "Okay, that's helpful. And then I like the UK mixed fleet disclosure slide from a revenue standpoint. Is it safe to assume that you see similar unit economics or maybe think about it as contribution margin in addition to more revenue? In other words, is operating leverage in those mixed fleet EV offerings?"}, {"role": "assistant", "content": "Yes, I'd say that's way too early to call, right? We've got a tiny little EV business and set of assets and cost structure. So our 99% focus at this point is on the revenue side, right, and figuring out how to serve these clients and win. And I don't know if people think it's a big deal, but as I kind of dug through the data, I'll say to everybody, it is a big deal, right? That companies, real clients that we have are willing to pay us more money to be more helpful in more places, and if you look at the chart, kind of significantly more money. So that is way different than I think we would have thought two years ago, getting into the thing."}, {"role": "assistant", "content": "So what I would say people ought to focus on is the fact that we have it. I think I'm in saying we're the only ones. There's no one else that has this 3-in-1 kind of offering that brings all the things together. So I'd say, come back, Andrew, a different day to me on the margin side, but there's nothing structurally that would make us think we couldn't be at the same level over time. It's just not we're on today."}, {"role": "user", "content": "Okay. Helpful. Thank you. Appreciate it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Sheriq Sumar with Evercore ISI. Please go ahead."}, {"role": "user", "content": "Thanks a lot for taking my question. I just wanted to get a sense on the trends in the month that you saw in the first quarter as to, was there a sequential decline in the month of March versus what you saw in Jan and Feb? Or was it highly consistent across all the months? And early read across how trends have been in April. And any areas of weakness or strength that you have seen so far? Thank you."}, {"role": "assistant", "content": "Yes, Sheriq, it's Ron. So no, I'd say if anything, the months are increasing why we're a snowball business where we add more than we lose. And I think I try to be, but March has more workdays so it would have been a higher print. And I did call out, we've had a pretty good peak here in April, both revenue and other trends that I'd say it's kind of spot on the plan, which obviously fits with the guidance. So we're still just not seeing much. We built a plan whatever a few months ago. And as you can hear from the results in the April we kind of track and right where we thought."}, {"role": "user", "content": "Thank you so much. One follow-up. On corporate payments, if I remember correctly, on the last quarter, you had mentioned that the growth will be around 20%, north of 20%, but now you had like around high teens, unless I'm wrong over here. So I just wanted to get a sense as to what's causing the difference in outlook for corporate payments?"}, {"role": "assistant", "content": "Are you trying to pick on, hey, it's 19% instead of 20%?"}, {"role": "user", "content": "Yeah. No, I thought it was more like 20-plus percent, so I thought it probably was more like a 200, 300 basis point of decline there."}, {"role": "assistant", "content": "Yeah. And if you go back and read prior scripts, I would have said high-teens to 20%, so 19%, I think qualifies as high-teens. And I did say I think it's likely you will see in one of the next two or three quarters to think -- tick above the 20%. So again, we try to build, design that business to run right around the 20%, plus or minus, so still highly confident of that."}, {"role": "user", "content": "Thank you so much. That's it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Sanjay Sakhrani with KBW. Please go ahead."}, {"role": "user", "content": "Thanks. Ron, I appreciate the commentary on the strategic review committee and it seems like you're on board. I know in the past, you've considered divestitures or sales of some of the businesses and the price simply was not compelling enough. I'm just curious, one, has the backdrop changed in terms of that pricing? Or are you just willing to make the deal in the name of simplification? And then second, maybe you could just talk about core versus non-core, how you guys are looking at this?"}, {"role": "assistant", "content": "Yes, Sanjay, on the first part of your question, the backdrop has changed our value of our earnings, right? So historically, I'd say up until, call it, the last 1.5 years, we traded in the mid to high-teens EBITDA kind of next 12 months EBITDA sort of trade at, call it, 10, 11 times is the first part of the backdrop. So a price from a third-party that would be a lot higher than where we are would be more interesting to me than it would have been when we traded obviously at 15% to 20%."}, {"role": "assistant", "content": "So in terms of the segments, I'd say it's really the size of the businesses is how we think about things that are core, So things that are big for us have big leadership positions, we would call core. And so if you know what those are, that would be fleet. Brazil corporate payments, lodging for sure, would be businesses that we would view as big and core and have great positions."}, {"role": "assistant", "content": "But again, as I said in the opening comments, we're -- when you're trading for whatever reason at this level, we are starting we are wide-open to someone else other than who's in our stock, valuing some or all of the company at a more appropriate level. And so I do want to make sure people that we are out talking and trying to get feedback if we can ID people that would value some or all the business higher."}, {"role": "user", "content": "Okay, okay. And then just a follow-up on the Russia sale, I guess, can you just elaborate a little bit on what specific approvals need -- are needed for the - from the Russian authorities? I mean, how much time that takes if this presents a risk? Thanks."}, {"role": "assistant", "content": "Yeah, that's also a good question. So I don't know how many months ago, somewhere three to six months ago, the Russian government created a separate, I don't know if you call it, agency commission group, whatever it is for this purpose of international western companies trying to exit and effectively created sign-off requirements, almost say an antitrust or something oversight. And so as Western companies like us make deals, right, sign SPA to sell things, then these go to this group, this agency, this committee, whatever it is, and they opine on it. Hey, we're happy to approve this deal, or hey, we'd like to see this or that. So that's what it is."}, {"role": "assistant", "content": "We've been told that it's a month or two. I think it's a function, right, of the volume of transactions that are in front of the group. But they have been -- we've looked at the history. As long as they've been established, they have been processing, one way or the other, transactions. So we do think, obviously, the buyer there is communicating to us that they're in conversations with this group, so it's in some kind of a process. Risk, yes, there's some hoops. So for us to say we know how that ball is going to bounce would not be accurate."}, {"role": "assistant", "content": "So we have an agreement and assuming that it gets approved, we will transact. And our best guess, it's probably in the next 60 days. But I want people on the call that it is not risk-free. There's obviously some chance that they would deny the sale or ask for changes in the sales that are unpalatable. And so we're just kind of waiting."}, {"role": "user", "content": "Okay. Well, great. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Ken Suchoski with Autonomous Research. Please go ahead."}, {"role": "user", "content": "Hi, good afternoon, Ron and Tom. Thanks for taking my questions. And Tom, congrats on the new role. Great to connect again. It's great to hear the comments on the portfolio review and that you're moving quickly on that front. There have been some discussions going around that FLEETCOR should consider breaking up the business and maybe ring-fence some of the things that might be weighing on the multiple."}, {"role": "user", "content": "So I guess, one, what is your preliminary analysis pointing to in terms of value creation as well as any dissynergies that need to be taken into account? And I guess if you were to go through with a potential corporate action, what might a separation look like and how should we think about the timing around that?"}, {"role": "assistant", "content": "Yes, Ken, I'd say, it's too early really to try to answer that whatever, five or six weeks, in to kick if this thing into gear and studying it. So we don't really have a super-formed view. I think I kind of said what I said, which is we're underway. We've run tumbled a bunch of numbers. We're obviously out talking to people. So really, we're just working our way through the options, and as I said, would be in a way better spot for a clear answer to you in 90 days."}, {"role": "user", "content": "Okay, okay. We'll wait on that, Ron. I guess as my follow-up, can you talk about the trends you're seeing on the corporate payment side? I mean, it kind of feels like the current macro slowdown or recession looks a little different than 2008, 2009 and maybe businesses might be pulling back ahead of the consumer. So maybe you could just talk about how you're feeling about the spending trends in the corporate payments segment? And then any puts and takes across the underlying businesses within that segment?"}, {"role": "assistant", "content": "Sure. I'd say that, I think we report spend in some of the appendices here and stuff, so it continues to be strong really across the board. I think maybe most importantly is the sales are just record levels. I mean, our Q1 sales in our corporate payments business was not only an all-time high, it was an all-time high by, I don't know, 50% or something. So we're pouring money into advertising, the brand now and reaching more people. We've got more people on the street. We finally have a really put-together product line."}, {"role": "assistant", "content": "So I think the fill on the top of the bucket is in is really the best place that it's ever been in. So I think it's -- without getting all my skis, it's kind of all systems go, the things work in. Our outlook is to compound now, like I said, high-teens to 20%. And other than the channel thing, which is, I don't know, 10%, 12% of the business now, really, all the other parts of that business are rocking. So no warning flags at all."}, {"role": "user", "content": "Great. Thanks Ron."}, {"role": "assistant", "content": "Got it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Trevor Williams. Please go ahead."}, {"role": "user", "content": "Great. Thanks for taking my question. I want to ask on corporate payments in the cross-border business in particular. Maybe just a higher level, if you could give us a refresher just on what differentiates you on the cross-border and the FX side. And now with AFEX and Global Reach is the main benefits you get with that added scale and then how that feeds into the durability of the growth that you're seeing there? Thanks a lot."}, {"role": "assistant", "content": "Yeah. That's really super good question, Trevor. The first and most important thing I think, I'd say is, who do we compete with? So how do we get business? And who would we lose business to? And the answer is banks. And because we mostly serve the middle market, it's Tier two banks. So it's super important that everyone has that in the brand. I say, we're playing a little league, but maybe playing Minor League Baseball versus Major League Baseball. And so, we have to be able to get a midsized business to trust us to make either spot or hedge transactions for them versus let me call kind of a Tier two bank. So when you have that context, the answer is we got to win everywhere."}, {"role": "assistant", "content": "We have a better network, right, in terms of basically the destination, if you will, of payments, more breadth, more countries. We have better tech, it's all we do, versus a bank running or using some third-party. But the winner, I think, Trevor, is the people. We just have more specialists, right? We have hundreds of people in these different originating markets here, Canada, U.K., Europe, Australia, that really know AFEX, that have grown up in FX."}, {"role": "assistant", "content": "So I think they really just outthink and out-pitch the representatives that are at these Tier two banks. And so it's the combo of all of those things. But we compete well because, honestly, who has the book of business would be my answer to you."}, {"role": "user", "content": "Okay, got it. Thanks. And then on the fleet segment, any help just on how we should think of the cadence of growth over the course of the year? Is the pivot of new sales to the larger customers as those, start to flow through? Ron, I think you said earlier on, getting to the mid-single digits. But just any way you could put a finer point around timing and just as we're thinking of the next three quarters, just progression of growth in fleet would be helpful. Thanks."}, {"role": "assistant", "content": "Yeah, super good question. I'd say think of it as just stepping up. So if it's, call it, three for the print for Q1, we're going to end middle kind of 3456, 3567 it's going to step out basically based on the plan we've built. So kind of one point or so acceleration sequentially."}, {"role": "user", "content": "Okay. Perfect. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Bob Napoli with William Blair. Please go ahead."}, {"role": "user", "content": "This is Spencer James on for Bob Napoli. Thanks for taking the questions The new sales definitely impressed us. Ron, could you maybe just provide a summary of what's driving the strength in new sales and the components of that number and what's driving the strength there? And then maybe if you could touch on how the digital ad environment might -- may or may not be impacting new sales motion."}, {"role": "assistant", "content": "Yes. I'm not so sure, Spencer, the second part of the question, but the first part, I can cover, which is, yes, it was a crazy good sales quarter, right? We're telling guys up 31%. And that's in the face of taking the gas off of our North America fleet business, right? We used to get, I don't know, 10%, 15% of the business in that micro segment and I just shut it down, right, to try to contain. So it tells you that the rest of international fleet and all the rest of the businesses grew faster even to 31%."}, {"role": "assistant", "content": "And I think it's a combo of things. One is, again, we've stepped up marketing and sales investment, particularly marketing. We've been pouring more money in corporate payments into this Corpay brand campaign, and so that's helping a lot. And then I'd say, second, I think we're finally getting the hang of digital leads, which is generating way more leads in every business. We have a couple of unique campaigns, digital campaigns, both in fleet. We call one of them, Barbara. I feel like I'm naming boats or something here and one in our lodging business called Sarah."}, {"role": "assistant", "content": "And so these campaigns that kind of create a bit of a personality in the space have been incredibly successful for us. So I don't want to say they're shooting fish in a barrel but the sales force is getting fed with a lot more quality leads, call it, in the last year than they were before. So it's just all good. It's inflationary time so we have kind of cost reduction products. We have better products than we have. We have more people on the street and our lean is working better. So it's just -- I mean, I'd just say it's working what we're doing."}, {"role": "user", "content": "Great. Thank you for that. And as a follow-up, maybe an update on credit and fraud trends in the fleet business."}, {"role": "assistant", "content": "Yes. So I don't know if we print that or not. So it's a just smidgy bit better sequentially from Q4. And again, based on when we started to take the actions, most of the benefit in terms of improvement is expected in the second half. So we're seeing a lot kind of in our -- what we call our delinquency roll rates. So we're staring at the last week, we have super good visibility into Q2, which doesn't necessarily impact the credit reserve we'll take for this quarter but super does for the following quarter. So we can see that thing really coming down. So I don't know if we can take it to the bank yet, but the early warning, the early good news signs are that the actions we've taken are going to take credit losses down in the second half like we planned."}, {"role": "assistant", "content": "And then same on the fraud side. The fraud side has been a combo of what we call application fraud, which are fully people pretending to be somebody and yet not. So we basically put in a bit of a new system that does way better at that as a few more variables that it looks at before it says okay. And then the second one is just criminal fraud, right? People at a truck stop, putting in skimming and selling cars and stuff, and so I think we're down 40% in fraud sequentially in those couple of areas."}, {"role": "assistant", "content": "And our partners, like the truck stop partners, have been helpful in trying to police that better at the site. So as those numbers get bigger, right, because fuel prices, what, Q2, I guess, peaked last year, I'm going to say Q2. It became a more attractive target. And so it took time, I think, for us and others to get on it. So not mission accomplished yet but we're making good progress."}, {"role": "user", "content": "Great to hear. Thank you for the question."}]}, {"messages": [{"role": "system", "content": "The next question comes from James Faucette with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Great. Thanks. I had a couple of follow-up operational questions here. Retention in the quarter was really strong. I think it was like 91.2% but was down about 100 basis points from last quarter. And I know you just mentioned the credit actions taken, but can you expand if there were any other factors driving that? Is there seasonality, etc, that we should be aware of? And how are you thinking about that for the remainder of the year?"}, {"role": "assistant", "content": "Yeah, James, Ron again. No, that's it. I mean, the reason it shows up there is what we call involuntary attrition, which is about half of our losses, right? So let's use 10% not to hurt our head, 8%, 10% of our customers quit us every year. We quit five of them, which means we get uncomfortable with your credit profile and so you're not a customer anymore. And so when you go through what we did of having greater heightened attention on these small-ish one, two, three kind of card accounts, we took actions basically to cut lines and pull back payment cycles and stuff really just obviously to contain losses. And so that just translates into us effectively kicking those clients out."}, {"role": "assistant", "content": "So that's it. That's the totality of the thing. And I want everyone clear, we did it with our eyes just completely wide open. And based on what we're seeing, happy that we did it. In our opening comment, we still work for ADP for 10 years. I'm still super happy with a consolidated 91% revenue retention rate. So we're no tears here."}, {"role": "user", "content": "Got it. And then just a follow-up on, there's been a lot of conversation, obviously, on segments and strategy, etc. But from a realignment perspective, at least as you've redefined some of the segment definitions, any change to how that strategically impacts those businesses or planned go-to-market, etc?"}, {"role": "assistant", "content": "That's really a super good question. Yeah, let me say what I think the insight is, and it comes a little bit from how we started on a product-centric view of our lines of business versus a market rider or a customer-centric view. And I think the Brazil guys that I called out at the top of the call, they've proven that if you want to redefine your business as, hey, I'm going to help vehicle-related drivers make payments, whether they're a business guy driving around or whether they're a consumer driving around, all those things that you pay related to the vehicles, right, fuel, toll, EV, maintenance, food, parking, now even insurance, that those things -- getting into those shows that the businesses and the consumers believe that our business has the right to offer to provision all of those payment things and having all those things on one account seems like a good idea to them. So I'd say that's kind of where we're headed."}, {"role": "assistant", "content": "The idea would be to basically stop looking at the thing as, hey, you're driving around and we're selling you one thing. Like go to Europe, where now I said, talked about the three-in-one. Now we're selling fleets but we're also selling old-fashioned diesel and EV. Why can't we sell parking and toll and insurance to those sets of millions of users and stuff? And so I think that's the strategic turn for us is to think about really the multiple things we could sell to the same customer that makes sense to them. And the great news is we have a live case like a real case to that. And the other thing I'm guessing people missed is the phone, right, the mobile phone is starting to matter."}, {"role": "assistant", "content": "Like I tell you that 3 million out of 5 million users, consumers in Brazil decided to go to our phone app in a month. I don't know if that's crazy to you guys but it is to me. We used to stick a tag on the windshield, and now 60% of the people are on their phone in our app looking for stuff. And so that creates, I think, an enormous ability again to offer up, like the insurance example, more things to the customer base. So we're going to -- the headline is we're looking at the world more through the lens of the customer and what we can offer and then we are product by product."}, {"role": "user", "content": "Got it, got it. Really appreciate the color commentary there, Ron."}, {"role": "assistant", "content": "You've got it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Jeff Cantwell with Wells Fargo. Please go ahead."}, {"role": "user", "content": "Hey, thanks so much. And just to follow-up on some of the questions about core versus non-core, and you gave us a ton of color on this. I just wanted to bounce something off you and see if you would agree that this is a fair statement that over the years, amongst fleet, corporate payments and lodging, there would be potentially a number of operational synergies amongst those three segments. And so the clear follow-up question to that would be, could you maybe give us some comments on Brazil within the context of core versus noncore? Just curious, how that piece of your business ties in with the rest. Thanks so much."}, {"role": "assistant", "content": "Yeah, I think Jeff, I kind of just said it. To me, in some ways, Brazil is the lead dog, is kind of the poster child for really how we should think about the portfolio, right? That hey, when we bought that business seven years ago, it was mostly a toll-centric business and it's transformed, right, in the, like I said, selling five or six things to the same, both businesses and consumers, and notice how we're selling EV, right, to both businesses and consumers. We're just basically repurposing the networks and the tech well, obviously, that's what Brazil has done, right?"}, {"role": "assistant", "content": "They've got toll networks they both use. They've got fuel networks they both use. They have parking they both use. So they literally taking the same networks and tech and sold the stuff to the two different groups. So I'd say if anything, that business looks more related. The other thing which is so weird is fleets in eight giant markets today, fleets not only in the U.S.A. It's in, obviously, the U.K., it's in Czech, it's in Germany, it's in Russia. It's in Australia, it's in Canada. Obviously, it's in Brazil. Obviously, we have a fleet business that's in eight geographies, of which one of them just happens to be Brazil."}, {"role": "assistant", "content": "So our lenses are, in some ways, it might be -- it is the most business in the company to our fleet business would be our Brazil, business because all of it is, is another country doing fleet vehicle stuff. So I would say that would be a super duper long. The only thing is I like businesses that are working just as in the side. So the fact that the business is compounding in the teens and pressed at about the 50% EBITDA line and beaten down people that are giving things away for free and continuing to compound, we like that. I mean, I like that like a lot the performance of the business."}, {"role": "user", "content": "Okay. Thanks very much. And my follow-up is for Tom. For those of us who have not covered you at your prior, would you maybe just, if you don't mind, give us a sense of how you think strategically and also conceptually about managing the business and so forth? Would love to get your thoughts on what your mindset is as you're coming on board here. Thanks."}, {"role": "user", "content": "Sure, Jeff. Look forward to working with you and good to work with many of you on the call that you did cover EVO, so my DNA, as a finance person is really to approach it from a business-centric perspective. I've had the benefit over the last month or so being able to participate in a variety of meetings here, really learning the company firsthand and getting grounded in how the business operates is centric to how I and the rest of the team within finance thinks and supports the business."}, {"role": "user", "content": "Our role is to make sure we bring good information and good advice and ideas to the business. And we can't do that by just looking at the output of the results. I've said repeatedly over the course of my career, I like focusing on the inputs in order to drive the outputs. And my dialogue and the team's dialogue with the business is around their KPIs. And if we can get their focus on their KPIs and how those KPIs drive the kind of outcomes that we're looking for financially, then the company wins."}, {"role": "user", "content": "So you'll find me, and again, the rest of the team very focused on making sure that we understand how the business is operating and how we can help it become more and more successful, very focused on things up and down the income statement and balance sheet, so no real bias there. It's where the opportunity is, is where we'll focus."}, {"role": "user", "content": "Okay. Appreciate all that. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Mihir Bhatia with Bank of America. Please go ahead."}, {"role": "user", "content": "Hi. Sorry. Thank you for taking -- squeezing me in here. My first question just has to do with the consumer EV build-out that you kind of mentioned, Ron. Can you maybe expand on that? Is the idea there to build a FLEETCOR consumer brand or are you whitelabeling? Is the -- I mean, I guess, based on some of your other comments about Brazil, is the thinking that using EV instead of tolls you can do something similar on the consumer side as what they have done in Brazil using tolls as the wedge, if you will."}, {"role": "assistant", "content": "Yes, that's a good question. So as I mentioned at the top, the motivation initially here is repurposing assets we have, which are networks, right, in tech. But your comment about brand is a good one. So the first thing I'd say is some of that build initially will be under other people's brands, where we'll be kind of Intel Inside. So what I mean by that is think of us going to an EV car manufacturer, Pixel, Volvo, Renault, somebody who's making EV cars and they want to give their new buyers an easy way to find public recharging and pay for it. They're going to use our network and our app. The brand and sometimes even the app will get pulled into Renault's or Volvo's way, right, of communicating."}, {"role": "assistant", "content": "So that's one. So leveraging kind of the carmakers brand to get to those drivers. And then the second one is kind of the CPOs, the gas stations, if you will, the Charge Point operators is what they call them. Same thing, we would go to someone that's got 100 charge points. It has customers coming in that wants them to be able to roam to go to places other than their 100. They would be trying to sign those customers up and get them under an app that we would provide them. So that's the first headline is that some amount of our consumer business would leverage these intermediary brands."}, {"role": "assistant", "content": "But lastly, I think it is a good idea. We have this brand, this company we bought, I called Plugsurfing, which, I guess, kind of sounds like an EV brand. So yes, we're not going to use, for sure, the FLEETCOR brand. We want something that's representative of EV. And so we might invest. We may take a market, to your point, and invest digitally to see if we can build that brand and add some consumers directly. But that's for a different day."}, {"role": "user", "content": "Understood. Thank you. And then just switching gears to this year, and obviously, you're seeing some sales momentum that you've highlighted. But just in general, as you sit here today, do you think things are getting better or worse relative to three months ago? Because there's a lot of conflicting data. I guess, from your -- the data you are seeing, are you seeing any pockets of weakness across your offerings? Or is it really just the macro is the only -- like outside macro is a big question mark for you?"}, {"role": "assistant", "content": "Yes. I know it's the question on everyone's mind, but I guess I'd make a couple of points. So first is our best internal metric here is what we call same-store sales, which basically isolates existing clients in the period that we had in the same period a year ago and just ask, 'Hey, are they getting healthier or sicker?' And the answer is healthier. So across the globe, at least among our clients, they're plus 3% healthier than they were 12 months ago. So that's point one."}, {"role": "assistant", "content": "The second point is our company that grows revenues double digit and grows profits faster isn't super reliant on GDP. I don't know what our GDP is here in the US or in some of our big markets, but let's say it's 1% or 2%. We're growing by gaining share, right? We sell way more than we lose. So the growth rate and potential of our company is way more in our control of being able to sell way more businesses at the top of the bucket and lose less businesses at the bottom. If the existing clients shrink one point or so, woe is me for a quarter or two maybe, but that's not our game."}, {"role": "assistant", "content": "Our game is to basically power through, either happier or a little bit sadder, GDP environment. So again, we're not seeing much, and frankly, I think it's the impact, it's at the margin for us."}, {"role": "user", "content": "Understood. Thank you. Got it."}]}, {"messages": [{"role": "system", "content": "Thank you. At this time, we will open the floor for questions. [Operator Instructions] We'll take our first question from Shahriar Pourreza with Guggenheim Partners."}, {"role": "assistant", "content": "Good morning, guys."}, {"role": "assistant", "content": "Good morning, Shahr."}, {"role": "assistant", "content": "Good morning. Maybe just probably we could start with a kind of a sequencing question regarding the Investor Day, as it kind of draws closer. Should we be expecting kind of a turnkey Investor Day reset or could it still be contingent on potential ongoing sale processes and the origin of the question is that the Wind stake sale, seems to be taking a while right now, you had that option now. So just trying to get a feel for what level of closure you're targeting for the rollout?"}, {"role": "assistant", "content": "Yeah, Shahr, we're targeting as we have said from the beginning, being able to give a very good sense of long-term for our company. So, no change from what we expected when we started or when we most recently updated."}, {"role": "assistant", "content": "Got it, perfect and Steven you mentioned in the prepared that you continue to look at cost efficiencies, albeit within the context of all the work you've done to date. I guess how should we think about the opportunities here? Any color on scale or timing as we look-ahead to the review and beyond?"}, {"role": "assistant", "content": "Yeah, thanks Shahr. I think on the third-quarter call of 2022 when we announced the business review. We did make some commentary on our focus on continuing our track-record of being a very efficient operator. And I think what we said at the time, which I think was well put by Jim Chapman, was that while we believe there is opportunity and we're constantly focused and looking at that, we don't view it in the -- through a lens of a game-changer amount of incremental savings to what we've consistently accomplished. So, as we're working through the business review, we continue to expect to find incremental efficiencies, but we've been driving a lot of those efficiencies -- inefficiencies out-of-the business for a number of years, as reflected in our O&M efficiency metrics in our rates."}, {"role": "assistant", "content": "Perfect. I think, just one last one, I guess just on the FTC, guess [Phonetic] what your kind of expectations for lawmakers I guess to fill the two vacant seats at this point? Sounds like there's been little progress in Richmond. I guess, what are the pathways forward here? Thanks guys."}, {"role": "assistant", "content": "Yeah, Shar. I think it's important to start-off by noting that the commission is functioning effectively. As evidenced by order it's just within the last few weeks that I mentioned in our opening remarks on our Clean-Energy-3 filing 800 MW of solar and storage. And on the transmission line that's important for us to be able to serve datacenter customers in Northern Virginia. So, the commission is functioning well in its current configuration. I can tell you that the process and the constitution of Virginia, is that when there are vacancies, the General Assembly can elect judges to fill commissioners, to fill those vacancies. If they are not in session, Governor could make an appointment for a term that would last until 30 days after the start of the next regular session. So that's the -- the process, but I think it's important if you sort of step-back and think about the regulatory construct in Virginia."}, {"role": "assistant", "content": "If you look just at where we sit in Virginia. We've got low rates; we've got strong reliability. We've got a clear mandate from policy makers for energy security within an energy transition and as our IRP indicates, we've got very strong load growth. So, we're sitting in a very good spot. Moving forward in the Virginia regulatory process. So, the commission is functioning now. There is a process for adding two new commissioners, but sort of in the big picture, we're very well-positioned in Virginia for strong regulatory outcomes in the future."}, {"role": "assistant", "content": "Perfect, guys. Thank you, guys, that's all I had. Have a great weekend."}, {"role": "assistant", "content": "Thank you, Shahr."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Steve Fleishman with Wolfe Research."}, {"role": "assistant", "content": "Good morning."}, {"role": "assistant", "content": "Yeah, hi, good morning, thank you. Good morning, Steve. So just... good morning, Bob. So just on the framing of the Investor Day, the -- a lot of the balance sheet FX release, it seems like it could come from -- could come from asset sales and -- and the like, and markets kind of keep moving around and the like, so just [Indecipherable] the Investor Day should we assume that asset sales, if you're going to do any are actually kind of announced by then or that this process, would kind of kick-off by then. Yeah, thanks."}, {"role": "user", "content": "Hey Steve. This is Steve, I'll take a shot at that as well. I think as we think about the Investor Day, the goal is to have isolated as many variables of the review as possible at the time that we address the market with the repositioning of the company for the long-term. And obviously, given the business review is underway, it's a little bit difficult to provide sort of more specific guidance than that, but we are well down the path on the review, but as Bob mentioned, we're pleased with the progress that we're making and we look to use the Investor Day to provide a refreshed strategic and financial outlook, that will cover earnings and credit and financing and capital investment and I think based on the progress we've seen to date, we will be well-positioned to do that."}, {"role": "assistant", "content": "Okay, makes sense. And just on the -- the performance provision and the ROE in Virginia, can you just talk to, kind of, is there any clear parameter for how they're supposed to judge your performance upside or downside?"}, {"role": "user", "content": "I think they will need to be some work done within the commission on how that will work. There was a similar provision in the law really starting back in 2007. And so, we see it as an opportunity to demonstrate our excellent performance, when we're in front of the commission but I think it's a little early to establish exactly how that will play-out."}, {"role": "assistant", "content": "Okay and then lastly, just on the datacenters is there any better clarity on who is really supposed to be servicing this data center load and planning for it, like is that your obligation as part of PJMN mission [Phonetic] or because they have choice. Is it -- is it not. Could you just give us some sense on how to think about, that aspect to the loan-growth, yeah?"}, {"role": "assistant", "content": "We have an obligation to serve customers in Virginia. It's our obligation and we build generation, transmission and distribution as necessary to serve that load. So that's the way that it has worked, that's the way it's going to keep working in the future. So, we've got investments to make, as you see from the IRP."}, {"role": "assistant", "content": "Yeah, I mean, even the ones that maybe if they do have on-site generation, they're typically connecting to you as well and using Dominion, at least for wires and backup and the light [Phonetic], is that correct?"}, {"role": "assistant", "content": "Oh, absolutely. These are large loads, 24 X 7, they need the grid."}, {"role": "assistant", "content": "Great. Okay, thank you."}, {"role": "assistant", "content": "Thanks, Steve."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Jeremy Tonet with J.P. Morgan."}, {"role": "user", "content": "Hi, good morning."}, {"role": "assistant", "content": "Good morning, Jeremy."}, {"role": "user", "content": "Good morning, Jeremy."}, {"role": "user", "content": "Just wanted to touch on the IRP scenarios and just see what factors are, I guess in play between the different scenarios. Just wondering if you would know any notable highlights and resource mix considerations across these scenarios and how that would impact D."}, {"role": "assistant", "content": "Sure, Jeremy. As you know, we laid out in the plan five different scenarios, some of them required by the commission from decisions in earlier proceedings. We have plans that as they should comply with the Virginia Clean Economy Act, others as I noted required by the commission that don't necessarily comply with the Clean Economy Act, but the commission asked for those scenarios as well. Across all of them what we look for is the appropriate balance between investing to serve our customers, reliably and the cost of that service and compliance with all the rules and regulations that govern us including the Clean Economy Act. This is -- the IRP is snapshot in time. It is what when we look out 15 and then and with certain parameters 25 years what we think our demand will be as projected by PJM and then the investments that we need to make in order to serve that load."}, {"role": "assistant", "content": "This changes as you know, over-time when we have further proceedings. It will be adjusted, I'm sure but we as of the time of this filing [Indecipherable] believe that this document lays out a pretty clear roadmap for different ways that we'd be able to serve what is very robust demand growth coming over the course of the next decade and a half or more."}, {"role": "user", "content": "Got it, that's very helpful, thank you for that and small point, but just wanted to pivot for Millstone just wondering if there's any updated thoughts that you could provide there given, I guess, changes in the market."}, {"role": "assistant", "content": "Yeah, as we've said in prior calls, Jeremy. We think Millstones an incredibly valuable asset two, New England, both for reliability and decarbonization purposes. Our team operates that plant extraordinarily well and as we think about the future of Millstone, we just see that it's very well-positioned."}, {"role": "user", "content": "Got it that's helpful. I'll leave it there. Thanks."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] We'll take our first question from Eric Coldwell with Baird."}, {"role": "user", "content": "Thank you. Good morning. Wanted to just clarify, last quarter you highlighted the 200 to 400 basis point potential impact from NHPs this year. I may have missed it, but I didn't see an update on that commentary. Looks like Q1 probably did a little better than the Street expected, 2Q looks better than the Street expected. I'm just curious if your range of potential impact has changed or if it's just shifted totally out to the third and fourth quarter. That's the first question. I have another."}, {"role": "user", "content": "Good morning, Eric, it's Flavia. Thank you for your question. The range is of the 200 basis points to 400 basis points of the supply NHP impact remains consistent with what we provided earlier in the year."}, {"role": "user", "content": "Okay. I just -- maybe a bigger-picture question on this topic, has any government agency actually blocked importation or exportation or changed any policy or are all of your actions, to this point, very much proactive and internally-driven decisions to just be as safe as possible?"}, {"role": "assistant", "content": "Hi, Eric. Certainly, it's prudent for us not to bring NHPs at least from Cambodia and to the U.S. And I would say that the U.S. government is fine with that strategy, so it's certainly not supportive of us doing otherwise. So we're going to cooperate and we're going to run our business. We have multiple supply sources doing the work at multiple sites and try to work hard to have new testing protocols that show parentage, accepted and used universally, we would hope. I'm quite confident in our ability to do that."}, {"role": "assistant", "content": "Little bit difficult for us to have much impact on the cadence of how quickly that goes and what the receptivity will be, but we feel good about the science behind that. We actually feel good about all of our supply sources. And we're doing the best we can to accommodate for the situation and as a result of that, we should have slightly better performance in the second quarter than was embedded in our guidance. But it's still fluid and -- Notwithstanding the fact that I think we have a good program and plan to satisfy the needs and demands of our clients. There are things that continue to be out of our control, which is why we have such a -- why we continue to have a guidance range that we do and we'll continue to give you as much information as we can as things -- if and as things change."}, {"role": "user", "content": "Okay, I'll let others jump in. Thank you very much."}, {"role": "assistant", "content": "Thanks, Eric."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Derik Bruin with Bank of America."}, {"role": "user", "content": "Hey. Good morning."}, {"role": "assistant", "content": "Hey, Derik."}, {"role": "user", "content": "Hey. Jim, two questions. I think the first one is, are the Cambodian NHPs currently being sold elsewhere. It's the supply that was destined for the U.S. have been going into China, they're going to China. And then, if you -- assuming the situation does get resolved, is it going to be difficult to get them back to the U.S.? Are you are you going to have to pay a lot more money to get them there? I'm just sort of curious, where are the supplies going right now and can you get them back?"}, {"role": "assistant", "content": "So we don't have any indication that the supplies are going to China. Of course, we did not get animals from all of the suppliers there, only one principle one. So we don't we don't categorically know but I would doubt that. China has lots of NHPs themselves, which is how this whole thing started. We're doing the best we can to accommodate the demand by doing work at multiple geographies within CRL. We're confident we can -- we can show parentage if we, as the discussion continues, and we have clarity and sort of cooperation with the various supply sources."}, {"role": "assistant", "content": "So I don't think this is the situation of getting that supply back. From some places that that will be gone forever. I think this is a transitory situation. Sort of an unusual one, frankly. I would just want to reiterate for the record that we're not -- we're cooperating in an investigation, providing information. I think we're cooperating really well. We're not a target of investigation and we don't know whether our supplier is, but we can just tell you that we've been there. We think the place is well run pursuant to the sort of sight -- oversight that's required for purpose bred -- breeding."}, {"role": "assistant", "content": "And we also think that the veterinary oversight and nutritional oversight and transportation oversight at the farm that we utilize is done really well. So given our experience with farms all over the world, including farms that we had ourselves years ago and started on our own, we think it's a good supply source."}, {"role": "assistant", "content": "So again, just to go back to the answer -- my answer to the first question. We're being very responsive on a timely basis with the folks that are asking us for information, but we have very little control over the pace in response and how we move forward. But I would be surprised and disappointed if Cambodia doesn't continue to be a source of supply, and as you know really well given your scientific background, not doing a sufficient amount of large molecule work and doing these drugs through the FDA without using an NHP."}, {"role": "assistant", "content": "So it's not optional. And since this is the largest supply source, it's something that needs to be rectified and as timely a basis as possible."}, {"role": "user", "content": "Great. Thank you. I'll stick to one question. Thanks, Jim."}, {"role": "assistant", "content": "Sure. Thanks, Derik."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Sandy Draper with Guggenheim."}, {"role": "user", "content": "Thanks very much. I guess maybe just thinking about the quarter, obviously, strong quarter total, but sort of looks like we as well as the Street sort of mismodeled. DSA was much stronger than we expected, RMS, pretty much in-line, Manufacturing, lower. I'm just curious. I know you don't give quarterly guidance by segment, but was this type of result generally in-line? Sounds like maybe you're a little bit surprised by DSA. Just trying to think about how these results compared? And so, how we should be thinking about your commentary on full-year growth rate by segment? Are those still appropriate or based on the first quarter results and we'd be sort of rethinking stronger DSA but lighter Manufacturing and RMS? Thanks."}, {"role": "assistant", "content": "So we'll both answer this. I would say we were not surprised. As we reported all of last year and probably the prior year, demand for Safety Assessment was unrelenting and growing and well in excess of the year. In some cases a year and a half. So strong demands. This NHP disruption really was not a factor. RMS has been growing really nicely for several years now. I don't know whether anybody remembers, I hope you do, but if not, we've reminded you. We knew that Manufacturing would be behind the prior year because of some milestone payments that we -- substantial milestone payments we had in the first quarter with our CDMO business and COVID-work for Biologics."}, {"role": "assistant", "content": "So quarter tracked pretty much as we anticipated. We're obviously pleased with that level of growth. The Safety Assessment business is a very large part of what we do, as you know, and so it -- it has had a really meaningful impact in our results. I'll let Flavi answer the rest of the year question."}, {"role": "user", "content": "Yes. And Sandy, I think we always talked about how our business is not linear, and it's not linear in totality and definitely not at a segment level either. And so, to Jim's point, RMS, we reaffirmed our full-year guidance of high single-digits. We talked a little bit about some timing events in RMS in the first quarter that will normalize in the second quarter. DSA was very, very strong in the first quarter. As Jim pointed out, continued strength following the second half of 2022."}, {"role": "user", "content": "I also commented that the growth will modulate throughout the year, both given the comp. As the growth accelerated in 2022, you have a comp dynamics that will impact 2023. And we reaffirmed our guidance of low-to-mid single-digits for the year."}, {"role": "user", "content": "And Manufacturing Solutions, as Jim pointed out, had a couple of headwinds in the first quarter with COVID vaccine volumes that are no longer existing, as well as the CDMO milestones. And we talked a little bit about a slower starting Biologic Solutions. So we expanded the guidance range a little bit to now include high-single-digit to low-double-digit for the year. The previous guidance was low-double-digits, so we just extended that range."}, {"role": "assistant", "content": "Sandy, it's worth reminding you and everybody else listening what the cadence was last year. Flavio, is probably right. So we had a first safety, we had a slow first half of the year and really strong second half of the year. I think some of our shareholders didn't think that that was going to happen but again 26% growth rate I think in the third quarter. So we're going to have these year-over-year comparisons less tough in the first half, tougher in the second half, some impact from the NHPs would have a cadence anyway. Linearity is impossible for us to design or even predict steady sort of start when they start and when they end. But as always, you want to listen to our guidance for full year, particularly in the safety business."}, {"role": "user", "content": "Great. That's really helpful. Thanks so much for the comments."}, {"role": "assistant", "content": "Yeah."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Patrick Donnelly with Citi."}, {"role": "user", "content": "Good morning. Argirou Lizzie on for Patrick. So just one more on the NHPs. It sounds like you're making progress on the test, is it to determine parentage? I guess, how long do you anticipate the rollout of that test once you have it will take throughout your supply and anything that we can expect there? And I'll leave it at that. Thank you."}, {"role": "assistant", "content": "No more NHP question. Just kidding. It's really difficult to say what the rollout is. The science is not trivial, but relatively straightforward. It's not all that complicated. We we have several places that we could do it or people could do it for us or all of the above. I mean, we're quite confident from what we know that our supplier is persuading these animals according to all of our expectations, and we can demonstrate that. It just -- the communications is just, as I said a couple of times earlier, is a little bit slower than we would like. We understand that and we'll do the best we can. So we'll give you clarity when we have it. I would say we don't. So we've been very responsive in terms of coming up with a program, providing that the various authorities. They looked them over, we just continue to go back and forth. And so, as a parallel strategy, we're using our international infrastructure and we'll continue to -- I've always held us in good stead in all of our businesses, but in this case, particularly in safety that we do the work on so many geographic book that it really helps with the current situation when things are a little more complicated in the U.S. But we're confident that we can proven and demonstrate it scientifically without a shadow of a doubt, at some point that will be kind of standard. And as I said earlier, we'd really like to come up with something that works for the whole industry, maybe not necessarily just the CRL."}, {"role": "user", "content": "And if I can just add to Jim's point, we made progress on scientifically identifying how the tests can be done. It will take some time to operationalize given obviously the supply logistics and everything. So it is -- as we continue to work with the government authorities, it will take some time to get this off the ground."}, {"role": "user", "content": "Great. Appreciate the color, guys. Thanks."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Max Smock with William Blair."}, {"role": "user", "content": "Hi. Thanks for taking our question. So I wanted to drill down on a decrease in DSA backlog because I think there's been a fair level of concern around some of the perhaps lower book-to-bill we've seen here in this part of the business. What are you seeing in terms of proposals in bookings so far here in the second quarter? Are you expecting backlog to continue to get worked down here over the next couple of quarters given the tougher macro-environment? And then, thinking ahead, where do you think you need to see backlog in this year in order to support double-digit organic growth for the DSA segment in 2024? Thank you."}, {"role": "assistant", "content": "So we'll both comment. For system bookings continued to be strong, less strong than last year which was a very unusual year. Enjoyable but unusual. And you have a combination of factors, but I'd say the principal factor is you have clients that at a certain level of waiting to start the study, it just becomes problematic for them to plan their business that to get drugs into the clinic and ultimately into the market. So we're seeing a normalization kind of pre-Covid, normalization of that level of demand, still healthy, still a lot of price, still everybody -- hi, everybody but almost everybody comes to Charles River for the really complex work and our geographic footprint. So we think this is in the process of normalizing. We think the demand, well, I'm not going to tell about '24, but the demand will remain strong this year. If you didn't have the sort of private overhang, I think we would have a very strong year in the safety business, not to the level of last year. So we're not concerned by that. We got a very big denominator in this business, it's a big business now. We're having nice growth rate, taking share, getting the the price, we don't see any amelioration of that."}, {"role": "user", "content": "Yeah. So I think if you look at our book-to-bill on a trailing 12-month basis which is how many clinical PRs look at their book-to-bill, we still above 1 times, excuse me, and that's firmly supports our DSA revenue growth outlook for 2023. We got a question earlier around the NHP supply impact and I commented again, on the 200 to 400 basis points. You do kind of do the math, you would be able to back into what would the DSA growth be had we not had that disruption and it would support a high single-digit, low double-digit growth in 2023. So I think that answers your question. Thanks."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Steve Windley with Jefferies."}, {"role": "user", "content": "I do have a brother named Steve Windley so. Hi. Hi, good morning. I actually -- my brother is actually Steve Windley. So Jim, I'll redirect a little bit. I know you already said no more NHP questions. I'm going try to..."}, {"role": "assistant", "content": "I'm just kidding, it's okay."}, {"role": "user", "content": "Yeah. On your -- in your proxy, you put a kind of a commitment to '24 broadening out, your supply chain diligence and how you work around your sourcing of these animals that are needed for research. I appreciate that and look forward to the information in that. I guess I'm thinking in that context. Certainly the -- if we go back to November when the indictments were first unsealed certainly kind of a big shock to the industry. How has that influenced your proxy calls at risk-based due diligence and risk-based supplier oversight? How has the environment changed the way you go about evaluating the situation? And so there was a suggestion. I thought I understood that you were not importing Cambodian animals into any part of the business, international or the U.S. and you're saying U.S. today, so I wanted to understand that. But just kind of the risk management around the situation, how has the changing environment changed your risk management?"}, {"role": "assistant", "content": "Good question, Dave. Our methodology hasn't changed very much. We believe we deal with suppliers who certainly producing purpose-bred animals under strict veterinary oversight and complying with permitting procedures and of course, as we talked about for the last two or three years, we have multiple sources of supply, in other words, multiple countries, in some cases, multiple providers in those countries. We own some funds, we own pieces of some farms, we have long-term supply agreements with, I would say almost all of them. So -- and we go and we audit them, we have a little disruption in that audit -- in those audits because of Covid but we go and audit them, so we are familiar with the situation. So just to use your parallel line, I think we were more shocked with the divest because that's not the nature of the work that we're doing, other people that we're working with. Sot that's obviously concerning and any sort of allegations like that."}, {"role": "assistant", "content": "So we'll continue to get closer to our suppliers, and I mean that in every way in terms of ownership, people on the ground, constant audits, the testing that we talked about 10 minutes ago with all of them, and dealing openly and appropriately and professionally with the variance oversight bodies in a variety countries. We -- for competitive and security and a whole bunch of other reasons, we want to not be to granular on how we're dealing with a situation right now, except to underscore the fact that we have multiple sources of supply and we're using the entire Charles River portfolio which is worldwide. And I know you've been to a lot of sites and the ones you haven't been to I think you know where they all are. And we think that's always been a competitive advantage for us, being able to use those sites it's really been beneficial."}, {"role": "assistant", "content": "And then the last thing I would say, which we haven't said yet. Although I think it's in the pretty early materials is that we've had extensive conversations with the clients who have been terrific and we said, okay, here is a situation, we don't know exactly how many animals we'll be able to bring in, so you need to prioritize studies that you do in terms of what you need to start and when. And they're doing that. And you also have to be flexible about where you do it. So as you know, some of our clients less all the time, but some of our clients who like, I only want to do the work wherever because I've always said that there I did a post-doc with the guy that runs this site."}, {"role": "assistant", "content": "So they've been terrific. I'd say our client base has really been very collaborative, working hard with us, being open to again the work, they just towards the start in the most timely fashion. So I would say we're doing a very good job so far, disrupting as few clients as possible. We had a strong Q1, we will have a better Q2 with regard to the NHPs than we originally thought through the back half of the year. Will be more challenging because of the comps and we -- it's a fluid situation. We hope we hope it's a positively fluid situation. So we will -- when there's something granular that we think is permanent and beneficial for you all to know, we'll tell you, but it's too changeable and we don't want to be providing very detailed information that maybe not be sustainable. But we're very pleased with the way we're handling and the way our clients are accepting the current situation."}, {"role": "user", "content": "Appreciate that. If I could -- no -- that was a long question-and-answer but if I can attempt to clarify one thing in the prepared remarks. So you talk about these NHPs and use the term pass-through. The pricing on the NHPs has gone up a lot. I just want to make sure I understand because DSA margin was very, very good, maybe the best of all time and that rising price on NHPs, if it is only pass-through would be a pretty significant headwind to your margin. And so I was hoping maybe, Flavia. If you could clarify that for us? Are the NHPs contributing to margin or are they a detriment to margin? Thanks."}, {"role": "user", "content": "Thanks, Dave. So a couple of things. Yes, the DSA margin was very robust in the first quarter and primary source of that continues to be underlying strong demand especially volume and also price outside of NHP. So we're very pleased with that. The NHP impact on margin specifically as you saying at a macro-level, as you pointed out, it's a pass-through so it should be neither accretive or dilutive to the percentage margin. The timing on when we start NHP studies can have an impact on the mix. I think they have -- that they contribute towards or not to the margin. So depending on that and how we ended up the year and how many new NHP studies we're starting on in each quarter can have a modest impact on the margin. But what I would focus all of you on is the strength of the margin in the first quarter in DSA is primarily behind volume and underlying price."}, {"role": "user", "content": "Okay. Thank you. Thanks for answering the question."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Casey Woodring with J. P. Morgan."}, {"role": "user", "content": "Hi. Thank you for taking my questions. So as a follow-up to the DSA backlog question from earlier by our math, it looks like bookings were down over 40% on the year in the quarter, so was that step-down in line with your booking normalization expectations in DSA? And then just on manufacturing quickly. Appreciate the commentary around the tough comps from last year but curious as to the rationale for widening that growth range for the year. Wondering if there's any cushion baked in for a more volatile cell and gene therapy demand environment, just given some of these your peer commentary in the CDMO space from earlier this week. Thanks."}, {"role": "user", "content": "Eah. So I think we talked about the normalization of the demand trends to more pre-pandemic levels. We had out throughout all of last year that the backlog has extended meaningfully in terms of the length of it with people bulking really ahead as we have never seen before and that has definitely normalized. I think our clients are focusing on study starts that are sooner rather than a lot into the future. And as they do that, they also look at studies that were booked before and whether they're ready to initiate them or not. So as we said, it's -- we see the present mobilization from extraordinary levels in 2022. And then just on the manufacturing solutions, I think we had commented and expected a lighter first quarter vis-a-vis the overall guidance for the year that originally was low double-digit. We not only saw the first quarter impact of the tough comps with CDMO milestones and the Covid volume in biologics but we also talked about a slightly sober start of the year forecasting and there might be some comments around the industry on bioprocessing. So we widened our guidance range a little bit on manufacturing to accommodate for that."}, {"role": "assistant", "content": "I think we are ready for the next question."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Tejas Savant with Morgan Stanley."}, {"role": "user", "content": "Hey, guys. Good morning. And Jim, since you've told off not to ask about NHPs that is exactly what I will do. Just one clarification actually to that first question from Eric. Flavia, you mentioned sort of the 200 to 400 bps range being the same, but at the same time, you also talked about how some of your ongoing efforts should mitigate some of the impact here. So is it fair to assume that at the midpoint things have moved a little bit towards the lower end of that 200 to 400 bps range? And then, Jim, one for you in terms of just dealing with the competition. You're more tactical rather than structural long-term because I know you're very competitive here. But given some of these Chinese CROs and NHPs being an abundant supply there, also some of your U.S. competitors perhaps acquiring NHPs from some local suppliers, which you may or may not have wanted to deal with, how do you think about the near-term sort of tactical competitive landscape in the market at the moment?"}, {"role": "user", "content": "So maybe I'll just take the first question. We had provided a wider guidance range. Obviously, this year given the NHP supply situation and to your point, it included 200 to 400 basis points of impact, as Jim commented, the second quarter is certainly a little bit better than we had planned given the collaboration with our clients to work in scheduled flexibly. So we continue to include the 200 to 400 basis points in our guidance range given also what Jim talked about, which is, it continues to be a fluid situation. We're working very hard to be at the lower end of that range, but it's still early in the year so I'll leave it at that. Jim, do you want to?"}, {"role": "assistant", "content": "So on the NHP competitive scenario, I'd say a couple of things. One is there is obviously a significant number of NHPs in China to be utilized by Chinese CROs to both support their current industry, I mean their internal China industry and perhaps the southern U.S. and European companies. The scale of the industry there is still relatively small, obviously, that's subject to change over a period of time and some clients may -- some Western clients may have gone there. It's difficult for us to tell, but not too many. And I think there is a whole bunch of obvious reasons to be taking your new drug, newly patented drugs and doing the work in China."}, {"role": "assistant", "content": "But having said that, I didn't forget the word done wherever they can. With regard to our domestic competitors, yeah, I'd remind you that number one they're smaller, way smaller. Number two, I think they have very limited supply sources. Number three, I think they're also not bringing anything from Cambodia than before they may be using suppliers that we buy doc use. So we are constantly trying to take the high road in terms of quality, consistency and volume of supply, and we think we're in a very strong competitive position."}, {"role": "user", "content": "Thanks, guys. I appreciate it."}, {"role": "assistant", "content": "Sure."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from John Sourbeer with UBS."}, {"role": "user", "content": "Good morning, and thanks for taking the questions. I guess just looking into the CDMO, could you just talk about some of the backlog building there? I know there's been some announcements over the last several months. And just the maturity of some of these programs and you still see the potential for commercial products this year or into next year. And then just one follow-up to an unrelated subject. There's been some press reports on bans of harvesting horseshoe crabs. Just any comment there on what the size of that business is for Charles River? Thanks."}, {"role": "assistant", "content": "So on the CDMO business unit, it has three parts. We have self-therapy manufacturing business which is our largest business and benefits. It's doing quite well, certainly contributing to the prior year. I was just down there, fabulous new facilities, new management team, new sales organization, significant number of new clients, both large and small. We are producing our first commercial products, can't divulge it, but we are. And we have other clients that are moving in that direction. By that I mean either filing with various government agencies in the U.S. and Europe and or telling us to get ready for audits by either the FDA or the EMA. So moving into the commercial direction, we have new production suites which are available. Some of those have been reserved by clients that are either commercial now or I think they will be soon because obviously they don't want to have a product approved and knock it. So we're pleased with the way it's progressing."}, {"role": "assistant", "content": "We also have a viral vector business in Rockville, Maryland and it also has been enhanced facilities and management team and sales organization, which is strengthening nicely with plasmid DNA business in the U.K. which again has been somewhat transformed. We have centers of excellence in both of those sites now where they used to do multiple things. So CDMO business will have nice growth rates this year, notwithstanding the pre-determined and expected difficult times for Q1. That business will continue to strengthen through each quarter both the top-line and the bottom-line from a comparative basis."}, {"role": "assistant", "content": "The horseshoe crabs thing, you know that's the reagents that we used for our endotoxin in Charles. I'll remind you that test is used for medical devices and injectable drugs required by law is a lot of release test. I'll also remind you that that was our first major foray into in vitro system, that's actually considered in vitro even now, ease of supply by horseshoe crabs. Those crabs are harvested in variety of places. We have a little bit of pressure in one of our locations in South Carolina, that's lawsuits related to that. I won't get into all the details but the punch line is we have some restrictions in fishing those waters but we also have new locations to harvest, perhaps in other parts of the U.S., which should hold us in good stead. We're also building the inventories nicely. And I guess the last thing I would say is that our technology as opposed to the conventional technology, which is 96 well plate, so we still sell lots of that, but our forward-looking technology is a more sophisticated device, which uses 95% of less crude. So our need for crude which is the collection of horseshoe crabs is actually -- as we transfer the clients new technology, it's actually decreasing all the time, so we're in good shape there."}, {"role": "user", "content": "Thanks for taking the question."}, {"role": "assistant", "content": "Sure."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Justin Bowers with Deutsche Bank."}, {"role": "user", "content": "Hi. Good morning, everyone. Just sticking with the CDMO and the improvements there. Sequentially I think in the deck, the prepared remarks, you talked about returning to those targeted growth rates. Can you just remind us what those are? And then maybe qualitatively is -- for 2023, are you thinking that that business is sort of above or below the segment growth rates for the year?"}, {"role": "assistant", "content": "We're expecting that those businesses in the aggregate again Memphis being the -- by far the largest tease will grow at 20% to 25% which is what we had anticipated when we bought. So that's a great growth rate. Obviously, accretive to the growth rate of the manufacturing segments and at the sort of the scale obviously somewhat accretive to the gross rate in a lot of countries as a whole but as growth, it will be increasingly more accretive. So lots of demand, limited competitive scenario. I mean, some clients are doing itself, but I'm talking about it on a contract basis. We have good competitors, but not a lot of them. Lots of drugs in development that we're working on, the preclinical sector, and then obviously lots of those moving into the clinical domain. Only a few have been approved, still think it's 13 and 14 totally. Went out making one of those, change modified cells cell therapy products, s we're very pleased and proud of that. Early days from a volume point of view, so it's not transformational necessarily from that point of view, but I think reputationally with regard to other potential current clients being comfortable with our capability and also the regulatory agencies have been piloted us, and being pleased with what they saw holds us in good stead. So we're happy with our infrastructure, with the growing client base, with our scientific capabilities, with our ability to sell more effectively. It's a pretty long sales cycles, so we're out and about well in advance. It does a fair amount of price tower in this business, because it's complicated and expensive to set it out, but while you may have some very big companies set their own sharp small and medium-sized biotechs not going to be able to afford it. So like in safety, well, like in all other businesses, we got to need to be paid well for our current and future investment in this space. But we're pleased with the way it's going. We learned a lot last year, we made a lot of fundamental changes in the physical plant and then the scientific and G&A staff. And just getting the word out that this is something that we do as we go to more scientific meetings and present more paper. So we should hit the growth rates that we originally anticipated in our acquisition model."}, {"role": "user", "content": "Great. And congrats on the commercial production in Manchester. And then maybe just a quick follow-up on RMS and NHPs in China. Is that -- are the -- is the messaging there -- was there was there a blip in 1Q and then it's back to normal in 2Q? Or has something changed in the way that you're sort of go into market there with RMS, in which case in China?"}, {"role": "assistant", "content": "Yeah. We have supply sources in China that has stayed in China, so we sell the animals to clients in China. Usually, we can predict the timeframe, so this just slipped out a little bit. So nothing has fundamentally changed. So it's a huge part of the business, but it's meaningful certainly to our Chinese business and less meaningful but still meaningful to RMS. Margins are good. Animal quality is good. And so, yeah, that's -- that will continue to be our situation over there. But nothing has fundamentally changed, just split out a little bit."}, {"role": "user", "content": "Yeah. It's purely timing I would characterize."}, {"role": "user", "content": "Okay. Got it. Thanks so much."}]}, {"messages": [{"role": "system", "content": "And we'll take our next question from Elizabeth Anderson with Evercore."}, {"role": "user", "content": "Hi, guys. Thanks so much for the question. You could comment on sort of backlog cancellations in the first quarter. Is that something that you're sort of being as broadly steady sequentially? Are you seeing any sort of changes in the characterization of that at all? Thanks."}, {"role": "user", "content": "Yeah. So Elizabeth, we've been talking about cancellations and slippage throughout last year and we also continue to talk about the size of the backlog which you had expanded to significantly higher than historical levels. And we talked about the elongation of that backlog which as one might expect would drive additional cancellations or slippage. So first cancellations and slippage are normal part of the business as clients do not have the test articles ready or continue to negotiate design study with the appropriate regulatory agencies, that normally happens in the business as the backlog elongated in time that certainly becomes more pronounced and as it's harder to predict things that much into the future. So we had seen that elongate throughout 2022. I think we're getting back to, I would say maybe more normalized pre-pandemic levels. And so, I think those things will work overall just together. The backlog is not going to be perhaps as long and the cancellations and slippage will lower accordingly."}, {"role": "user", "content": "Got it. That's super helpful. And then just what is your thought like obviously the margin in manufacturing was impacted a bit by the lower revenue growth I would imagine in the quarter, but the OpEx growth in general seemed a little bit higher than your usual kind of run rate on that. Can you just talk to maybe like the cadence of that in the back half of the year and sort of how much was specifically a function of maybe some of the deleveraging and manufacturing support versus how are you seeing any kind of heated changes in the Fed over the rest of the year. Thank you."}, {"role": "user", "content": "Yeah. So let me comment first on the manufacturing solutions margin in the quarter. So as Jim talked about, we had some of those prior year headwinds with the milestones in CDMO and the biologics COVID volume that we no longer have. We also had a lighter start in biologics testing this year and then I think we also talked about, we had a -- an asset impairment in that segment in Q1. So all those things contributed to a I'd say unusually low manufacturing solutions margin in Q1. I think for the overall margin for the company, we were about 20 basis points lower year-over-year, and we continue -- we provided an update on the guidance for the full year of flat to lower versus 2022 given the continued fluidity of the NHP situation that we talked about earlier."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "We'll take our next question from Tim Daley with Wells Fargo."}, {"role": "user", "content": "Great. So Jim, just moving away from all these near-term factors here, wanted to clarify some comments made at a broker conference in March around the RMS segment long-term growth rate. So over the past three years, you guys have formally up-indexed long-term growth forecast and RMS from low-single mid-single to mid-single high-single and DSA from high-single 10%. So where we sit today, are those still the official goalposts or any further updates here on that framework on a segment level?"}, {"role": "assistant", "content": "I mean certainly for this year we feel good about RMS growing at high single. The constituent parts of that business continue to strengthen actually gaining share in the U.S. and Europe which we haven't seen a long time. We always get price in that business. Chinese business is growing nicely both on the small animal side and then the NHP business. Service businesses which have great margins are growing very nicely. Obviously, we did an acquisition last year, which is explorer labs with all of these new cradles, and very important geographies. Really great receptivity in a tough economy for these sites. And surprisingly, nicely surprisingly, clients have very large and very small. We felt that it would be only smart clients. And the supply business, which was in the prepared remarks, but we have -- clients about that much. Well, we get a small business. We really had probably the only business in the portfolio really had a tough time as a result of COVID and had a very nice first quarter sales. I'd say without getting into '24 obviously that the outlook for that business continues to be stronger because it's extremely well-utilized. Competition, well, we always respect notwithstanding what I am about say, I would say, is continues to be financially less strong and more fragile and more siloed. So I think it's difficult for them to compete with us so we're fairly really good about that. And the DSA side with some moderation from an extremely strong '22, and assuming that the NHP situation gets resolved permanently as we hope it does, and we think that's going to be a -- DSA should be a strong business for us."}, {"role": "assistant", "content": "Our current guidance, given the vagaries is what I said low to mid single-digit, but the current long-term guidance out there is low double I think. So we'll give updates on all of those growth rates sometime when we have our investor conference. I think the things are a bit fluid as I said on the NHP side, but we will give guidance. I'm assuming that that's clarified and hopefully will be clarified by the time we have our investor conference. But I think we have pretty much across the board very good demand for what we do. I think we're providing an extraordinarily valuable service and products with various remarks at a position and great connectivity across the various parts of our business that should not only be enhanced given the portfolio and hopefully, as we continue to add to with very small and perhaps some mid-sized deals."}, {"role": "user", "content": "Great. Thank you. And then a quick one for Flavio. What's the overall China exposure as a percent of revenues, an update on that. And then are any big businesses or segments over under-indexed to China? And thanks for the time. Appreciate it."}, {"role": "user", "content": "Yeah. I think the only business really that we have a China presence is RMS with obviously all those business there but also the services business. And so as you can imagine because of -- and then we also have microbial which is part of the manufacturing solutions business redistributed and available in China. So our largest business, excuse me, the segment which is DSA has no presence in China. So as a result of that China is a fairly modest portion of overall Charles River sales."}, {"role": "assistant", "content": "I think it's still less than 5% of total revenue, 5%, 3% or 4%. I think last time, we had it like 15% of our agreement."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. We have no further questions in the queue. I will turn the conference back to Todd Spencer for closing remarks."}, {"role": "user", "content": "Great. Thank you for joining us on the conference call this morning. We look forward to seeing you at upcoming investor conferences in June. That concludes the conference call. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]. Your first question comes from the line of Justin Post from Bank of America. Your line is open."}, {"role": "user", "content": "Great. Thanks for taking my question. I guess two things. First, when you look at ROI in the marketing channels, how do you feel about that going into the summer? Are you seeing some advantages based on changes from some of your competitors? And then secondly, as you think about your overall use of cash, any reason why you can't just put buybacks to work for the next five years? Are there anything we should be thinking about on the debt side?"}, {"role": "assistant", "content": "Well, Justin, why don't I take the second and then I'll let David talk specifically about ROIs and marketing and thoughts on that going forward. So, I think we've been fairly clear in the past about how we view the company and how we believe our free cash flow should be used."}, {"role": "assistant", "content": "And the first thing we always want to see is how can we invest that money appropriately in the company, build out services in ways that we can make the way we work with our partners and our traveler customers in a better way to help build this franchise. That's the first thing absolutely important."}, {"role": "assistant", "content": "And after that, we say, well, we can't build it organically, is there something outside the company, we think, that could add value, make things better for both, again, our traveler customers and our partner customers. And the last thing is, okay, if we don't see a good use of that, then we should be somehow returning that capital to our shareholders which is what we laid out. The last quarter, we laid out our buyback program, where we had $4 million left in the previous authorization, $20 million in the next one, that made $24 million total. And then we said that, over the next four years, we expect to be able to complete the full authorization. And I believe we've given out some numbers about our buyback now. And I am thrilled with the way we're doing this. But for long term, five years, this is what we laid out. Things can always change, but that's the way we've laid it out."}, {"role": "assistant", "content": "And I'll leave it up to David in terms of ROIs, anything you're seeing differently about the summer. I haven't myself. Maybe you've seen something."}, {"role": "assistant", "content": "Yes. Justin, I think it's hard to predict what's going to happen to ROIs that far out. So what I will say is that you can see that we saw some encouraging ROI trends compared to expectations in the first quarter. Those were a little bit related to what happened to our bookings profile. So as we mentioned, we got a lot of extra bookings for the summer in the first quarter, more than we would have expected. The ROIs in the pay channels were better than expected due to basically three things -- higher ADR, a lower cancellation rate and a longer-than-expected average length of stay. So we were bidding -- so basically, that was tied to the expansion of the booking window. So the expansion of the booking window is quite closely correlated to what we saw in terms of good ROI performance in the first quarter. I've just always maintained the point, these are highly competitive channels, many players in them. And relative to your question on competitive dynamic, nothing really to talk about that's different."}, {"role": "user", "content": "Great, thank you. Appreciate it."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Mark Mahaney from Evercore. Your line is open."}, {"role": "user", "content": "Thanks. I just want to ask about the Asia Pacific travel and China travel. Are you already seeing the impact of China outbound travel? And then within Asia Pacific, it sounds like that's the strongest region. Are there any particular markets that are performing well for you? Thank you."}, {"role": "assistant", "content": "Hey, Mark. Let me take that part two ways. Because I know last time, I believe you asked about China outbound then too, if I recall correctly. And so, China is not a significant part at all of our very strong Asia growth in the first quarter. And I want to make it clear that China is still not anywhere near it was in 2019 in outbound. It is coming back in terms of overall market coming back, but there's still shortages of lift there. It is getting better than it was in January when there was a think mid-teens number of available airlift out of China outbound. It is coming back."}, {"role": "assistant", "content": "I'll be probably honest with you, we are seeing more growth, obviously, in other parts of Asia. Om very pleased with the very strong growth we're seeing. I don't believe that we're going to break down individual countries, but I do see that this is an area of growth for us that I'm very pleased about."}, {"role": "assistant", "content": "Anything else, Mark?"}, {"role": "user", "content": "That's it, Glenn. Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Lloyd Walmsley from UBS. Your line is open."}, {"role": "user", "content": "All right. Thanks. Two, if I can. First, just going back to the higher marketing ROI. Like how much of that is you all proactively managing to higher targets versus just the competitive market maybe softening up in marketing channels? And like, do you think this is durable? And do you think we should think of this as a reflection of kind of normalizing consumer demand?"}, {"role": "user", "content": "And then the second one is just anything you're seeing in terms of just price consciousness among consumers either trading down at all or taking shorter trips to compensate for higher ADRs. Anything you'd call out there in any of your big markets."}, {"role": "assistant", "content": "Let me take the second one because I do look at that very carefully to see are there any smoke signals coming out of the market, giving us any indication of any changes. And I have not seen any decline in the star ratings that people are going for nor are we seeing a decrease in the length of stays, either one of which could increase that potential softening in the market and we have not seen that yet. And I think we made the remark about the booking window has gone out further indicating confidence, I believe, that's one hypothesis I want to point out, confidence about the future willing to put your money down and be willing to book for further out. [Indecipherable] is that people are concerned about there's not going to be enough availability or they could be concerned that prices are going to continue to rise and want to lock it in now. That's another way to look at too. But none of those hypotheses are going to say anything about a weakness at all."}, {"role": "assistant", "content": "And in terms of I think your first question, I'll leave it to David."}, {"role": "assistant", "content": "Yeah. In terms of -- Lloyd, let me just remind you that this is a year that we still expect to be leaning into marketing and merchandising because we believe there's recovery in the travel market available to us. And I think that our growth rates relative to the market demonstrates that we're making progress there."}, {"role": "assistant", "content": "If you remember, we started off the year by saying we expect our marketing and merchandising investment to be roughly the same as it was as a percentage of gross bookings, roughly the same as it was in 2022. We still expect that to be the case. Remember, we said that 2022 was a year which we look out of leaning in and making more investment relative to gross bookings that we did in 2019. And that story for us hasn't changed."}, {"role": "assistant", "content": "We believe that we want to continue to lean this year to continue to gain share in a recovery marketplace. And the fact that we saw some improvement in Q1, as I mentioned in my -- in the answer to my question to Justin, was to do with the kind of shape of our booking profile and the booking window getting more summer bookings with higher transaction values than we would expect it to get from a mix point of view in Q1 and actually why the ROIs came in better. But we still plan to believe in the industry. And as I said in Q2 and for the full year, we still expect that investment in marketing and merchandising to be as it was in 2022."}, {"role": "user", "content": "Okay. All right. Thanks, guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Brian Nowak from Morgan Stanley. Your line is open."}, {"role": "user", "content": "Great. Thanks for taking the questions. I have two. The first one is on the direct mix of traffic, the percentage of the business that's direct. You've made a lot of progress on that over the last year or so, a couple of years, Glenn. If you break it down by region, where have you made the most progress in increasing the percentage of the business that's direct? And how should we think about how high that is? And what's the regions that you have the most runway to sort of drive that percentage of the business that's direct up longer?"}, {"role": "user", "content": "And then, the second one on your forecasting. You guys have a lot of data and you're very good at forecasting. It seems like demand really came through better than you thought throughout the quarter. Which regions sort of drove that outsized demand versus your forecasting? Thanks."}, {"role": "assistant", "content": "Right. So we don't break down the direct mix by region at all. But I can repeat things I've said in the past about how important direct mix is for the long-term, increase the value of the franchise because of things we talk about with our Connected Trip. Getting people in through the app primarily, having them understand all the different things we'll be able to offer to them, give them a real personalized thing that will make them want to always come back to us. The more we learn about them, the more they come back to us. So it's a flywheel effect happening there. Again, we're not going to break it down by region, but my goal is to have every region have as many people as possible using the app and coming directly. That's the first thing."}, {"role": "assistant", "content": "In terms of how we varied against our forecast, I don't know how much David really wants to get into that?"}, {"role": "assistant", "content": "You can see that -- obviously, we did significantly better on the top line. And I think the place to go to -- I'd say it was fairly balanced across all regions. Obviously, the place we sold -- booking window expanded the most was in US and Europe. So that's where we got a higher share of summer bookings than we expected to get in Q1. But you see that also Asia did very well. And in general, also exceeded our expectations, but we didn't have the booking window phenomena there. So I wouldn't call out any particular region, but I will call out some of the differences in what we saw across the regions that contributed to the overachievement."}, {"role": "user", "content": "Great. Thank you, both."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Doug Anmuth from J.P. Morgan. Your line is open."}, {"role": "user", "content": "Thanks so much taking the question. Glenn, I just wanted to revisit on AI. Can you just talk about some of the advantages that Booking would have in leveraging generative AI versus what other external or potentially new travel services might provide? And do you feel the need to protect the data on your platform to keep it from being used for training broadly across many large language models? Thanks."}, {"role": "assistant", "content": "Thanks, Doug. They were very interesting questions about that and I'll break it out into -- you start off with AI, then we went to a specific subset of the generative AI. Let's just talk in general about AI first and how important this, into our business for many, many, many years, more than a decade perhaps, machine learning models that really helped us do a better job, making sure that what we're presenting to consumer, for example, is really something that they have a higher percentage chance they're going to convert on that. All sorts of ways that we use, very sophisticated machine learning models in many parts of the business that have helped us get us where we are today."}, {"role": "assistant", "content": "Then of course, we come out in the fall, something that is -- something a lot of people were not that aware of is generative AI, large language models and see what could be done with them. And clearly, anytime there's a major shift in technology, everyone thinks like, well, is this going to be disruptive to the players who are already doing well? Is it not?"}, {"role": "assistant", "content": "And I said in my prepared remarks, how I feel very confident of where we are in this because of the work we've done in AI in the past, the number of people we've had working on, the amount of capital we have, our collaborations with universities. I believe that we are going to be benefiting greatly from this new type of technology in many different areas, some we haven't even thought of them yet and some things are going to be simple and easy as perhaps increasing the productivity of our developers which we believe is hopefully going to achieve some very good results in the hopefully not so distant future, to things that perhaps are further away, but ways that people interact with us in that Connected Trip Vision, the way that you really do -- are able to recreate that human travel agent into something that's actually an automated player, but does it so much better than the human being did it in the past."}, {"role": "assistant", "content": "Now in terms of your very important question about the data and how do we protect it and not let it get out and be used by others, that is a very important thing. And everyone from our attorneys to people in our development departments, people who are really working with some of these large language model, foundational model people, we are looking very closely. Have they already been using our data and should they be? And I think there's going to be a lot of interesting regulations in this area that nobody knows the answer yet too. But how will people be calm and say -- if their data has been used in the past for training purposes or not, and I think it's a very open question that nobody knows the answer to yet, but we will be very interested in the results."}, {"role": "user", "content": "Thank you, Glenn."}, {"role": "user", "content": "Your next question comes from the line of Kevin Kopelman from TD Cowen. Your line is open."}, {"role": "user", "content": "Thank you so much. Yes. First question, I wanted to ask about ADRs, big area of interest. With all the strength you're seeing in Q1, could you just -- and quarter to date, can you touch on how ADRs have trended generally compared to what you're seeing as of the last call."}, {"role": "assistant", "content": "Yes. So we gave you some data on the call. ADRs are still trending positively. They're up on a year-on-year basis and they're up in -- across all regions on a year-on-year basis. So we're not seeing any slowdown in ADRs. We've been looking at some of the things, I'm sure, behind your question, but we're not seeing a reduction in ADRs in any region on a year-on-year basis or on a year-on -- on a full year basis. So we see ADRs continue to hold very strongly."}, {"role": "user", "content": "Great. And then, one other question. Could you talk about a little bit about the dynamics in the US market? What are you seeing in the US that's causing your growth to be a little bit slower there? And how do you feel about your market share in the US?"}, {"role": "assistant", "content": "We feel that -- obviously, our US business is still growing very, very strongly compared to 2019. And we have -- seeing that growth relative to 2019 come down a little bit. But we feel that a part -- we still feel it's -- when you look at how our business is vis-a-vis 2019, it's significantly bigger than it was before and it's still growing at a very healthy rate vis-a-vis 2019. So we don't really worry about that."}, {"role": "assistant", "content": "And I would just add, my conversations with our partners, some of our biggest partners and with their senior management, the critical thing for me is, are we providing them with what they need? Are we providing incremental business to them that helps them do better in their business? And do you feel that we are being valuable to what you need? And I only heard positive things from all the people that I speak to in regards to where we are today versus where we were in the past. And it's a much more complementary relationship and I believe that will help us in the future to continue to build on that."}, {"role": "user", "content": "Great. Thanks, Glenn. Thanks, David."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Lee Horowitz from Deutsche Bank. Your line is open."}, {"role": "user", "content": "Great. Maybe sticking with some of the comments around direct, you guys continue to post impressive direct booking results and app growth. Maybe looking beyond this year, how does this process of execution within the direct channel inform the way you see margin progression, say, beyond 2023?"}, {"role": "user", "content": "And then, maybe one on VR. Our charts continue to indicate that you guys seem to be picking up some share in the US vacation rental market, an area where you've been perhaps underrepresented. I guess to what do you owe maybe some of the improvements you're seeing within the US VR industry? And then looking forward, what are the things you think you need to continue to do in order to really scale up that business in line with some of your competitors?"}, {"role": "assistant", "content": "So why don't I start, Lee. If I can start with -- as you put it out, VR, vacation rental -- I'd like to use alternative accommodation. Neither one is a great customer-friendly term, of course. Let me talk about that and then I'll let David talk about the direct business and what that may or may not indicate when you go into share in terms of margins down the road."}, {"role": "assistant", "content": "And I talked a little bit about, in my prepared remarks, about some of the things we are doing in terms of the alternative accommodations area in the US to build that business and you were very polite to say that maybe -- that we may have been underindexed where we did. It's very nice to say because I've continually admitted that, in the past, we have not been hitting that as well as we should have, that we were behind where I thought we should be, especially since we do fairly well in in other parts of the world, particularly in Europe."}, {"role": "assistant", "content": "Things that we've been doing are things that I talk about. First of all, is you've got to make sure you're providing a good service to the people who own the home, who own the apartments. Are we doing things like liability insurance? Well, now we have something like that. Damage waiver type stuff. Do we have that? Yes, we do. Last time I talked about how we were testing out an ability to request to book because some people have properties, they don't want to have automatic booking. They want to have a request to book system, so we are developing out back."}, {"role": "assistant", "content": "Once you start getting that in, you start saying, well, are people aware of your product? Because as I said, there wasn't a lot of -- people didn't have a lot of knowledge that we had such a product. And it was just a joke that if you went down New York City and you said something on the street and said, I need a place in the Hamptons, where shall I go, I could almost guarantee you, they weren't going to say Booking.com. Well, we need to get that supplies. Once we have it, then we've got to make people aware that we have the supplies. We have to build all that up. So there's nothing miracle about this. This is blocking and tackling business 101. Get your supply out there, make it attractive and then make sure people know about it and that's what we've been doing, cranking away at it."}, {"role": "assistant", "content": "And I'm pleased -- and I said, it's really nice to see us starting to hit it. It could -- come up with our mix in the US at an all-time high in terms of alternative accommodation part of our total mix, along with having the absolute number of alternative accommodation room night bookings. So, I am pleased with the progress that we're making and I know that we had to continue that because I know customers like this product and this is an area where we have growth possibilities."}, {"role": "assistant", "content": "And, David, regarding direct only book, do you want to--?"}, {"role": "assistant", "content": "Sure. Lee, direct mix obviously is very tied to our strategy. Our strategy is to build a better product, provide better service for our customers and partners and get those customers to come back to us more frequently and more directly after we've acquired them in the first place [Indecipherable] we bring them into the portfolio the first time around. So it really does tie to us executing against our strategy and lots of things that we do, many things that we do contribute to that better product. I could talk about alternative accommodation, I could talk about payments, I could talk about adding flights, so all these things just create a better service for our customer and, therefore, we're more likely to get them back directly. So it's very much tied to our strategy."}, {"role": "assistant", "content": "It is also tied to your financial model because we made a comment last quarter or in February that we're obviously not targeting pre-COVID margin level because of the mix shift in the business for some of these new areas that we're now focused in, but we do expect to be able to grow our EBITDA margin above the levels we're at in 2023. And the biggest driver, that would be continue to increase our direct mix. We'd also expect to be able to do better from a leverage on our more fixed costs going forward. And those themselves would more than offset the pressure from the mix of lower-margin businesses as they grow within our portfolio."}, {"role": "assistant", "content": "So continuing to improve our direct mix is very important for both the strategy and the financial model and will be the major source for us to be able to provide some margin expansion beyond where we are this year."}, {"role": "user", "content": "Helpful. Thank you both."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of John Colantuoni from Jefferies. Your line is open."}, {"role": "user", "content": "Great. Thanks for taking my questions. Hoping you could update us on your strategy in the US market. You've had a lot of success gaining share in recent years, but I'm curious if you could update us on your learning so far about sort of the return on investments and how that's informing your aspirations to continue pursuing that opportunity as aggressively as you have been?"}, {"role": "user", "content": "And second, you sort of characterized investing ahead of the travel recovery to gain share throughout 2021 and 2022. I'm curious if that's your strategy in the Asia Pacific region as that market recovers. And if you have any early reads on returns on that investment. Thanks."}, {"role": "assistant", "content": "Yes. So, I'll start off by saying that I'm very pleased with how the strategy has been working out in the US, given our gain in share. As David mentioned, we have a bigger business than we did in 2019. It's been growing nicely. I really do think that it's achieving what we've been trying to accomplish, which is to not be the under-indexed player that we were in the past and we're making good progress there."}, {"role": "assistant", "content": "In terms of the absolute ROIs on these things, we don't break them out by region at all. But I will say that, obviously, we are very conscious of spending money the right way to get the right return. And we are -- I came out of the business -- previously, I was in finance. I know how important it is to make sure that you're getting your money's worth where you're spending it and we are doing that. Now, I think it's just -- going forward, our strategy is working, so I see us continuing in the same vein."}, {"role": "assistant", "content": "And in terms of Asia, it was not dissimilar that we want to make sure, when people are going to start traveling, we don't want to wait until you're halfway down the track to get out of the gate. That would not be the best move. Get out in front, be there when the traveler wants to start traveling and providing them with what they want. And that we've been doing and we just talked a little bit about how we were very pleased with the first quarter for Asia growth. And I think, hopefully, it will continue the same way."}, {"role": "user", "content": "Great. Thanks so much."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Deepak Mathivanan from Wolfe Research. Your line is open."}, {"role": "user", "content": "Great, thank you. This is Zach on for Deepak. Just first on the fixed cost side, 1Q -- or I guess the first half is kind of tracking above the kind of 20% growth that you kind of outlined last quarter. And the 1Q to 2Q is also kind of sequentially stepping up a little bit here. Just curious on your thoughts on how we should think about the fixed cost growth kind of maybe sequentially kind of into the back half of the year and into next year?"}, {"role": "user", "content": "And then second on just the buybacks. I think 1Q came in a bit stronger than we were expecting. Just curious how we should think about kind of the puts and takes in terms of the cadence of buybacks through the rest of the year? Is 1Q kind of a good run rate or how should we think of that?"}, {"role": "assistant", "content": "David, you're the owner of the P&L there, looking -- you want to take them on the costs?"}, {"role": "assistant", "content": "Yes. On the cost side, yes, we talked about being 25% in the first quarter -- we talked about being 25% in the second quarter. So obviously, that's going to put a little bit of pressure on our guidance for the full year. But what I'd say just generally, when you look at anything that's in the kind of full year view, we've not updated our guidance, there are going to be some -- likely going to be some puts and takes for the full year at the line item level, but we're not going to update that line item detail today other than just recommit that we'll have a margin expansion by a couple of points versus 2022. Remember, next year, we said that we do expect our fixed cost to grow more slowly next year than we expect them to grow this year and that continues to be the case."}, {"role": "assistant", "content": "And regarding buybacks, I think we laid it out a little bit. You know what our plan is. You know what we're doing. And I'm not sure there's any more color I can give and we're pleased with where we are."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "And your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open."}, {"role": "user", "content": "This is Josh on for Jed. Thanks for taking our question. Just wondering, if you can maybe speak to how recent improvements in payments is resonating with US property managers and their opportunity to increase share?"}, {"role": "assistant", "content": "Sure, Josh. Payments is an important part of the business. I've talked in the past about how it's the glue that brings everything together, along with making it easier for both the customer traveler and for the partner. And I think the growth in the amount of our business going through payments is a good indicator that is working and being accepted well. Customers have choice, both the traveler and the partner. Both of them can choose to use the payments or not. The fact that it's going up to me would be proof positive that people are finding it useful. And I believe in the long run, it's being very, very helpful as we continue to build out the Connected Trip further."}]}, {"messages": [{"role": "system", "content": "And your next question comes from the line of Stephen Ju from Credit Suisse. Your line is open."}, {"role": "user", "content": "Right. Thank you. So, Glenn and David, your merchant booking dollars are now at parity with your agency dollars. So just wondering how much of this is due to the ramp in air versus a more proactive choice the consumer may be making in their lodging product selections, to your point earlier to alternative accommodations. And I guess, doing more merchant and the rise in deferred merchant bookings there should improve your free cash flow generation, so does this change your capital allocation plans a little bit? Thank you."}, {"role": "assistant", "content": "On the second question, no, the capital allocation plan that we talked about last quarter, that Glenn summarized earlier, anticipated that we would be continuing to increase our merchant mix. So on that piece, there is no change."}, {"role": "assistant", "content": "In terms of where is that merchant increase coming from, just to remind us all, it's really coming from a mix shift inside of Booking.com where we are moving from what used to be almost entirely an agency model now to a much more balanced model. That is the biggest change would be in accommodations. That's still, by far, the biggest part of the business, although as flights grows, it's having an impact. But what's really driving the changes that you're seeing is the increase in merchant mix across our accommodations business, our Booking.com. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of James Lee from Mizuho. Your line is open."}, {"role": "user", "content": "Great. Thanks for taking my questions. Two here. Can you guys maybe give us an updated outlook on ADRs. I think, previously, you talked about expectation being maybe flattish on constant currency for FY 2023. And also, David maybe can remind us -- talk about some of the puts and takes on take rate for your expectation for 2023."}, {"role": "assistant", "content": "We said that we expect our ADRs for the second quarter just to kind of continue the picture. We expect our ADRs for the second quarter to be up slightly on year basis. As I mentioned in one of my earlier answers, we're not updating every single line item on our full year guidance. But if they continue to hold at the current levels, there may be a little bit of upside compared to what we said on the last call on ADRs. As I said, there'll be some puts and takes up and down our full set of guidance. But we're not specifically updating our guidance or giving you anything beyond what we're talking about for Q2. We'll have to wait and see how that all develops. But I think you can see from where we were in Q1, plus what we're expecting in Q2, things are trending positively."}]}, {"messages": [{"role": "system", "content": "And your next question comes from the line of Richard Clarke from Bernstein. Your line is open."}, {"role": "user", "content": "Hi. Thanks for taking my questions. Just the first question was what is the ability for you to continue to get discounts from your hotels? I know the Genius discounts tend to be hotel-funded. And in this travel environment, are they more or less likely to give those? And is that influencing your level of merchandising at all? And could that change if the travel environment altered towards the back half."}, {"role": "assistant", "content": "Richard, look, there's no doubt that hotels when they are doing well may see less of a need to use all other ways to distribute and get business than just have [Indecipherable] direct, right? And one of the things they're always looking is what's the return."}, {"role": "assistant", "content": "So with us and Genius, it's really being very targeted with them to make sure they understand how we can get the incremental demand that they wouldn't necessarily be able to get otherwise and then working with them and make sure, is this value for them or not. And something I actually talked a bit in the past -- I went on a call, but our sales people have worked with hoteliers and talked to them sometimes, well, we're working on the Genius program -- the Genius program and it's not actually the best use of their money and the best way for them to do business. And told them, look, don't think you should use Genius this way, this amount, this time, whatever other time, etcetera. This is an idea long term, having a good partnership. It's just -- it's not just knocking down the door of hotel, give us discounts, give us discount. That's not how this works. This works with science. This works with data. This is the machine learning stuff I talked about in the past. This is getting together to come up with a way that we can come up with a better way to improve their business."}, {"role": "assistant", "content": "Now no doubt, as travel improves and such, there's going to be less of a need as the hotels will find other ways and perhaps less expensive ways or more efficient ways for them. And so, maybe there will be some places, but I am not at all concerned -- if your point is that this is going to make a drastic difference to how we do our business in the future, I don't see -- I see this as something that's going to be more and more central as we continue to develop more ways to provide value to the traveler customer and be able to work with the customer supplier partner in ways that are complementary, symbiotic for all of us that we all win in this, the traveler wins, the hotel wins and we win."}, {"role": "user", "content": "Okay. That makes perfect sense. Maybe just a little technical question after this. You talked about -- you've got $19 billion of merchant bookings in the quarter. You've talked about longer booking windows, but your deferred merchant booking is only at $4.5 billion. Just trying to square the gap between the $19 billion and the $4.5 billion that we see there."}, {"role": "assistant", "content": "Richard, you're confusing me on this one."}, {"role": "assistant", "content": "Richard, you stumped us both on that one."}, {"role": "user", "content": "[Indecipherable] the deferred merchant booking line which is $4.5 billion on your balance sheet, how does that square with you getting $19 billion of bookings -- merchant bookings in the quarter that you're saying are largely for future quarters?"}, {"role": "assistant", "content": "Richard, why don't we follow up with you offline on that one rather than try and bog us all down? Just to understand the question, make sure we get you the answer. And if others want -- just to give us the answer, we can follow up to them as well. But we'll touch base with you offline. John will call you back."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "And there are no further questions at this time. Mr. Glenn Fogel, I turn the call back over to you."}, {"role": "assistant", "content": "Thank you. So as always, I want to thank our partners, our customers, our dedicated employees and our shareholders. We appreciate your support as we continue to build on the long-term vision for our company. Thank you, everyone. And good night."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question comes from Joe Ritchie of Goldman Sachs. Your line is open."}, {"role": "user", "content": "Thanks. Good morning, everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "So let's just -- let's start on the backlog as a percentage of next 12-month sales is super interesting, how that's progressed over time. I guess -- my question is really, as you're kind of thinking about the 2024 framework, I know you'll give us guidance in August. How is this going to inform that framework, whether that's a like more narrow sales range? And any color you can give us around that would be helpful."}, {"role": "assistant", "content": "Well, you're right. We'll come back to you in August with the full year guidance. So we really believe that this backlog as we've shown the consistent increase over time will remain. I always use the term demand sense. And I think that with the transformation of the portfolio, we're going to have more backlog because we have a longer cycle business. So we'll look at it for the new fiscal year, the same way in which we've been looking at it most recently. So that will help us with the future year guidance."}, {"role": "user", "content": "Okay. Thank you. That's helpful. And I guess maybe since things seemingly are still going very well. If you take a look at the organic growth you put up this quarter, there's certainly some pricing that's coming through that as well. Just maybe talk through the orders in industrial a little bit. And I'd love to hear whether there are certain areas, particularly in industrial distribution, how that's holding up today, whether there's any destocking that's happening. Just any color around that would be helpful."}, {"role": "assistant", "content": "So I'll start off and give you a little bit of color on industrial, and then I'll let Lee chime in on distribution. So in North America, orders to go negative, as Todd mentioned, a negative 4%. Just a reminder, real tough comp as North America last Q3 was plus 23%. So, customer demand remains strong. We have seen some destocking happening, and we believe that's very steady overall, positive outlook, and we continue to believe there will be broad-based growth."}, {"role": "assistant", "content": "International also at minus 4%. That decrease was mainly driven by Asia-Pacific, which was down the mid-teens. China Mobile construction remaining very soft. A lot of, I think, automotive awaiting for the government stimulus. Semicon soft, but that's pretty much what drove the international negative. And EMEA, there's really no signs right now of the market weakening, strong mobile construction and automotive. still some tough comps related to COVID vaccine business last year and some supply chain challenges. But that's primarily around electronics chips and sensors. So, it looks to be good in EMEA."}, {"role": "user", "content": "Joe, I'll just add on, just a quick -- this is Lee, just a little bit about distribution. I would tell you, in general, the sentiment is still very strong, very positive, and the backlogs have stayed very consistent. There's obviously here and there some balancing of inventory, but it's truly negligible on the total backlog for distribution and it's really true for all the regions."}, {"role": "user", "content": "North America, the most. Asia, I continue to see some strength in China on our distribution level. And EMEA has been fairly resilient, which if you would have asked me a quarter ago, I thought we'd have a little more headwinds, but it's been much more resilient than I planned on."}, {"role": "user", "content": "Got it. Thank you both."}]}, {"messages": [{"role": "system", "content": "Thank you. This question comes from Andrew Obin of Bank of America. Your line is open."}, {"role": "user", "content": "Good morning."}, {"role": "assistant", "content": "Good morning Andrew."}, {"role": "assistant", "content": "Good morning Andrew."}, {"role": "user", "content": "So, I love your slide that shows the company's transition to longer cycle business over time and how it's just fundamentally different. But I guess it's a question for Jenny and Lee. As you -- as the company has transitioned the portfolio, clearly, it's happening outside of aerospace as well, right? How are you adjusting the sales organization and you go to market to deal with the fact that you now have to deal with longer horizons, perhaps you do need to carry more inventory to service these kinds of customers. Maybe give us a 30,000-foot view. Thank you."}, {"role": "user", "content": "Yes. That's a great question, Andrew. So, I think I could probably spend a half hour on this conversation. But the sales organizations continue to morph around the globe. I would say at a high level, we've got very focused teams that deal in the aerospace sector, deal with the big OEMs and in a separate organization on the MRO side."}, {"role": "user", "content": "And then with key market segments, if I could take electrification initiatives around automotive, we've got whole sales organizations and application engineers that deal specifically with that. So, we are constantly adapting. We've got a team right now that's dealing nothing, but hydrogen generation, even though it's early days. So, we kind of organized based on some of these secular trends and based on what we see the opportunity in the field."}, {"role": "user", "content": "Excellent. Thank you. And I guess I want to resist asking this question, giving Jenny's background. But I think a lot of debate on HVAC. And I know that this is one of your largest businesses. Can you just give us more insight if you're willing to go that granular what's happening at the Portland? And I guess if you can, that's great. And if you can, just would love to hear your view on the U.S. construction cycle? Thank you."}, {"role": "assistant", "content": "So yes, obviously, very, very fond of the Portland division and a lot of history there. It is one of our markets that is single-digit negative right now. But I would tell you this is a very strong business and historically has done very well. So we don't expect that this is going to be any time -- any long-term impact to the division. And I think they're in a good position, Andrew."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. This question comes from Scott Davis of Melius Research. Your line is open."}, {"role": "user", "content": "Great. Good morning, Jenny, Lee and Todd. Congrats on another good quarter here. Great quarter. Jenny, you mentioned in your prepared remarks about a new annual incentive plan. What -- can you share a little bit of color around what you changed or what you're emphasizing in the plan?"}, {"role": "assistant", "content": "Yes. Thanks for asking, Scott. So we used to be on a plan that was driven off of return on net assets. And it was very difficult for all of our team members from -- inside of our factories even up into our offices to understand exactly where all those numbers came from and how they fit into that calculation. And now with our annual incentive plan, the operators on the shop floor, all of the people who support the manufacturing environment, everyone can clearly see because it is based off of sales and profit and cash."}, {"role": "assistant", "content": "So they know exactly how they fit into it at the division level. So if you can kind of imagine a production planner, thinking about the inventory they need to bring in and the scheduling of the shop floor, they are in tune to that fact that, that is cash, and that is a metric that drives their incentive plans. So that's just one example of how we've been able to take that plan and the metrics that support it and deploy it to where everyone can understand it and buy into it. First full year this year, all groups, and like I said, nearly all of our team members are on this and has been very positive thus far."}, {"role": "user", "content": "That makes sense. And just conceptually to back up a little bit. I mean, it's -- I've been studying companies for 30 years. It's very hard for capital spending to stay at levels around 2% of sales with growth above GDP and less productivity is just exceptional. And so I guess my question, which is a little bit of a tough question here. But productivity is something you measure in kind of the 3% to 4% level. I would guess it would have to be something like that to be able to sustain something down towards the 2%. How do you guys think about it, I guess, is the question?"}, {"role": "assistant", "content": "Yes. Great question. So we think about it a little bit higher than that. We're very challenging when it comes to continuous improvement. It's why the Win Strategy has been so successful. Our lean tools and Kaizen constantly drive cost out of the business and make that productivity possible. That goes again to every member of the business being part of using those lean tools being part of Kaizen."}, {"role": "assistant", "content": "So it's ingrained in our culture to consistently be more productive quarter-over-quarter, year-over-year. And in many cases, that's part of people's annual goals, depending on the role they're in. So we pride ourselves. We we're the hardest on ourselves. We still think we have plenty of room to improve, but we do pride ourselves on constantly looking for ways to increase efficiency and drive output."}, {"role": "user", "content": "So even above the 3% to 4% level that I mentioned, is that what you said, Jenny?"}, {"role": "assistant", "content": "In some cases, targets that divisions will be there, yes."}, {"role": "user", "content": "All right, okay. Impressive. Thank you. Best of luck."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. This question comes from the line of Mig Dobre of Baird. Your line is open."}, {"role": "user", "content": "Thank you and good morning, everyone. I wanted to go back to backlog as well. I'm curious how much of this backlog is deliverable in the next 12 months? Do you have multiyear orders that are in here? And as you look at the backlog build here, is there a sense from you as to how much of this build is just a function of supply chains and lead times and folks securing production slots as opposed to just a pure structural change in your business model?"}, {"role": "assistant", "content": "Well, Mig, I think that, obviously, we know that the supply chain has been very chaotic over the last several years. But -- that's why we wanted to talk about this consistent growth over time, because this is not just related to what's happened in the supply chain. I mean, you can look at the slide, you can think about where floored and Exotic and now Meggitt has come into play. And those are all longer cycle businesses that put orders out there for a further period of time. So when you look at this, we think that this is something that is going to be consistently out there into the future. We don't expect that we're going to see this drop very much."}, {"role": "user", "content": "And how much of this is deliverable in the next 12 months? Is it all of it or just portions?"}, {"role": "assistant", "content": "About 85% of it."}, {"role": "user", "content": "Okay. Then my follow-up on industrial and international, and maybe this kind of relates to the backlog discussion, too. If we're looking at the last couple of quarters, we've seen order intake declines. Your organic growth has stayed positive. You're guiding for the fourth quarter, implying still positive organic growth. So there is this disconnect, I guess, between orders and organic growth. And I'm wondering how you would frame it for us to think on a go-forward basis? Thank you."}, {"role": "assistant", "content": "Well, I think the big thing there is that the backlog remains strong, right? So the orders did go negative. But as I mentioned earlier, we constantly check the health of that backlog, and we see the shippable orders to that backlog."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for next question. [Operator Instructions] This next question comes from the line of Julian Mitchell of Barclays. Your line is open."}, {"role": "user", "content": "Hi. Good morning. Just wanted to switch back maybe to the aerospace business. Some of your peers have been very, very upbeat as they're thinking about the defense or military exposure into next year. I think your orders are starting to reflect that the last couple of quarters after some tough comp's prior to that. So maybe help us understand kind of how you're thinking about that military piece within aerospace over the next kind of 12, 18 months. Any update around Meggitt's organic performance?"}, {"role": "assistant", "content": "Sure. So first of all, you're right about military. Military OEM, we're starting to see orders return on the F-35, F-135 and the Black Hawk. So we're happy to see that. That's looking good. On military MRO, it is increasing as well with some new partnerships on stocking. And when you look at the growth compared to last year, military OEM will still be negative mid-single digits. But as Todd pointed out, it went flat to prior year for the first time in the last quarter and MRO will be high single digits. So I feel really good about that.. The second part of your question again, please?"}, {"role": "user", "content": "It was really around the sort of the growth outlook into fiscal 2024. Aero is a particularly sort of backlog-centric business, especially the OE side. So is it realistic that we could see kind of high single-digit growth again for the segment overall next year just because you've got very good commercial growth and now sort of military helping."}, {"role": "assistant", "content": "Yeah, absolutely. We see that as a possibility. And just as a note, last quarter, I mentioned that the outlook for this fiscal year for Meggitt was $1.9 billion at 17% and we increased that to $2 billion at 19%. So strong outlook."}, {"role": "assistant", "content": "Yeah, Julian, I would just add. If you look at our organic growth in our aerospace business, nearly 15%. The Meggitt business is performing better than that. If you remember, they dipped down lower than we did in the airline COVID times, but orders are strong. And if you see the total orders that we reported, it's a plus 25%. So we feel really good going forward about aerospace."}, {"role": "user", "content": "That's very good to hear. Thank you. And just one quick sort of fiddly follow-up, apologies for this, but just sort of the nature of the guide. If I look at the North America industrial, it looks like you're assuming sort of margins are down a bit year-on-year in the current fourth fiscal quarter. Just wondered, if that's correct. And is that more just around the kind of seasonal you've got a sequential decline in sales and that's bringing the margins down with it, anything else going on there?"}, {"role": "assistant", "content": "Yeah. I mean I would just say, Julian, Q3 was fantastic. I mean, stellar far exceeded our expectations. We were forecasting a slight decline in margin for Q3. We outperformed, and we did better than that. We did increase our Q4 margin expectations. You're right though, it is slightly below prior year. It's just a combination of mix and of course, Meggitt being in there, and obviously, organic growth moderating. So we're going to try to do the best we can there, but we are forecasting just a slight dilutive year-over-year just for Q4."}, {"role": "user", "content": "That's great. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. This question comes from the line of Jamie Cook with Credit Suisse. Your line is open."}, {"role": "user", "content": "Hi, good morning. Nice quarter. I guess two questions. One, the international margins have surprised on the upside, in particular this quarter in your guidance. So can you speak to the color of what's going on there? How much of that's price cost versus some structural stuff?"}, {"role": "user", "content": "And then I guess my second question, back to Parker's change business model with later-cycle businesses and Meggitt and integrator backlog going into a potential recession. How does Parker manage the business differently going into recession versus the old Parker that was much shorter cycle in terms of levers that you pull, maybe you're less aggressive to take cost out quickly. I'm just trying to understand how you approach the new Parker in a pending recession. Thanks."}, {"role": "assistant", "content": "Yeah. Hey, Jamie, this is Todd. Thanks for the good comments there. I'll start with the international margins, and then maybe I'll hand it over to Jenny to talk about how we're going to manage through whatever the future holds for the macroeconomic trends. You're absolutely right. International margins, international volumes far surpassed our forecast. And it really was across the board. It was -- Europe is way better than feared. Asia has been extremely resilient with the start-ups and shutdowns and the back and forth with certain end markets."}, {"role": "assistant", "content": "And Latin America has really been very solid for us. So across the board, it was a combination this specifically this quarter. Lots of volume leverage, great cost control, really integrating the Meggitt businesses that are in the international area. And it was just solid execution across the board, so easiest that. I wouldn't call out price cost as any different than any other region. They're doing exactly the same thing that we're doing everywhere across the board, it was really just really solid execution. Jenny, you want to take that?"}, {"role": "assistant", "content": "Thanks, Todd. So Jamie, probably the biggest thing to say is we don't wait for the recession to hit. We have a playbook for this. And quite honestly, we're always planning for the next recession. So when you look inside of the wind strategy and you look at our tool box, some of the things I was talking about earlier, constantly using our lean tools and our Kaizen events to make sure that we drive out cost. Those are the things that are always ongoing that help us expand margins."}, {"role": "assistant", "content": "When we get to the point where there are some changes in volume, we have several different levers that we pull around -- over time around the temporary workforce before we make any permanent reductions. We also make sure that we are constantly keeping an eye on the customer demand. Like right now, we've seen no significant push-outs or cancellations, but we continue to work closely with them. So we can stay ahead of that from the standpoint of bringing in inventory and staffing the shop floor. So we have a lot of levers we pull on an ongoing basis, and we performed well in the last couple of downturns. And as I mentioned before, we're very well-positioned for what's going on today and into the future."}, {"role": "user", "content": "Thank you. Great job."}, {"role": "assistant", "content": "Thanks Jamie."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next caller. The next question comes from the line of Nathan Jones of Stifel. Your line is open."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Good morning, Nathan."}, {"role": "assistant", "content": "Good morning, Nathan."}, {"role": "user", "content": "Just a question on the corporate G&A. I think, Jenny, you said lowest salary and other benefits. I'm here if anybody talking about labor costs going down. Can you give us a little more color around what's going on there?"}, {"role": "assistant", "content": "Nathan, yes, that was me. It's really true. So lower salary costs across the board. I did mention other benefit costs, a little bit of that is pension. Other things is just a market-based benefit. So it's really a combination of really just minding our SG&A, like we always do and then some favorable headwinds from pension and other market-based benefits."}, {"role": "user", "content": "Are you talking about salary costs going down per capita or the number of heads going down?"}, {"role": "assistant", "content": "Yes, it would be the number of people."}, {"role": "user", "content": "Number of people. Okay. And then maybe if you could just give us an outlook on working capital going forward here. You obviously got growth to support, but it's probably carrying extra inventory or supply chain issues and themselves out. So just any expectations, I guess, more for going into 2024 than for just the end of the fiscal year?"}, {"role": "assistant", "content": "Yes, for sure. Obviously, working capital with what's been going on in supply chain and obviously dealing with the growth and making sure we've got continuity for our customers. It has been a headwind to cash flow. I think we've turned the corner on that. Our teams are really focused on reducing inventory."}, {"role": "assistant", "content": "We are tightly managing capex, right? Our plan has been 2%. We've kind of stated that throughout the year. There is opportunities certainly across the Meggitt businesses as we continue to integrate those. So we feel positive about that being a tailwind for next year. And I would tell you across a number of the legacy businesses, we think there's opportunity as well. So I expect that to be a plus for us going forward, Nathan."}, {"role": "user", "content": "Great. Thanks for taking the questions."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. The next question comes from the line of Nigel Coe with Wolfe Research. Your line is open."}, {"role": "user", "content": "Thanks, good morning, everyone and great quarter. Very strong execution, obviously. So just looking at the fourth quarter guidance. And as my math is 1Q, you're guiding for sales to be down roughly 4%, 5%. Again, if I'm wrong there, please let me know. But that's something we only normally see during the sessions, I think it was 2009 and 2020. It doesn't sound like you're planning for recession. So just curious what course need to be so conservative with that 4Q guide? And what are you hearing from customers as you go into 2024? Are you hearing more caution as we kind of come into that planning session? I mean any thoughts there would be helpful."}, {"role": "assistant", "content": "Yes. Nigel, this is Todd. I think your number might be a little bit high. I think if you look at it, we might be close to 2%, down from Q3. And when you look at this, Q4 really starts to kind of anniversary some of these growth periods that we had prior year. If you remember, Jenny said last year, I think North America was plus 23%. We significantly increased our guide. If you look at organic growth for the quarter. I think we were almost flat with our forecast coming into Q4, we're now roughly 4%, 4.5% organic growth."}, {"role": "assistant", "content": "There's still some uncertainty out there. We are monitoring it closely. And like I said, we're just giving you the best look that we have right now. We feel really good about aerospace, and we're watching North America and international. You've seen the orders, the orders did turn negative, still robust. We're just giving you the best look we got at this point."}, {"role": "user", "content": "No, I appreciate that. That's helpful. And just on the orders cuts, down 4% for both North America and International. I noticed that you've made a slight tweak to the policy with acquisitions. So do those numbers include the contribution from the Meggitt industrial businesses in both segments? Or is that a change to the like-for-like? So you've also just the prior year. So we still have a core but including Meggitt, so do we have four, five points in North America for Meggitt there?"}, {"role": "assistant", "content": "No. Yes, we did. You're absolutely right. What we started to do this quarter, we finalized the formal structure of where those Meggitt businesses now sit within legacy Parker-Hannifin. And we felt good about that. As we've talked about the change in our portfolio and when we looked at what we were guiding going forward, we felt at this point in time, it was prudent enough to include those both in the prior and in the current year period. So that is -- those comparison rates that you're seeing, those are apples-to-apples comparison rates. And if you remember..."}, {"role": "user", "content": "Okay. That's helpful. Yes."}, {"role": "assistant", "content": "Yes. 80% of Meggitt sits in the Aerospace Systems segment, roughly 20% of that does sit in the International segment, roughly 15% of that is North America, 5% of that is in international. And I would tell you, just got to keep in mind, obviously, Aerospace segments got the biggest chunk of that. You can see the plus 25% on the orders in the aerospace segment. It is a smaller slice of Meggitt that is in the North American and International Industrial segments. And when you look at the size of those businesses, it really is a small impact to what it was historically reported."}, {"role": "user", "content": "That's very helpful. Thanks, Todd."}, {"role": "assistant", "content": "Yes."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. Our next question comes from the line of Jeffrey Sprague with Vertical Research Partners. Your line is open."}, {"role": "user", "content": "Thank you. Good morning, everyone. I was on late, so I'm just going to ask one, and I apologize if it's been addressed. But just, again, looking at kind of the backlog. It is interesting, right, the backlog of forward sales has moved up pretty nicely. Certainly, Aero plays a big role in it. But looking at even industrial backlog to forward sales by my math is sort of double what it used to be, high teens to maybe into the 30s now sort of thing."}, {"role": "user", "content": "I just wonder if you could maybe address how much of that is reflective of the longer-cycle business mix shift that's going on within Industrial, versus just kind of legacy supply chain and other issues and just kind of the raw ability that gets to out the door as you deal with supply chain, both on the back end of the process through your plants and then out to the customer level. Thanks."}, {"role": "assistant", "content": "Yes. Thanks, Jeff. Yes, we believe that the majority of it is due to longer cycle business and the way that it's going to look going forward. So if you think about the addition of the LORD business and you think about how that's impacted the industrial segment, that's definitely longer cycle and in here along with all of the aerospace that you already mentioned. So we feel like this is the new way that the backlog is going to look and feel that it's a little bit of supply chain impact probably, but seeing this growth over time is an indicator to us that the portfolio changes are really changing the company and changing what the backlog looks like going forward."}, {"role": "user", "content": "And maybe then just a second part of that. So the margins obviously look very solid. Are there any residual just inefficiencies that you're dealing with in the system because of supply chain or other dynamics? Or is that pretty much ironed itself out at this point? Thank you."}, {"role": "assistant", "content": "Yes, I would say, overall, we've seen some supply chain healing, but we definitely are still in the thick of it when it comes to electronic sensors and chips. And our Motion Systems group on the mobile side is impacted by that. And I would say that aerospace not only impacted by chips and sensors, but still a little bit of a bumpy road in supply chain yet in aerospace. So, we're not completely through it."}, {"role": "user", "content": "Great. Thanks for the color."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] This question comes from the line of Jeff Hammond with KeyBanc Capital Markets. Your line is open."}, {"role": "user", "content": "Hey good morning everyone."}, {"role": "assistant", "content": "Good morning Jeff. How are you?"}, {"role": "user", "content": "Hey just a follow-on on supply chain. I guess, one, if you look in the industrial business, as supply chains kind of heal, are you seeing changes in order patterns, less blanket orders and maybe how does that impact the order rate? And then also, just as the supply chain friction comes out, how do you see that playing out in the margins going ahead?"}, {"role": "assistant", "content": "Well, first of all, we're not seeing any significant changes in order patterns or lead times overall, I would say. The thing I would say about that is that when we have supply chain issues in any of our businesses, it does somewhat drive inefficiency, right? We're doing whatever we can to get the material in and get it out the door. So, as the supply chain continues to heal in different parts of our business, we'll look for those opportunities to be more productive. It's one of the things that I mentioned that we were focused on in the last call and again in this call, is that some of the chaos that we went through really highlighted some areas where we could improve, and we could look to use new tools and new strategies to analyze that demand in a faster way, be more reactive, thus increasing productivity and shortening the lead-time."}, {"role": "assistant", "content": "So, definitely still opportunities out there to become supply chain leaders in. We're working closely with our suppliers on this. And it's one of the things that we've come out and said that we're using capital for to invest in the supply chain."}, {"role": "user", "content": "Okay. And then just on Meggitt, do you have an accretion number for the quarter to give us? And then just on the up-synergy should we think of that as more of a pull ahead, getting things done faster or some upside to that $300 million number?"}, {"role": "assistant", "content": "Hey Jeff, this is Todd. I'll take that. We're not going to give an EPS accretion number. I would tell you, we're just extremely happy with the way that's performing. It is doing exactly what we hoped it would do. When you look at the synergies, we did up the synergy numbers for FY 2023 from $60 million to $75 million. That's basically just doing things faster. So, if you look at the cost to achieve, if you go to that detail, the cost to achieve are slightly higher. That is just a result of doing things faster than we originally had planned. So we still are committed to the $300 million in the full third year of acquisition. We just are pulling those a little bit forward.."}, {"role": "user", "content": "Okay. Thanks."}, {"role": "assistant", "content": "Thanks, Jeff."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for next question. This question comes from Josh Pokrzywinski with Morgan Stanley. Your line is open."}, {"role": "user", "content": "Hi. This is Toby [Phonetic] on for Josh. Congrats on great -- a follow-up on the order trend question. Jenny, you mentioned some of the mega projects that have been going on. Where are you seeing this in the business? And how would you think about the potential uplift given Parker historically is focused more on components and assemblies?"}, {"role": "assistant", "content": "Yes. So it's -- it's difficult to directly tie it to a specific project, but we are definitely benefiting from some of these projects in the secular trends. So if you think about a lot of the new battery plants that are being built to support electrification, we're there when they're prepping the land, we're there when they're building the factory and we're there when they're putting all the equipment in the factory."}, {"role": "assistant", "content": "So definite benefits there. Also although it's a little bit longer-term for these to be online, but we'll directly benefit from a lot of the chip and sensor production that is coming to the U.S. And today, if you look at the secular trends, obviously, aerospace, we've been talking about that a lot definitely benefiting from that secular trend in that market recovery. And beyond the battery production, we currently have a lot of content on electric vehicles. And when we transition from an internal combustion to an electric, it's 1.5 times to two times the bill of material for us."}, {"role": "assistant", "content": "In addition, we're starting to see from an electrification standpoint, a big pull on our mobile business. So between mega capex projects and secular trends, again, it's the reason we feel so confident about those targets in the future, 4% to 6% organically and really why we believe we're going to grow differently with this portfolio."}, {"role": "user", "content": "That's very helpful. Thank you."}, {"role": "assistant", "content": "Hey, Chris, this is Todd. I think we've got time to maybe squeeze in one more question. Let's take one more and then we'll wrap up after that."}]}, {"messages": [{"role": "system", "content": "Thank you. Todd. Standby for our next question. Our final question comes from the line of Joe O'Dea of Wells Fargo. Your line is open."}, {"role": "user", "content": "Hi. Thanks for taking my question. One, just on the quarter in the North America margins flat year-over-year on 12% organic growth. And so can you elaborate a little bit on mix? I also just anything else that you could be ramping up on the investment spend side where you could see opportunities there?"}, {"role": "assistant", "content": "Yes. Let me take this. This is Todd. When you look at the Meggitt business, we're extremely happy with the way the Meggitt business is performing. If you remember, what we did was we put some of those businesses in the technologies where we thought they fit best. That would be engineered materials and a little bit into filtration. Those just happen to be some businesses, some parts of Meggitt that are lower performers compared to the total."}, {"role": "assistant", "content": "So when you take that out, if you could look at just the legacy portion of North America, it would be very similar to what you're seeing across the rest of the company, record performance, record volumes, record incrementals and -- or strong incrementals, I should say and really sound performance across those legacy businesses. So if I had to call one thing out, it would be the main driver of why North America was flat, it would be simply the inclusion of those mega businesses in that total."}, {"role": "user", "content": "That's helpful. And then just in terms of -- I mean, what's kind of changed over the past three months? I think, Jenny, three months ago, you were talking about maybe seeing a little bit of pushouts. I'm sure a little bit of destock as supply chain improves here. But given the strength of the revenue in the quarter, real evidence of much in terms of pushouts. And so I'm just curious with credit conditions out there, obviously, the macro uncertainty, but sort of day-to-day, what you're seeing anything notable in terms of shifts, either more constructive or more cautious?"}, {"role": "assistant", "content": "Yeah. Really, I think it goes back to the strength of the backlog, and we've seen no notable shifts. We were cautious last quarter, and I think we obviously are very pleased with the performance. March really, really strong month for us. So we were able to ship a lot of that. And again, that backlog is still healthy and really has what has led us to the guide for Q4."}, {"role": "user", "content": "Appreciate it. Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And thank you for your participation in today's conference. Sorry, please go ahead."}, {"role": "assistant", "content": "Yes. Thank you, Chris. This concludes our FY 2023 Q3 webcast. If anyone needs any kind of clarification or have further questions or need to follow-up, both Jeff and Yan we'll be here for today and through tomorrow. We obviously appreciate everyone's time. We appreciate your recognition of a strong quarter, and we obviously appreciate your interest in Parker. So thank you all for joining us today."}]}, {"messages": [{"role": "system", "content": "Thank you sir. [Operator Instructions]."}]}, {"messages": [{"role": "system", "content": "And the first question comes from the line of David Karnovsky with JP Morgan. Please proceed with your question."}, {"role": "user", "content": "Hey, thank you, Michael, Joe. We've seen a couple of bills introduced in Congress to address ticketing practices and contracts. So I'm wondering, first, how you think some of these items might impact your business assuming they were fully enforced and then just based on meetings, you've had, do you think these bills largely meet the primary concerns of lawmakers as you've come to understand them."}, {"role": "assistant", "content": "Yeah, thanks. Yeah, what kind of watching, what's going on and we believe that through all of the noise, most people are ending up in the industry and politics at exactly where we are in the principles of what the fair act it, so whether it's all in pricing, cleaning up deceptive practices in the secondary, giving artist more tools, those seem to be all the common themes coming out in all of these different bills which were fully supportive of an - and having our own build fair act. We know Senator Cantwell and Cruz introduce theirs, [Indecipherable] has got to bill coming [Indecipherable] and Cornyn. These are all in the same vein, in the same thematic around helping the artist control their ticket and get them in the hands of the fans and be away of some of the practices in the secondary of the spec selling, deceptive websites, hopefully better protection bots and we've always supported all in pricing. So this is - this is not [Indecipherable] versus any of these, we are aligned to all of these bills, we think all of these bills we've sent continuing for long time, it's better for our business because it helps us deliver a better on sale and fan experience, so right now it's the wild west. We're doing our best, but any bills and these natures that start putting some better regulations and controls around the experience is going to help our overall business. Okay then was hoping to get expand a bit more on why the - maybe can you frame the [Indecipherable] is this something you plan to build primarily for your major festivals residencies or is this - is there a wider opportunity across your promotional footprint and then just interested what drove the decision to kind of build this out internally versus maybe putting that out to bid for events partner. Yeah, we look at the - as we look at the excitement overall, if you look at what we've been talking about on our Investor Days the last few years, the premium business is a huge opportunity for us. I think I've said many times in the industry that has done a great job of being scaled GA, but nothing a great job of doing a premium experience for customers, the sports and new arenas and stadiums are doing a great job on that. But as an industry, Live Nation and music industry has not done that and we think there's a great opportunity overall to launch more products and services that can provide a better premium experience with a customer. So this would just be an extension and a continual strategy towards what we call the premium experience. We've got a company called VIP Nation will do about 1,000 of those events this year, those are based around the concert and the tour and go into a sound check or early experience of meet and greet to we've been the leader in that space and expanding that. Ticketmaster has launched Ticketmaster Travel, looking at ways we can map - we can put - put both the ticket and an airline or hotel together to take advantage of that scale and we've been testing that in UK with great success and Vibee is another product where we looked at Poland and we looked at on location in BIB and Quince and others that were doing it. The difference is, we have the scale, so we already have been doing it. We have the expertise. So we looked at our insomnia team and built-out Vivee launched it with the U2 experience sold out and were close to $20 million in ticket sales around a high end premium experience. So we have the in-house expertise and this is another product in our ongoing strategy, whether it's clubs, premium memberships, premium clubs subscriptions, all the ways we're going to continue to look to say, how do we turn the GA into a premium experience product."}, {"role": "assistant", "content": "I know there is also the challenge of some of these other companies have is the - the expensive part about doing this is the right and we don't have that problem. So when you're chasing the Olympic rights, you're chasing a business for premium, it's a little harder unless you are in-house, so I'm sure on location those fabulous with their UFC experiences similar to us, we don't have to pay right, these are all our rights, so we can do it in house. We don't have to outsource it and split any of that upside with anyone else but our own businesses."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Brandon Ross with LightShed Partners. Please proceed with your question."}, {"role": "user", "content": "Hey guys, thanks for taking the questions. One on your fundamentals and then a follow-up to David's question on the bills in Congress. Actually I'll start with that one. I think the Klobuchar bill, very specifically attack your venue exclusivity. Can you kind of just respond to that bill and how important is the venue exclusivity model to you in North America; and then kind of on the fundamentals, last year was obviously a pretty depressed year in terms of concert marketing, I tell you hate the word margins, Joe, we'll go with that anyway. Is it - should we see a real bounce back in that and continuing payables get up from 2023 and beyond into future. Thanks."}, {"role": "user", "content": "Thanks, Brandon. First of all, on the exclusivity point I think. First point I should make is, Congratulations on the birth of your daughter. Glad to hear everybody doing well."}, {"role": "user", "content": "Thank you."}, {"role": "user", "content": "But to the - to the exclusivity point, I always start with these are the venues rights and the venues have been figuring out over time, how do the best monetize certain rights they have what they have determined is the best way to monetize those rights in the US is by auctioning them off for exclusivity. So I think it's frankly primarily were there to be any changes in exclusivity, it's the venues that would be hurt the most because they would lose the ability to fully maximize the rights. We're very confident that with the quality of our systems, its ability to handle on-sales in a way that no other system can - can do has been shown both by the clients that we've been adding as well as you've seen in the press issues that other systems have with very modest on sale. So we're very confident in our ability to deliver I think it's uncertain any bill in today's Congress, not just this one, but any build it doesn't have bipartisan support, out of the gate, has as its challenges, but the more fundamentally I think that you'd see the venues respond to that and - and probably pushed back because they would be hurt a lot more than we would."}, {"role": "user", "content": "In terms of the performance of the business, I tried to give a lot of details in there. I think that as you know, first of all, we look more at the cash profitability of the business where that is, how that's operating on a per fan basis, which as I said, we expect to continue to grow this year. I also noted I think in the concert side, the last year was a bottom tick in terms of our margins, we expect it to be coming back this year. We don't obsess over margins, because, for instance this year we expect to be having a great stadium and arena year as you can tell by the numbers were I gave for Q1. That's inherently going to be a lower margin business from one of our amphitheater customers, we're still going to pursue that business, still great business but it's - but it impacts technically the margin while generating cash profitability. So, I think that we are on an upward trajectory, I think 2023 is going to be great and every very early sign we have for 2024 is continued success."}, {"role": "user", "content": "Just one quick follow-up to that comment. The key, I think there is concern about lapping the supply-side for next year. Do you feel good about the supply side coming out it's 2022 and 2023. I know you get asked this question every year as things grow, but especially since you feel confident with what you're seeing so-far. That's all."}, {"role": "assistant", "content": "Yeah, yeah, as you know, yes, we love this and the - I think the follow was all about the air pocket and would there be enough shows in 2023, so hopefully we put that to bed. We don't think this has anything to do with pent-up demand or COVID rescheduling, that stuff has long been flushed out in 2022. This is all about regular business back to business and I think we're thrilled that we're sitting here looking at comparable last year but basically had almost a year and a half combined into a year because of all those rescheduled shows of $20 million. To be sitting here today above and beyond last year's numbers shows the global strength of the business and then also just shows the global strength of the business from the amphitheaters, the stadium, to the club, to the festival, we're looking at all territories around the world, firing in all cylinders. We're looking at the kind of talent you see on the road right now. This isn't just the Rolling Stones, right, that question we always have to fight off. Six of the top 10 artists were younger artists. You look at Lollapalooza Coachella with Bad money, Karol G, Rosalina, the black [Indecipherable] by the BTS, Billie Eilish. I mean, there's just a host of great new talent every year coming up filling the pipe that we didn't know. Luke Combs, who is going to be selling stadiums out this year. Two years ago we had no idea Bad Bunny was going to be the largest selling artist last year. So we just continuously the pipe, the supply demand we think for the future it's really-really strong, there is more and more artists hitting the studio right now on Tik-Tok, the creator economy is alive and well and they all want to be the next bad money and we've said it before we're also seeing this encouraging new supply strategy where for many years, it was all about the US or UK based artists that fill the charts and fill the stadiums and most other talent was domestic, it might have been big in Canada, it might have been big in Korea, but it didn't travel. This is the real breakout year where the world - the world and the consumer are truly global and now you can see artists coming from Latin America and Korea and becoming global superstars. That didn't happen for the last 30 years, it was a very pop US or UK controlled industry. So we think that alone gives the next kick to the supply chain for the next 10 years of young talent from, it will be from India, South Africa, it's going to be everywhere overnight finding their way to Tik-Tok and and to Spotify, some other places to become these global stars that are selling arenas and stadiums out in their markets."}]}, {"messages": [{"role": "system", "content": "Thank you. And the next question comes from the line of Stephen Laszczyk with Goldman Sachs. Please proceed with your question."}, {"role": "user", "content": "Hey, great, thank you. Maybe for Michael on underlying concert demand, setting aside the stadium and arena tours for the moment. Can you maybe talk about how demand for the average or even smaller amphitheater, clubs, Joe, who is trending compared to what we saw for the types of shows last year. I think there is some concern that maybe the top shows are performing well this year, but it's perhaps come at the expenses in the smaller ones, but just love to hear your thoughts on how those smaller and average size shows are performing."}, {"role": "assistant", "content": "Yes, Stephen absolutely."}, {"role": "user", "content": "Joe, Joe is helping out."}, {"role": "assistant", "content": "Yeah, just to give you a feel on that. We don't have a lot of amphitheaters yet just in the first quarter but if you look at our theaters and clubs, which tend to be pretty strong this point of the year. They're tracking around 8% ahead in terms of average attendance per show. We're doing that with also increased pricing, lower cost structure on per fan basis, so those shows are performing very well for us."}, {"role": "user", "content": "And just to jump on Joe there - unlike the movie - the movie theater kind of model, we're not a hit-driven industry right - we are a truly scale business and, you're right, we looked at the beyond phase of the world, there always going to do the great numbers, but when you're sitting here today looking at even our festivals, the Lollapaloozas are the easy ones. So we have over 200 festivals, Bonnaroo to one day festivals in smaller markets to our US and international businesses and all of it seems to be doing really really well. So whether it's say a middle of the road festival in a smaller market, whether it's a clawback at all levels, there seems to be incredible demand and on a global basis. So we haven't seen just the top stuff selling and - and they're not coming to the other stuff, the demand seems to be uniform from clubs to stadiums from Pittsburgh to Milan."}, {"role": "user", "content": "Great, thanks for that. And then maybe just one on the venues business, you called out in the press release, think you expect to host 3 million incremental fans at new Live Nation venues this year. I'm curious maybe for Joe, as you look at your ambitions on the venue side, how many incremental fans or shows you think you can - you can add to the flywheel over the next couple of years, maybe just given how the venue pipeline stands today."}, {"role": "assistant", "content": "Yeah, I think this year would be typical and what we would hope to add in the low millions per year from our own venues with a mix of some new amphitheaters, new arenas at the larger end, while continuing to build-out the club and theater portfolio. So it continues to be a meaningful part of it and more robust as I said earlier you can scale to stadiums and arenas faster, but over time we've learned, we can deliver a very accretive returns for our shareholders by operating it and being able to sound to bear money and the sponsorship money as well."}, {"role": "user", "content": "Well I think we laid that out in our November Investor Day probably on a more macro-level, we wanted to remind investors, we've been doing this for a long time, we have a large venue portfolio. We don't see that strategy changing, it's not - it's not incrementally different than its been year-after-year we bolt-on and continue to look around the world that opportunists markets where there's a great return and we keep adding venue, club, theater and arena, if we can find the right market like Austin, where it's big return. So will continue that strategy over-time and I think we laid out in November to cleaner - cleaner in terms of how many and what numbers we look to subscribe to over time."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Jason Bazinet with Citi. Please proceed with your question."}, {"role": "user", "content": "Just had a question about your cash balance. It seems like you guys used to run, I don't know $0.5 billion or something and it's been four times something over the last year. Do you think the spirit of being cautious that it just makes sense to have more cash on hand or do you think there is some flexibility to deploy it in one way or another."}, {"role": "assistant", "content": "Yeah. I think just to make sure you have the cash numbers right. I think those cash numbers included untapped revolver capacity, right. So from that metric, it's probably not quite that extreme, but we continue to see a very strong set of opportunities to continue growing the business. We just talked about the venue business, which we've been in, but we've been kind of global basis has a lot of great opportunities to continue to build out portfolio, and we think even within our existing portfolio there are lot of things that we can do to enhance the fan experiences Michael was talking about. So at the moment we're - maybe being a little conservative coming out of COVID, but looking to continue to grow the business and we'll continue to reassess it and see what the right options are."}, {"role": "user", "content": "Can I just ask one follow-up. One of the more interesting things to me, looking at your stock price is, it seems so depressed relative to the fundamentals, you guys have been putting up for the last year or so part of the DOJ related, part of it fears of sort of COVID pent-up demand, but I was just surprised you guys didn't sort of take advantage of that seeming disconnect with share repurchases."}, {"role": "assistant", "content": "Yeah, I think the flip side of share repurchases tactically is one thing. I think we've also seen a lot of companies out there that embark on share repurchases and the market takes that as a signal that they are growth ideas and I think that we have such a robust set of growth ideas that we wouldn't want that to be misunderstood. Secondly, when you invest in growth, you deliver compounded returns over time. You can maybe get an attractive return from - from a stock if you think there is a dislocation, but you lose out on the accretive compounding impact you can have by investing in these growth opportunities. As I said, I think we'll continue to look at all the options as we move forward, but I think in immediacy of coming out of it that's been our thought process."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Stephen Glagola with TD Cowen. Please proceed with your question."}, {"role": "user", "content": "Yeah, thanks for the question, Michael and Joe. Just two specific questions around the proposed legislation and how that's could potentially - could potentially impact your business. So one on the prohibition of ticketing exclusivity with venues, just provide like I guess your color on the competitive position of Ticketmaster in international markets that you operate on an allocation or non-exclusive model, just to kind of glean insights on how that US could be from that. We can how renewals are trending there and new business there. One, and then two on this junky protection act, I believe there is a provision that the FTC can determine if mandatory ticketing fees are excessive. So, I just wanted to know how would fee caps impact your service fee revenue, would that impact more than what the venue collects or what the primary ticketing service collect as well. Thank you."}, {"role": "user", "content": "I think you need to - you need go listen to [Indecipherable] will help you. This venue drivers, as Joe said, this is the venue business. I know everyone wants to subscribe to ask the venue demand, demand most of the service fee and kind of auction for the tickets. So again, we think that the bill, the venue that is built in billion dollar arena or multi-billion dollar stadium in that market. I think he is - I think he is going to continually pretty, pretty strong and vocal about his rights and returns on what companies he can't hire exclusively or not to - to services his business. So whether it's - whether it's Microsoft or CRM or Salesforce or Ticketmaster, I think they -I think they're going to look at other options for the best return for their business. So we look at that from that perspective and we look at Europe just because it was always thrown out very likely that international is an allocation in the US is here just kind of for the trend, International is moving more towards an exclusive model than away from it. As new buildings are being built over there and you're building your arena what's really had been under developed that was mostly a - a soccer business or football, but as the new buildings are getting built, they are looking over here and realizing that this is another revenue stream that they should be leveraging. So I look at international probably moving closer to the US model and the US model moving to the international model because I think they're now realizing that they've been undervaluing their exclusive ticketing rights for their venues. Now we do - we do really well over there, because we always will do well in an open market with the best technology, we sell more tickets than the competitor, so if you are an open allocated market and you're going to allocate to us and others, we're going to do really, really well because we're going to be the one that always sell the most tickets for you, we will end up allocating more to us, but we don't think that model probably ends up here more driven by the venue agenda than the ticketing agenda."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of David Katz with Jefferies. Please proceed with your question."}, {"role": "user", "content": "Hi, good evening, everyone, thanks for including me. You've covered a lot, but I was hoping you could just talk about the secondary ticketing market which seems to be an area of growth for new smaller entities other approaches, technologies, etcetera, and I know you've talked about in the past how - what their impact is on the market. What's new with respect to that, what can you do about it to protect yourselves better and I just love an update there please If you can."}, {"role": "user", "content": "I'll jump-in and Joe well. I just want to remind we said earlier, of all the legislative noise we've - we've been swirling around for six months. The common theme in all of this legislation that you're seeing come forward is around limiting and putting some handcuffs around the scalpers and the business. So we do see a lot of this legislation moving forward is going to help the primary ticket, the content holder, do a better job on that front and It will be harder for the go through the bot, deceptive website, spec selling, a lot of practices drip selling, etcetera. So we do think that, overall, this market right now, legislatively is moving against the secondary business in general, not going to ban it, not going to cap it, but some of the cleanup legislation does help primary hurt secondary, that's a big move that hasn't happened in the last 10-15 years."}, {"role": "assistant", "content": "Yeah. I think the other piece is, you have to remember that secondary for sports is very different than secondary in the concert, secondary and sports is often used as a distribution platform, where you sell the seasonal ticket to the scalpers, they disaggregated and there performing a function for the sports teams have guarantee them some upfront funding that has value to the teams, value to the fans. You don't have that in concerts, the concerts, the issue is that they're using illegal and deceptive practices to get tickets with the sole objective of increasing the price and selling them to the fans. So, I think what you're seeing is because the artist, don't have the same sort of collective central power that league does today, they can set-up a NFL ticket exchange, you need to give the power back to the artists. So it's very clear that there can be the decision maker, and then it becomes the onus of the secondary players to figure out how they're adding value. It's like any other business today, you have to survive and adapt and grow because you're adding value to others in your ecosystem that hasn't been which how the scalpers have done it in music over the past several years and it's finally gotten to the point where you're getting the pushback now from the artists and that's been fully understood by our politicians."}, {"role": "user", "content": "Thank you and to say nice quarter would be understating bidding by $100 million. Thank you."}, {"role": "assistant", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of Ben Swinburne with Morgan Stanley. Please proceed with your question."}, {"role": "user", "content": "Thanks, good afternoon. Two questions. Michael, you also mentioned I think in your prepared remarks that the secondary prices are running about two acts primary last year, I think it was last year so that Bruce Springsteen moment about market pricing, expectations that more artists would embrace that. I was wondering if you could just sort of update us today on sort of the trend in market pricing on primary and sort of pricing back house, [Indecipherable] house the right way where you feel the industry is in the businesses today. And then secondly you guys are always thinking pretty far ahead around technology. What are your thoughts on AI as an opportunity for Live Nation, just broadly, it's obviously a huge topic these days, so would love to hear what you think."}, {"role": "user", "content": "Perfect. On - on pricing, I think we've been saying for the last few years, the the great transparency and sunlight of secondary it's really helped the artist and the management team look at their pricing models. Historically, it was a fairly static pricing, three different maybe price points, same price point all across the country, didn't matter if it was a Friday in New York or Tuesday in Pittsburgh, so the business has gotten really-really sophisticated with our price master or different dynamic models that artists can now use. So we see that there's still years away between where the artist markets the price and what the market is willing to pay. The artist is one of the few - a few products in the world it's worth more than a minute it's sold, what they do that for their brand and accessible - accessibility and I think that'll continue, but I do think we've seen the artist looking at their ticket price and the whole manifest and how do we bring the prices down in the back, bring the prices up in the front. So we can sell-out and make sure everyone gets a ticket at an affordable price, but let's not look secondary runaway with the front row. So we think that we're still dramatically underpriced versus demand and you'll see that every day on the secondary and we think that's probably going to live for the next 5 to 10 years as the artist moves closer to market probably never gets to market but between here and where they feel comfortable we think there is years of - of upside, but they'll continue to look at."}, {"role": "user", "content": "AI, Joe, you can talk about the TM."}, {"role": "assistant", "content": "Yeah, yeah. I think I know just to be clear it's all upside for us. There is no concern that somehow AI can never replace the live experience. For us it's a - I consider it a infrastructure tool for both efficiency and effectiveness. So if you think about using AI on recommendations much better marketing, much better individual recommendation in terms of making you aware of shows you might want to go to. Clearly, we're using machine-learning now to help inform models on suggesting pricing that we were just talking about, AI is just the same thing, the next level of data input through that machine-learning process. It'll help us automate a lot of tools. The event creation process takes place at every venue, being able to use much better data, machine learning, whatever, what's going on elsewhere in the TM system will make that more efficient. A lot - all the chatbots do you have today, those who go to a whole another level of effectiveness, working with fans and be a much lower cost than you have today and then as we're finding box using AI to continue in our battles to make sure we know who is the person or trying to know who is a person, but if he is not, so it kind of runs throughout all of our infrastructure, it's a lot of places that we're using machine-learning today. AI is really that to the next level."}, {"role": "user", "content": "Thank you, Jeff. Very helpful."}]}, {"messages": [{"role": "system", "content": "And the next question comes from the line of John Healy with Northcoast Research. Please proceed with your question."}, {"role": "user", "content": "Yeah, thank you for that squeezing me in. I just want to ask a question on kind of the pace of growth and we really get deferred revenue, I think it's up almost 30%, you talked about the concert ticket sales at this point, up 20%, any help that you could give us just on if you think that type of pace of growth can be sustained this year. I think, I think the message is clear, it's going to be a strong year, but we just love to get a little color and flavor about kind of the speed at which you could grow this year."}, {"role": "assistant", "content": "Yeah. I think that you generally start the year coming out of the gate fast this when you're led by stadiums and arenas. So that those are the shows that we've long talked about get on - put on sale earliest relative to that show date. So you've got great scalability in the stadiums, which you're seeing, four times the level of activity, good scalability in your arenas. So that's driving your huge increase in attendance, strong increase in ticket sales and $90 million in your deferred revenue. I think as you get into more of the shows that take place in our buildings across the festivals, amphitheaters to some extent, theaters and clubs you generally have a lower level of scalability, you still have very solid growth, but not the same level as you have with your stadiums and arenas. So I don't think we're ready to try to declare an exact number, but I think we recognize the level you have in Q1 is probably going to be the high point of the year."}, {"role": "user", "content": "Okay that's great. And then just wanted to."}, {"role": "user", "content": "And - and I think, sorry, I just wanted to jump on that for one sec, John. And just what's more important to us is just helping both sides realize what's the future in 2024 on. So we went through obviously COVID was down and last year was an extraordinary year, so how does 2023 and 2024 start to look, and we're very optimistic, we look at this year has been a very strong year coming off what people probably thought we couldn't be last year and we think 2024 into forward you kind of look at what we historically have deliver. We've been the high single industry growth business and a high single digit revenue AOI business year-after-year for many years and we look at going forward, we think we're back to be in a great strong growth business year-over-year off this foundation business. So we think the industry is back, bigger than ever and we think there is years of industry growth we've shown you when the industry grows, we tend to - we tend to arise with that tied and capture as much as industry growth. We tend to do a couple of points better so industry been grown about 8% or 9% a year, we tend to beat it. So we look at this as a long-term continual growth story again."}, {"role": "user", "content": "Great. And then just a big picture question I want to ask. I think you called out, APAC and Latin America as fuel and some growth to start the year just as we think about those businesses long-term. Is it safe to say that as they become a bigger piece of the pie, the margin level of the business should rise, are those business - I always thought those businesses have potential to be maybe higher-margin than the US market, but we're just kind of curious how you're thinking about those as I said today."}, {"role": "assistant", "content": "Yeah. I don't think we start with thinking about it as margin. We think about them as being massive growth potential markets, probably, the least developed of our major markets. So having great growth opportunity to continue to drive more fans and more obviously highly profitable fans as we establish more venues in those markets and ensure that you can get some attractive margin, [Indecipherable] operate but I think more than more than starting with any margin focus, we're looking at just what's the volume of fans and what's the overall concerts, ticketing, sponsorship, profitability we can drive off that."}]}, {"messages": [{"role": "system", "content": "At this time, we have reached the end of the question-and-answer session and now I would like to turn the floor back over to Michael Rapino for any closing comments."}, {"role": "user", "content": "I appreciate everyone. Thank you. We'll talk to you in the summer."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] I think we do have a few questions in the queue. And our first question will come from Jimmy Bhullar."}, {"role": "user", "content": "Good morning. Thanks for taking my question. So first, just a question on investment losses and their potential impact on statutory income and just your dividend capacity and share buybacks next year? Should we assume that the loss that you took on signature bank and the upcoming loss on First Republic will have an impact on buybacks as you're going into next year?"}, {"role": "assistant", "content": "Yes, Jimmy, we would expect statutory earnings to be lower from our subsidiaries in 2023, which would impact the dividends that the parent receives in 2024 as a result of those losses. It's too early to really tell what the impact on our buybacks plans are for 2024."}, {"role": "user", "content": "Okay. And then on the decline in stat income should be commensurate with the losses on the two banks assuming nothing else?"}, {"role": "assistant", "content": "No, that is right. So as you think about the total realized losses that we had in the first quarter, there was the one bank. We did have a smaller small bond related to a University of Georgia property that was included in the net $24 million in there as well. But that as long as Republic would go through the statutory income in 2023 on an after-tax basis. And then, Jimmy, I was just going to note that there's other -- as we think about the changes in our loss claims, so we still have a certain amount of expectations with respect to the payments of -- we've talked in the past on excess obligations, whether it be from COVID or COVID-related and obviously, as those kind of subsides. So it's a little bit early to see. I think the initial anticipation was that those would be lower in 2023 than what they were in 2022. So we typically have some growth in our statutory earnings as well over time. We'll see how that plays out over the course of the year."}, {"role": "user", "content": "Okay. And then just on direct response. Obviously, it seems like the Internet business is growing, but the mailing business, should we assume that if -- unless inflation comes down, a decent amount, then there shouldn't be much of a change in your circulation volumes and your sales activity?"}, {"role": "assistant", "content": "Yes, you're correct. Those two are offsetting each other. Our -- as we've mentioned in the past, we are reducing some of our circulation in mail and we'll continue to most likely do that through the remainder of 2023, in because of those costs associated with the higher production cost of that channel. But we're trying to offset that, of course, with increase in Internet sales. And so that's why we've guided to essentially flat maybe a slight decline from a sales perspective for 2023."}, {"role": "user", "content": "And then just lastly, could you comment on the recruiting environment, I would have thought with the tight labor market, the agent growth would have been stunted, but it's actually been fairly strong across the various channels recently?"}, {"role": "assistant", "content": "Yes. As we've talked about in the past, we've been able to successfully recruit in a variety of different economic environments. And as we think about it, we really look at what are the things that we are doing because we always have good sources of recruits. And so we really focus on how effectively can we onboard new agents. And as we've mentioned, that growth in the middle management count who's doing a lot of the recruiting of new agents, training them and getting them onboarded that's a key aspect that we're focused on growing to be able to grow that agent count."}, {"role": "assistant", "content": "So we're really not seeing an impact from a macroeconomic environment from an employment perspective. And if you reflect back on, we had strong agent count growth in Family Heritage and Liberty in Q3 and Q4 of last year. That momentum is continuing on. And then as we talked about on the last call, AIL, some of the things that we've put in place right at the end of the year are showing some fruits here in the first quarter. And so we've upped our projections for the agent count growth at AIL. And in fact, across all three of the agencies just based on the individual things that we're putting in place in each of those divisions."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Wes Carmichael of Wells Fargo."}, {"role": "user", "content": "Good morning. I think you mentioned a senior debt maturity that's coming up here in May, and I think that's going to be met with the draw on the term loan. But I think there's also some commercial paper around $285 million that's coming due. So are you expecting that to also be satisfied with the term loan draw or is that going to be met another way?"}, {"role": "assistant", "content": "We generally have commercial paper out there maturing and then issuing again. So we would expect to just reissue that commercial paper as well. And we generally will maintain that $285 million to $300 million of commercial paper out there."}, {"role": "user", "content": "Got it. That's helpful. And then on the CNL portfolio outside the limited partnerships, you mentioned there are transitional or bridge loans for the most part. And I think 5% is shown in the office bucket, but it looks like a good portion of the mixed use bucket is also related to office. So within your stress test or your thoughts, like how are you thinking about any higher capital charges on that portfolio, either from drift in CM ratings are due to potentially having to take on some of those loans as owned real estate?"}, {"role": "assistant", "content": "Yes. So when we did look at the stress test on those, we did take into consideration both the potential drift in the downgrades along with any downgrades we would have within the fixed maturity portfolio. We looked at that the same way if we did have some drift in those as well. But then we took a look at the loss rates on those that actually assumed in kind of our -- the high-end severe stress, about a 15% loss rate, which is about two times the Fed's severely adverse scenario. I think there is around 6.8% or so. And so we doubled that with respect to what we included in our stress test."}, {"role": "user", "content": "Got it. And you touched on this a little bit, but the press release didn't have anything related to COVID or excess mortality. I think previously, maybe you guided to around 105 U.S. deaths this year. Is that still the case? Has that changed? And how much of that excess mortality is embedded in the midpoint of the $10.40 EPS guidance?"}, {"role": "assistant", "content": "Yes. Good question. So we still think COVID deaths for the year will be around in the U.S. around 105,000. We haven't changed from that estimate. While we updated our assumptions last year, we reflected what we thought from an excess deaths perspective from the pandemic, both from COVID and non-COVID causes. So that's embedded in our -- the midpoint of our guidance."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "And our next question comes from John Barnidge of Piper Sandler."}, {"role": "user", "content": "Good morning. Thank you very much for the opportunity. If we could stick with the investment portfolio a bit. Can you maybe talk about occupancy rates of that office and mixed-use and then compare it to central business district versus suburban?"}, {"role": "assistant", "content": "Just in general, on the broad 200..."}, {"role": "user", "content": "I'm talking about -- I'm talking specifically around the office and then that 45% of the mixed uses."}, {"role": "assistant", "content": "Yes. So on the ones that are maturing here in 2023, so we've got about $8 million of -- that are 100% office. One of those was located in Washington, D.C., one of those in New York City. And then on the mixed use, there's about a $2 million allocation to office use of that particular property. So there's only three properties that make up that entire amount that's due here in 2020 or it's maturing in 2023. One of those is in the process doing renovations, they're in the process of actually extending that for another 24 months. So that will be extended into 2025."}, {"role": "assistant", "content": "The other one that's a 100% office It's around -- it's a little bit different because they're actually taking it and then selling it into condo style offices. They're in the process of selling that. And as they sell those offices, it's -- they are repaying back down a portion of that goes to pay back on the loan. Given some of the current -- the sale bump from that particular property, it kind of points to actually a loan-to-value ratio of around 42%. So something we're not very concerned there. And on the mixed-use they've actually got, it's actually 100% leased and occupied at this point in time."}, {"role": "user", "content": "That's really helpful. My follow-up on mortality. Some of us talked about an early flu peak in the fourth quarter. Others have suggested that didn't occur. Can you maybe talk about your seasonal experience in the quarter?"}, {"role": "assistant", "content": "Yes. Just -- I mentioned that we had a small favorable fluctuation in mortality during the quarter. So we were pleased with kind of the overall mortality results really very consistent with our expectations, slightly positive."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Erik Sherbet of Autonomous Research."}, {"role": "user", "content": "Good morning. Thanks for taking my question. First question, just when you give your free cash flow guidance for the year, do you have any placeholder on for credit losses in that? Or is your assumption just that if those occur, they'd be borne by the excess RBC ratio in the subsidiary?"}, {"role": "assistant", "content": "It's really the latter, right? we don't reflect any access losses. And we do anticipate losses in general during the course of the year, we'll have some realized gains and losses. But -- so our base case does assume some but not a significant portion. So in general, I'd say any subsequent losses would be borne by our other liquidity resources and the surplus that we have in our -- the excess in our RBC ratio that we currently have."}, {"role": "user", "content": "Got it, which is, I guess, why with these losses, you're just comfortable it brings the RBC ratio to the midpoint of your range, but there's really no impact on your free cash flow expectations."}, {"role": "assistant", "content": "Exactly. And in addition, we -- just our liquidity resources that we have available to us if those losses did occur, we have resources available."}, {"role": "assistant", "content": "Remember again, from the free cash flow -- from the excess cash flow that's really, again, driven by the dividends out of our subsidiaries from last year's statutory earnings. And so any of those losses don't affect that cash flow as any losses that we have this year will simply affect next year's cash flow. But again, as we -- although that it would be included in our stress test. And again, as we think about those stress tests we're trying to really look at what maybe could happen as we're doing a bottoms-up approach, not necessarily what we think will happen because when we look at our particular portfolio, we don't necessarily think that we'll end up and again because we have that ability to hold, especially on the fixed maturity side. So we don't anticipate losses that would actually be occurring during the year."}, {"role": "user", "content": "Got it. And then can you talk about the decision to use the term loan to pay off the debt maturity as opposed to issuing senior debt now? And I guess as you think of liquidity management, you'll now have the term loan maturity next year to deal with. Does that change at all how you think about kind of how much liquidity you want to hold or need to hold?"}, {"role": "assistant", "content": "Yes. As we were thinking about the best way to refinance the debt that was maturing. We looked at a number of options. And we just -- one of the things that we're trying to do is to look at our maturity ladder as well. And so we thought it best to issue debt in 2024 to space out some of our maturities going forward."}, {"role": "user", "content": "Got it. Thanks."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Ryan Krueger of KBW."}, {"role": "user", "content": "Hi, good morning. I just wanted to understand the under LDTI, given that you already made an assumption for some level of continued excess mortality, is that -- is the 37% to 39% underwriting margin guidance, does that actually -- is that being negatively impacted at all by the excess mortality? Or did the assumption change that you made last year basically reflect that upfront already?"}, {"role": "assistant", "content": "Yes, the [Indecipherable] last year ended up being reflected in that 37% to 39% underwriting margin. So it's already embedded."}, {"role": "user", "content": "Got it. I guess maybe the question maybe to ask another way is, if -- how much upside would there be to that margin if the excess mortality kind of fully subsided?"}, {"role": "assistant", "content": "Yes, it's probably about 1% premium? Maybe."}, {"role": "user", "content": "Then just one more. How are you thinking about your leverage capacity if we did end up in an environment where you had more credit losses, do you think you could end up just issuing additional debt and maintain the buyback at a consistent level?"}, {"role": "assistant", "content": "Yes. Our debt capital ratio as of the first quarter is 22.9%. So we have quite a bit of debt capacity over $700 million, $700 million or $800 million to be a bit below a 30% debt cap ratio, which is kind of where Moody's sets their limit. So quite a bit of debt capacity. And we'd actually expect that debt capital ratio to go down during the course of the year as well to give us even more debt capacity."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Andrew Kligerman of Credit Suisse."}, {"role": "user", "content": "Hi. Interesting, American Income agent count up 6%. Their average producing agent I think, was up 4%. And the guidance this year for sales and life is low single digit. I'm kind of curious about you're recruiting, how that's coming along? And just kind of the seasoning of these new recruits. And could we expect a really nice number next year as a result?"}, {"role": "assistant", "content": "Yes. Probably go back in history just a little bit. As far as if you look at the increase in life sales for AIL in Q1 of last year, so Q1 of 2022. We had a 23% increase in life sales. And then in the second quarter of 2022, we had a 16% increase in life sales. So we've got tough comparables, so to speak, when you look at the first quarter and the second quarter of this year as compared to the prior year. But as we've talked about in the past, the agent count in the recruiting is a leading indicator for sales yet to come. And so what we're very pleased about is just that growth in the agent count throughout the first quarter of this year. And in fact, each week in the month of March, we were over 10,000 agents, again, in American Income."}, {"role": "assistant", "content": "So that momentum, as those agents get up producing and as we've talked about in the past, the more experienced agents, obviously, are more effective from a sales perspective. So as those new onboarded agents get more experience, we expect that sales growth to accelerate in the last half of this year and then obviously that would carry over into 2024."}, {"role": "user", "content": "Very helpful. And then just staying on that topic, you mentioned -- and I didn't get the exact numbers increasing the branch managers. And maybe you could talk a little bit about those initiatives within American Income. What's the delta there? And how impactful?"}, {"role": "assistant", "content": "As far as our middle management growth in American Income, it's up 10% in the first quarter of this year. So that's what we're very pleased with. So that 10% growth in the middle management, again, helps us from a recruiting perspective as well as training and onboarding agents, and that's very good. We anticipate as far as just new agency owners, new offices being open, in American income, still predict that for -- throughout 2023 to be in the three to five number range, so good growth there as well."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Wilma Burdis of Raymond James."}, {"role": "user", "content": "Hi, good morning. Just a question on the health margin that increased a little bit. Could you talk just drilling a little bit more what happened there?"}, {"role": "assistant", "content": "Yes, we have to -- when we kept the bottom end of the range the same, but we do see the potential it to move up a little higher. We're seeing a little bit favorable experience on Family Heritage. And we feel like if that continues, the health margins could go up overall. On the UA side, we have seen a little bit of first quarter, a little bit higher claims, and I think others have seen that as well. And that's fairly consistent with the seasonality of Medicare supplement. But we think that Family Heritage actually provides kind of an opportunity for some upside."}, {"role": "user", "content": "Great. And it seems like all of the recruiting and sales numbers came up a little bit, which is great to see. But I guess my one quick question is if there's any recessionary impacts that could kind of flow through on pressure sales a little bit this year?"}, {"role": "assistant", "content": "Generally, in the past, as we've look through different economic trends, we really haven't seen that. Our sales growth is really driven by agent count growth and agent count growth is really driven by middle management growth. And so that's why you're seeing us revise up just the momentum that we're seeing in our onboarding of new agents as well as the growth in the management count across the three agencies is really what's driving our sales projections for the year."}, {"role": "user", "content": "Okay, thanks for the color."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] We do have one remaining one for now. Wes Carmichael of Wells Fargo."}, {"role": "user", "content": "Good morning. Thanks for taking my question. Actually, I had a technical one. As we're thinking about stress testing, and I'm really thinking about the RBC framework, but it does kind of give you credit through diversification benefit of the C risk. So I think you guys are a pretty C2 heavy company. I was just wondering if there's any way to think about a rule of thumb for the diversification benefit within C1 if you see any credit risk, if that makes sense."}, {"role": "assistant", "content": "There would be some overall, you're right, about 50% of our CMLs or in there CM2. And are you looking -- maybe I misunderstood your question here on just the."}, {"role": "user", "content": "Yes, I'm just thinking if that's really like -- sure. So like if you think about the gross C1 charges and then you could do that math to your 300% to 320% RBC target. But then when you actually put it into the RBC formula, the square root calculation gives you some offset against those growth factors. So I'm just thinking about -- is there a rule of thumb we can use, so we're not overestimating the credit drift impact to Globe for RBC."}, {"role": "assistant", "content": "Yes, I'll be honest. I'm not sure that I'm able to give you that what that rule of thumb would be. I mean there is definitely, as we do think about the C1 charges. We look a lot -- we think about size, diversification, and we work with that quite a bit and then trying to get the diversification across the portfolio. I'll be honest, I don't have that something I have handy to try to give you that rule of thumb."}, {"role": "user", "content": "Okay. And just last one on LDTI. It looked like there might have been a favorable impact on retained earnings and thus, book value ex AOCI. Just wondering, is there a way to quantify that? My math was there's a few moving pieces, but I thought it was around $4.50 a share versus prior gas. Is that in the ballpark? Do you have that handy?"}, {"role": "assistant", "content": "I didn't put it in that framework, but we are definitely seeing higher retained earnings as a result of restating 2021 and 2022 earnings under LDTI. It was -- and then the traditional balance sheet change was relatively small. There's like that was about $12 million. So we had previously guided to the LDTI would increase earnings by $105 million to $115 million. And so I think actually, what might be helpful to you is to look in the supplemental financial information, where we've restated the 2022 earnings numbers. And that will help guide you. But 2021 was about $187 million favorable over historical and 2022 was about $253 million favorable over historical. So that's adding about $428 million to retained earnings just because of the restatement of the prior historical numbers, yes, to the retained earnings as of 12/31/22 right? So that's right. 12/31/22."}, {"role": "user", "content": "That's perfect. My math was 4.29%. So it sounds like we're in the same ballpark. But I appreciate the follow-up."}, {"role": "assistant", "content": "And a large part of that, of course, if you're thinking about restating on those prior years, it is because we had the large fluctuations with COVID in both of those years so under LDTI that got a good chunk of that got pushed out in the future years as well as then the impact from the lower amortization."}, {"role": "user", "content": "Okay, thank you very much. Appreciate it."}]}, {"messages": [{"role": "system", "content": "Thank you. And as we have no further questions, I'd like to hand it back over to Stephen Mota for any closing remarks."}, {"role": "user", "content": "All right. Thank you for joining us this morning. Those are our comments, and we'll talk to you again next quarter."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Juan Sanabria with BMO Capital Markets. Please go ahead."}, {"role": "user", "content": "Hi, thank you for the time. Just curious on the renewals, those popped up in the fourth quarter, if you look relative to the trailing 12, you also had lower TIs. Is that a mix or is that kind of a new normal? I know you mentioned some anchor leasing. Just curious if you can comment on that. Thank you."}, {"role": "assistant", "content": "Yes. It was essentially a mix with regards just what not done during the quarter. One of them was the grocer renewal that we had up but also just a broader mix. And obviously, the TIs again a mix of the leases that got done."}]}, {"messages": [{"role": "system", "content": "The next question comes from Craig Schmidt with Bank of America. Please go ahead."}, {"role": "user", "content": "Yes, thank you. I kind of wanted to talk about mixed use and added resi. I noticed on your future development opportunity page, you've gone from six mixed-use projects that could add residential, now, we have 14. What I'm wondering is, I've heard you say that one third of your properties or mixed-use now, where do you think you might be in five years time?"}, {"role": "user", "content": "And the second is, will mixed-use assets grow faster in their rents than strictly retail ones? And what are retailers telling you about mixed-use and what are the resi people telling you about mixed-use?"}, {"role": "assistant", "content": "Craig, that's pretty funny. I love it. We limited it to one question. You have a whole white paper in that question there. You are the best. So a couple"}, {"role": "user", "content": "I apologize upfront."}, {"role": "assistant", "content": "Not at all. Don't apologies at all. I'm just having just a little fun. Listen, what you see in the 8-K is a continuation of what we believe, and that is the ability wherever we can to maximize the use of the real estate that we own. Especially when we're talking about successful retail shopping centers with -- and you know ours are on bigger pieces of plant. And so the ability to add other uses is something that it's just part of our DNA and something we'd like to be able to do."}, {"role": "assistant", "content": "Now I don't -- I would not -- you should not expect us to be running and putting shovels into the ground over the next nine months, 12 months at those projects because the economics don't make any sense today. I do expect them to make some sense in the future, and that's what that is supposed to convey."}, {"role": "assistant", "content": "Now with respect to the overall mixed-use properties, what we have clearly found, clearly found is that the demand for lots of uses in both office and retail and resi and hotel frankly at a really well-done mixed-use property is a real differentiator. It's where people want to be. It's why in the comments I made -- I'm talking about traffic counts that are really enormous. These are a lot of visits there, a lot of sales. They also seem to have the ability to raise their prices in places like that more than that more value-oriented properties."}, {"role": "assistant", "content": "And I guess you would expect that Apple in areas, the Lulu Lemons of the world, et cetera, they can raise prices. And as a result, we see the ability to charge higher rents there. Now if we did that right on the ground floor, then we should also see outsized returns, both in the form of occupancy and the rates that we're getting upstairs in the other users. That's been our experience, frankly, since COVID, I think it's even stronger than it was before COVID."}]}, {"messages": [{"role": "system", "content": "The next question comes from Steve Sakwa with Evercore ISI. Please go ahead."}, {"role": "user", "content": "Yes. Don or maybe Wendy, just on the leasing side, I mean, I know this strength has probably surprised you, Don, things have remained healthy. Consumer spending has held up. I'm just wondering what you guys are hearing from tenants. And you mentioned maybe bankruptcies picking up. I'm just wondering how you feel about the 75 basis point general reserve and might you not use all of that as you sit here today just as you survey the landscape."}, {"role": "user", "content": "Steve, let me just kind of add some color first before Dan talked about the numbers. But you're right, we're seeing great demand on the retail leasing side, specifically in the small shops. We have not seen a decline of anything considerable as it relates to people's ability to fund projects and make decisions. They're making decisions for the long term, and they're understanding that with these recession discussions that these headwinds that we're facing, the decisions that they're making are critical to their livelihood, especially for the mom-and-pop."}, {"role": "user", "content": "So there's a flight to quality that continues to happen in our portfolio. So I'm feeling very bullish about what I see in our pipeline. Again, I honestly, I was expecting it to level off a little bit, and it has not. It is as robust as ever. So I'm very encouraged."}, {"role": "assistant", "content": "And I guess, Steve, I would only add to that. Yes, there might be some room in the 75 basis points. But I read the same things in the newspapers that you do, and its May 05 or May 04 or whatever day it is. By the way, Steve, my 25th anniversary at least, happy anniversary Don, right? It makes me laugh though because the power of the small shop tenants and that Wendy mentioned is something I really want to make sure that you understand a little bit, we don't do kind of first-time mom-and-pops."}, {"role": "assistant", "content": "We don't have those type of businesses here. They are almost always adding a store or adding a food use from a place that -- from strong cash flow at another location, whereby they're expanding into the third or the fourth or the fifth. There is that flight to quality. That's a critical component. So if this is anything like whatever happens this year or next year is anything like prior recessions, this is one of the strongest parts of our portfolio and the place that the differentiates us.The next question comes from Greg McGinniss with Scotiabank. Please go ahead."}, {"role": "user", "content": "Hey, good evening. Happy 25th Don. Let's talk about office demand. Can you just talk a little bit more about the interest you're seeing in Santana West this feels like serious increase, is it All tech whole building or by floor? And so any additional color is helpful there. And then we'd also appreciate updated info on 919 lease-up and initial rent contribution expectations. Thanks."}, {"role": "user", "content": "Sure. Yes. Greg, this is Jeff. Let me start off on the West Coast, obviously, Don can jump in on the second part of your question. So the business decision we made late last year to allow the building to be leased by four by four and to start building out the building."}, {"role": "user", "content": "So we were a great alternative to the sublease space that's coming on the market that I'm sure you've heard about is working out for us. That combined, I think, with a little bit more of a settling at least in the, call it, mid-sized tent market as what they're going to need in the way of the office space as cause tours to tick up, and we have paper going back and forth with a couple of tenants."}, {"role": "user", "content": "So they're not full building tenants, but they are multi-floor tenants and I don't know whether we'll get any of them not, of course, at this point, but there is activity and I would call the activity very good. And really happy when we made the decision that we made to start building out more four by four."}, {"role": "assistant", "content": "Yes. And Greg, just to say the obvious, that is a difference in feeling. I don't think we could have said that. In fact, we didn't say it on the February call or maybe last November. So really happy about that decision at this point, too. Hopefully, it bears fruit. Time will tell. And with respect to 919, 919 it's really -- it's really interesting. We haven't done 919 yet. On 915, we turned the building over the floors over to choice. Then they are building out their space. We will have a contribution from them starting next year.End of the year."}, {"role": "assistant", "content": "Sodexo also, which, as you know, signed the lease, we're almost ready to turn the space over to them. That is going really well. And then so that's the 60-some-odd percent of the building that is completely leased. We have serious back and forth on a number of tenants for most of the rest of the building at this point. So it's pretty interesting at a time when, as you know, there can't be a dirtier word than office in the country is it possible that a subcomponent of all of us is actually undersupplied."}, {"role": "assistant", "content": "And that's a component would that be mixed-use properties where you have a new building in a first ring suburb, which is obviously all we have. So I'm pretty encouraged by what we're seeing here at road is certainly the same up at Assembly Row. And with new activity at Santana West, I hope we have something tell to you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Connor Mitchell with Piper Sandler. Please go ahead."}, {"role": "user", "content": "Thanks for taking my question. So now that you've entered Hoboken Phoenix, and I know you've mentioned you're not rushing to start digging any time soon. But as you deploy more capital, do you see more urban infill or population growth areas and maybe just how you think about the two different market types."}, {"role": "assistant", "content": "Yes, Conor. It's it certainly wouldn't be areas with big population growth. The problem with big population growth means that there's usually room for a lot more supply to be added. And we want to be in supply-constrained areas. Nothing more supply constrained than Washington Street in Hoboken, and love the investment that we've made there."}, {"role": "assistant", "content": "We're just getting into -- on the one redevelopment there, whether we can effectively make the numbers work. I'm very encouraged by that fact. I would not, again, expect to see us under construction in the next month or two or something like that. But that project is going to very likely make some sense. To the extent we can find more have it makes sense in markets where we already are like that. We'll look at it all day long. But that's the type of thing that's far more attractive to us than chasing headcount."}]}, {"messages": [{"role": "system", "content": "The next question comes from Craig Mailman with Citi. Please go ahead."}, {"role": "user", "content": "This is Hassan on for Craig. The active mixed-use redevelopments all have a 6% projected returns. How are you thinking about return thresholds for incremental project starts given the elevated cost of capital?"}, {"role": "assistant", "content": "It's a very good question. And I think I've answered this a couple of -- but think about it this way. We need incremental returns or incremental returns on top of our cost of capital in terms of development of at least 150 basis points from an IRR perspective, more like 200 basis points from an IRR perspective. The reason I keep saying IRR perspective is because the stuff that we do in those projects, we won't do unless they grow faster."}, {"role": "assistant", "content": "Our experience has shown us that those projects are able to increase rents faster. The residential component is important with respect to that. But incrementally, once we get comfortable with what our cost of capital is going to be, I'd like a little more clarity from the Fed. Maybe we're getting there -- getting a little bit closer that way on the debt side. On top of that, add 150 to 200 depending on the risk of the particular project from an IRR perspective."}]}, {"messages": [{"role": "system", "content": "Next question comes from Floris Van Dijkum with Compass Point. Please go ahead."}, {"role": "user", "content": "Hey, good evening. I guess, could I ask about your shop occupancy at 90% leased. What is the gap between occupied and leased and how much more will that number, can you drive that over the next two years? And how much more do you think that will increase maybe even this year?"}, {"role": "user", "content": "Yes. The occupied percentage of small shop is 88. And we would expect to be able to drive both of those up higher. I think that's a real opportunity. And up towards the occupied percentage above 90% and up towards north of 92% on the lease side. I think there's still more room to run on that our portfolio."}]}, {"messages": [{"role": "system", "content": "The next question comes from Derek Johnston with Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Hi, good afternoon everybody. I wanted to touch on capital recycling, primarily because it's such an important growth tool for REITs. And really, it's been hampered as you know, especially this year. But Don, with the Fed striking a pause here and some calling for perhaps a first round of cuts and maybe Q1 '24, somewhere around that time frame. Do you think there's visibility in rates and somewhat of a stability in rates can condense or narrow what must be a wide bid ask spread. So you can maybe do some accretive acquisitions and reignite that growth engine later the year?"}, {"role": "assistant", "content": "I do, Derek, I mean you said the word in your question, there has to be some level of stability. There has to be predictability. And without that, as there hasn't been, as you know, it's sure, the bid ask is very different. That will change now, it will change over time, and there are other things than just Fed policy that dictate whether there is or an acquisition market that makes sense for a disposition market that makes sense, but it's not going to stay the way it is."}, {"role": "assistant", "content": "So yes, I mean, we run this business. We've run this business for long time. We'll continue to do that. And during those cycles, there will be a reversion to some level of stability that allows us to get stuff done. No questions."}]}, {"messages": [{"role": "system", "content": "The next question comes from Michael Goldsmith with UBS. Please go ahead."}, {"role": "user", "content": "Good evening. Thanks a lot for taking my question. Dan, you had a slight beat on FFO relative to the consensus, you're not touching guidance as it's still early in the year. I guess like what are you looking for over the next three months or when we next speak on an earnings call, would that give you more confidence that you can take the year's expectations higher? And then separately, like what are you looking for, which would maybe give you a little bit more caution in terms of the outlook for the year."}, {"role": "user", "content": "Thanks."}, {"role": "user", "content": "Look, I think the biggest driver would be just continued strong leasing volumes. Our pipeline is as strong as is large in terms of what's been executed To date this quarter and what's in the pipeline of executed LOIs. It's never been higher. And so that continues, and we can see that continue. I think that obviously, we'll have some confidence. On the flip side, look, I think the market is -- got some risk out there, particularly with regards to tenants and whether or not tenants we'll be able to weather this difficult economic environment, whether or not we see a continued uptick in bankruptcies. And I think that balance, we've done very well balancing that. I think that we've managed to have very little exposure or on a relative basis, certainly, but just in absolute terms in terms of our exposure to those bankruptcies, we hope that continues."}]}, {"messages": [{"role": "system", "content": "Next question comes from Haendel St. Juste with Mizuho. Please go ahead."}, {"role": "user", "content": "This is Ravi Vaidya on the line for Handel. I hope you guys are doing well. Just wanted to comment and ask about the snow spread. You currently are at 160 bps. Would you view this as a long-term steady state for what snow could be?"}, {"role": "user", "content": "Look, we've done an exceptional job, I think, of bringing our SNO metric down from north of 300 basis points in our existing portfolio, down to 160 basis points. We'd like to get that tighter. We'd like to get that down to 100 basis points to 125 basis points. One of our differentiators though, is that we have an SNO and space that is yet to be delivered from our large redevelopment and expansion pipeline that is equal to that size."}, {"role": "user", "content": "So we have $18 million in the existing portfolio, $18 million of total rent in our redevelopment and expansion pipeline and that equates to over 300 basis points. I think that's pretty compelling. And I don't think anybody has a redevelopment pipeline that has the pre-leasing that's been done, where it's something that is a real differentiator because we've got scale. And that truly, I think, the equivalent of what's in the existing portfolio and what's in the redevelopment portfolio is effectively 300 basis points or more."}]}, {"messages": [{"role": "system", "content": "The next question comes from Hong Zhang with JPMorgan. Please go ahead."}, {"role": "user", "content": "Hey, guys. Just a quick question on occupancy. I think last quarter, you talked about potentially pushing economic occupancy above 93%, maybe in the mid-93s by year-end. Just wondering if that's changed given the Bed Bath announcement and your views on near-term bankruptcy risk in general?"}, {"role": "user", "content": "Yes. No, I think, look, it depends on so far of our nine anchor boxes, we've only had one lease rejected. We'll see how it plays out. Obviously, if there's a full liquidation, then we're not going to be at 93% on an occupied percentage. We'll be probably closer to 92%. But we'll see how that all plays out. What gets somewhat that is in terms of what leases get purchased in there liquidation. And from that perspective, we would hope to have a clearer sense from that number as the bankruptcy unfolds."}]}, {"messages": [{"role": "system", "content": "The next question comes from Paulina Rojas-Schmidt with Green Street. Please go ahead."}, {"role": "user", "content": "Hello. Don, you have talked about how you believe your portfolio outperformed peers in an economic downturn. And you have highlighted how demographics are a key driver behind that. But as we perceive perhaps as vulnerability is your slightly higher exposure to more cyclical categories, restaurants a little bit more foot price apparel."}, {"role": "user", "content": "So could you please provide a little bit of a history lesson on how these segments have performed historically in downturns in your portfolio to have a better understanding of how the overlap between high demographics and cyclical categories perform."}, {"role": "assistant", "content": "Hi, Paulina. Thanks for asking that. It's kind of like in my prepared remarks, I wanted to make a distinction of how those mixed-use properties with generally higher-end tenants, how effectively they do. And what we have found -- and look, real estate is local. So in the specific markets where they are operating both historically and currently, what we're seeing is increased sales and importantly, very importantly, on a period of inflation, those tenants have the ability to raise prices."}, {"role": "assistant", "content": "When I sit and I think about -- and I don't know the answer to this, but I ask you to consider something like this. If you take aspirational tenants, the Lulu Lemons of the world, people like that effectively. And imagine how much they've been able to increase prices over the next -- last two years of inflation and compare that more to maybe the big lots of the world or something that is aiming for a lower demographic. It's harder to press, it's harder to push price increases. That's a really important thing for us in all parts that includes restaurants, et cetera."}, {"role": "assistant", "content": "Now I don't know whether I've told you this before or not, I don't remember, but everybody was worried about Federal Realty going into the 2008, 2009, great financial crisis because we had more restaurants, because we had more lifestyle, if you will. Everybody was worried about Federal, and it turned out that those were the best-performing categories in the company doing that. And when I look today at our company, and I look at the restaurant performance in the mixed-use properties, they are generating over $1,000 a foot of sales."}, {"role": "assistant", "content": "And part of that is because they've been able to raise prices. Part of that is because there's a huge amount of volume that goes through there. But that gives them the ability to certainly cover the rents that we are charging them and more. And when you think about that in those type of areas, we would expect that to continue to happen. The conversations we have and we are very tight, we're a smaller company in terms of number of properties than our competitors. We have very close relationships with our tenants. We understand what it is that they are doing to be able to work through more difficult economic times."}, {"role": "assistant", "content": "And so those things give me confidence because we have been doing this a long time, and there are cycles. And I expect it to behave similar to the way it's behaved historically. I hope that's helpful."}]}, {"messages": [{"role": "system", "content": "The next question comes from Tayo Okusanya with Credit Suisse. Please go ahead."}, {"role": "user", "content": "Good afternoon, everyone. Congrats on a solid quarter. Don, last quarter, when you kind of talked about dispositions, it sounds like there was a pipeline of kind of a little bit over $100 million or so you were working on. I think this quarter, you kind of announced $13 million of it done."}, {"role": "user", "content": "Could you talk about like the rest of the pipeline, what's kind of happening there whether it's kind of taking a little bit longer to close deals because of the shakeout on the debt market. So just give us a sense of maybe what's kind of happening on that front?"}, {"role": "assistant", "content": "Yes. We have and continue to have a list of assets that we would recycle as a component of our business plan. And frankly, we have that list in good times and bad times in terms of what it is. So those are not a lot of properties, but it's a few that we look at. That's what we talked about last quarter, last year, et cetera. And we got to get comfortable that we're going to get paid well."}, {"role": "assistant", "content": "And so in going through that process, we couldn't get comfortable on as many of those assets as we thought we could. That doesn't mean they come off the table. That just means pursuant to the question that was asked a little bit earlier, once there's some stability and some understanding of the general market conditions, you'll see a pickup in the disposition side of our business. I don't know, Dan or Jeff, is there anything to add to that? Think that's it."}]}, {"messages": [{"role": "system", "content": "The next question comes from Linda Tsai with Jefferies. Please go ahead."}, {"role": "user", "content": "I'm not sure if you look at it this way, but I think one of your peers talked about the average rents in their SNO pipeline. I was just wondering if you had a number for that for yours."}, {"role": "user", "content": "Probably on a total Rent basis in the kind of the low to mid-20s and probably in the upper 30s on a -- mid to upper 30s on a base rent basis. But we can come back to you with more precise numbers. I don't have them exactly here."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Alexander Goldfarb with Piper Sandler. Please go ahead."}, {"role": "user", "content": "Thank you. Good evening. Don, can you -- a number of years ago, you guys expanded into the Hispanic centers out in California. And just sort of looking for an update on that. Then also the Korean like the edge marks of the world seems to also be a pretty powerful anchor, and those shopping centers also seem to have that cold-type following. So do you see expanding into more in the Asian Hispanic centers? Or is your experience so far with what you bought a number of years ago, maybe not panned out the way you thought."}, {"role": "assistant", "content": "Thanks, Alex. It has panned out the way we thought. In fact, probably better than we thought in terms -- given the fact that we didn't consider a global pandemic, and those properties performed exceptionally well during the pandemic. The answer to your question really depends on the right local partner. It really depends on the market, of course, that we need to be comfortable with and a partner that we would need to be -- that we would need to be aligned with, with respect to our views and the way we can manage a property."}, {"role": "assistant", "content": "Prime Store has been that. It's been a very good partnership. We've had trouble adding more to it. We would have wanted to have added more to it. But those are individual deal by deal, and they've got to make some sense, and we didn't find any of that made sense. But those assets perform really well. I'll actually be out there on Monday of next week with Prime Stores. So that part's worked out really well."}, {"role": "assistant", "content": "In terms of any other property type with a demographic that we're not as comfortable with, as I say, we need the right partner because these are real estate decisions that have to be operated and have to be leased and have to be grown specific to a market and if we're not familiar with, we'll get hurt. So we better have the right partner, and we've not found that at this time."}]}, {"messages": [{"role": "system", "content": "This concludes our question-and-answer session. I would like to turn the conference back over to Leah Brady for any closing remarks."}, {"role": "user", "content": "We look forward to seeing many of you in the coming weeks. Thanks for joining us today."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question comes from Mohit Bansal with Wells Fargo. You may proceed."}, {"role": "user", "content": "Great. Thank you very much for taking my question. Maybe, Marion, if you could elaborate a little bit on the EYLEA, over this more dynamic at this point a little bit. Given the weakness in the quarter, you did mention that aflibercept is taking some share. So if you could elaborate on where the where the share is coming from? Is it more of a switch? Or do you think it is also some new patient starts? And your confidence level in terms of flipping this situation once high-dose EYLEA comes along. Thank you."}, {"role": "assistant", "content": "Sure, very happy to comment. And as I noted, as we're reporting on the quarter performance on a sequential basis, we did see with EYLEA, if I look at a sequential quarterly basis, we did see with EYLEA a net product sales decrease of 4%. As I mentioned, it was driven by a number of factors. Certainly, competitive pressure is one, but we also reflected on while we had slightly higher demand volume. It was offset by lower sequential wholesaler inventory levels and overall tire sales-related deductions."}, {"role": "assistant", "content": "Specifically as it relates to competitive pressure, I would say that this is overall competitive dynamic in the anti-VEGF category, not something that we would necessarily identify with a particular product, more the totality of competition. I will comment that in the quarter, we certainly maintained a 70% branded share and over at approximately, I believe it was a 46% share in the overall anti-VEGF category. So certainly standard of care with EYLEA. And very importantly, we look forward to launching aflibercept 8-milligram, as I mentioned now, is about seven weeks away."}, {"role": "user", "content": "Thanks, Marian. Josh, next question, please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Robyn Karnauskas with Truist. You may proceed."}, {"role": "user", "content": "Great. Thanks for taking my question. Just some questions on LAG 3, and thinking about the first-line melanoma market and you're going to be having data relatively soon. So what -- I guess it's a multipart question. What is the bar for success, do you think, for the combination to be competitive? And when you think about penetrating into the nivo and checkpoint monotherapy buckets for first-line melanoma, can you help us understand how big these buckets are to actually model this opportunity better? Thanks."}, {"role": "user", "content": "Well, as we've alare seeing remarkable overall response rate increases over the PD-1 standard alone, almost doubling with much longer PFS. If we get anywhere near these numbers along with a satisfactory safety profile, which we had seen a favorable safety profile in the small studies, but if we reproduce or come anywhere close to reproducing these results, we believe that this will establish an entirely new standard of care for this disease. And as we all know, the first-line melanoma opportunity is very large, but we're also moving laterally and earlier and so forth into many additional applications within the melanoma opportunity itself. We're going -- we're already now in adjuvant and entering neoadjuvant studies. We'll also be going to other cancer settings, including lung cancer and so forth."}, {"role": "user", "content": "So we consider this a major opportunity, and we can only help to -- if we approach the data that we've already seen in our earlier studies, it really has a chance to make a huge difference for these patients."}, {"role": "user", "content": "Thanks, George. Josh, please move to the next question."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Tyler Van Buren with TD Cowen. You may proceed."}, {"role": "user", "content": "Hey, there. Good morning. Thanks for the question. For high-dose EYLEA, is there anything left to do on the regulatory front? And have you guys started labeling discussions yet? And forgive me for the follow-up, but just briefly for housekeeping and related to your response to the first question in prepared remarks, Marion, can you quantify the impact of the lower EYLEA inventory for the quarter?"}, {"role": "assistant", "content": "So on the regulatory update, we don't comment on ongoing stuff. I'd like to say we're looking forward, hopefully, to the action of the FDA on June 27 and the launch promptly thereafter. Marion, you can comment on the inventories."}, {"role": "assistant", "content": "Sure, Tyler. I can give you the detail there. So while still within the normal range of inventory related to your question on EYLEA in the quarter in the normal range is five to 10 days, our inventory levels were approximately 3 days lower at the end of the first quarter of 2023 compared to the end of the fourth quarter of 2022. And when you do the calculation on that, as I'm sure you all will do, that's a negative impact in the first quarter net sales of approximately $70 million."}, {"role": "user", "content": "Thanks, Marion, Tyler. Move to the next question, please, Josh."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Terence Flynn with Morgan Stanley. You may proceed."}, {"role": "user", "content": "Great. Thanks for taking the question. I was just wondering on the commercial footprint for DUPIXENT here, given the potential for another indication with COPD. If you could talk about any additional footprint or spend that's required there. And again, maybe just how to think about leverage on the forward. Thank you so much."}, {"role": "assistant", "content": "Sure, very happy to comment. And as we think of DUPIXENT and all the different therapeutic disease areas and specialists that we cover with some indications, there certainly is an amazing and wonderful synergy. And you give an example with COPD launch potentially. And obviously, today, we're in market with our asthma indication and with nasal polyps."}, {"role": "assistant", "content": "As we look forward with COPD, it's a really important launch, an indication to help patients in a way potentially that, as George described, hasn't been achieved ever for this population. So we have the opportunity to use our existing footprint, specifically in covering respiratory specialists, pulmonologists. But we'll also evaluate very closely with Sanofi, as you've seen us done in dermatology indications, where we might need some additional coverage and where the synergy is adequate, and we'll be very disciplined and very thoughtful about that. But you can be assured that we'll make certain that we appropriately give commercialization effort to such an important indication of COPD."}, {"role": "assistant", "content": "And it's interesting, just to add a little bit to that, Marion, that the allergists seem to have really understood the concept of Type 2 inflammation. And the fact that Type 2 inflammation is not a collection of individual unrelated diseases, it's a collection of related diseases. And I was speaking to an allergist the other day and said when you take an asthma patient, if you look carefully, many of them will have nasal polyps. And if you talk to dermatologists, they're beginning to understand that when they're treating atopic dermatitis, people who have concomitant asthma, for example, they get a benefit there."}, {"role": "assistant", "content": "So I think DUPIXENT really is kind of unique. And we are talking to the main doctors, including the allergists, the dermatologists and the pulmonologists, with some of the ENT, as Marion said. We're covering them all, and many of them are covering multiple diseases."}, {"role": "assistant", "content": "I'll add to the enthusiasm here too in COPD, the potential to have a second product following Dupixent as well. So this will be a very important future area for helping patients."}, {"role": "user", "content": "So with regards to your question on leverage, first off, welcome back. Nice to have you back on the team. You'll see with the issuance of our 10-Q this morning with regards to our share of the antibody alliance, we're going to pick up quarter year-over-year for the quarter, roughly 300 basis points. And again, that's half the economics on the transaction. So we're beginning to see really great leverage in to Marion's comment that should continue on with the COPD indication."}, {"role": "assistant", "content": "Obviously, we work very closely with Sanofi and all of these. And I believe it's fair to say we're equally excited about the potential for the future of DUPIXENT in all the current and, hopefully, future indications."}, {"role": "user", "content": "Thanks, everyone. Next question, please Josh."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Christopher Raymond with Piper Sandler. You may proceed."}, {"role": "user", "content": "Thanks. Maybe another Dupixent question, if you don't mind. Leonard, I know you don't talk about regulatory interactions. But when you had the COPD data, I think the signal that I got from you guys that seemed to be pretty strong was that you were hoping to have some discussions with the agency on BOREAS alone. Just kind of -- maybe can you map out how you anticipate communicating the results of that discussion with FDA once it happens?"}, {"role": "user", "content": "And then maybe a second part of that question is, our KOL checks have been pretty consistent when we asked them about this data. They're very impressed. But one of the things we've heard consistently cutoff or Sanofi's greater than 300 as sort of arbitrary and that this drug would see -- maybe add value to patients with Sanofi count as low as 200 to 250. Just maybe your thoughts on this, and how you anticipate to sort of take advantage of that. Thanks."}, {"role": "assistant", "content": "Yeah. Well, let me start with the regulatory aspect. The -- obviously, what we're all staring at is an incredibly positive state -- I mean a Phase 3 setting, where, as we've mentioned, that we not only improve people's exacerbations, but we also improved their lung functions and the lung function and their quality of life, and all these other measures that were part of the statistical hierarchy. So when you have a very robust study like that, and you have -- I don't know how many patients we currently have, but it's a huge number, a very large patient commercial database and so many indications, I think Sanofi and Regeneron concur, that this is something that we should be discussing with the FDA to see how they feel about whether or not there is a potential filing. We don't have any update for you, if it's something once we have that meeting, if it's something definitive, I'm sure Sanofi and Regeneron will figure out a way to properly communicate that."}, {"role": "assistant", "content": "In terms of cutoffs and what have you, I think it's a little bit premature to talk about that, other than to say you stick with what you brought to the trial, which is a cutoff of 300. And that's where you commercialize. But the future work one can look at in other studies, that's something obviously we'll think about. But I remind you as George and both Marion mentioned, our IL-33 antibody gives a larger, although somewhat overlapping population potentially. So we really could have cover many, many, many patients, a great opportunity to help people with what has been really a very unfortunate progressive loss of lung function."}, {"role": "assistant", "content": "Len to your comment, you were talking about number of patients. I can fill in there that as of March worldwide, we had over 600,000 patients on DUPIXENT in 57 countries."}, {"role": "assistant", "content": "Right. So that speaks a lot to the post-marketing experience of the product."}, {"role": "user", "content": "Absolutely. Next question please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Brian Abrahams with RBC Capital Markets. You may proceed."}, {"role": "user", "content": "Hey, good morning. Thanks for taking my question. Shifting gears, you recently reported with your partner, APP data in Alzheimer's. I'm curious what this proof of principle potentially opens up beyond this indication? How quickly you can expand into some of the other neurodegenerative diseases that you mentioned, and your level of confidence overall in the safety of the program. Thanks."}, {"role": "user", "content": "Well, we think that the data were really game-changing. I mean this is the first time in human history that one has been able to use this very exciting sRNA technology within the brain and silence, to a very high degree, higher-than-expected levels an important pathological gene. Obviously, this could have important implications for Alzheimer's itself. But as you point out, the application goes way beyond that."}, {"role": "user", "content": "To every neurodegenerative disease, there are also other types of CNS diseases as well. We have a number of programs that we're working with Alnylam. We have exclusive relationship with them on all of these CNS targets. And we're trying to expedite a lot of them based on the exciting results from this initial clinical work into the clinic. And we're also trying to expedite many of our programs that are behind as well."}, {"role": "user", "content": "So we really think this opens up an entirely new way of addressing a whole assortment of brain diseases and neuropsychiatric diseases, not just neurodegenerative diseases. We're in exciting times. We have to go cautiously. We have to hope that the initial results, in terms of the safety profile and so forth, hold up. We're all in the early days, and we don't know for sure. But the low doses with which we saw this very marked reduction in the target give us a lot of hope that we can have a sufficient therapeutic window that will be applicable to these large variety of disease that could potentially be addressable by this modality."}, {"role": "assistant", "content": "So I just wanted to add to that, two things: streaming on a different channel, I think you might find some further data being discussed by our friends at Alnylam, which will speak to not only impressive result, but the durability of the effect. And one of the other things I want to comment is really to echo something George said. The recent amyloid plaque clearing antibody results by Lilly previously, by Biogen, are really quite important. But as George said, even with the adjuvant, there's still going to be a tremendous burden of Alzheimer's disease. But what the data seem to be speaking towards is that the process is ongoing, is that the pathologic role of amyloid is not over. And as George said, having another way, perhaps upstream, stopping the production of amyloid, maybe even a more advantageous way to deal with the ongoing process that amyloid seems to be generating, which is what the antibody data, I think, seems to be speaking to us."}, {"role": "user", "content": "Hey, thank you. Josh, next question, please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Salveen Richter with Goldman Sachs. You may proceed."}, {"role": "user", "content": "Good morning. Thanks for taking my questions. So with regard to EYLEA high-dose becoming the larger share of revenue on the forward here, can you give us any color here on discussions with payers and how to think about formulary fit?"}, {"role": "assistant", "content": "So Salveen, we are actively involved in all aspects of launch preparation. And certainly, that includes all elements and levers associated with premarket activities and then getting ready for the launch activities. We do have in place a very sophisticated market access, payer and pricing team. And at the appropriate times, they most definitely will be involved with payers and other organized customers that will be important in our launch efforts. Additionally, this is a customer base that we know very well from our over a decade experience with EYLEA. So we look forward to potential FDA approval and launch activities and working with all of our customer stakeholders."}, {"role": "assistant", "content": "I'll also mention again the importance in the retinal space of the key opinion leaders and prescribers and the enthusiasm they have for a product that really can be a game changer for their patients in terms of visual acuity, duration and the safety profile they've come to know with EYLEA. So we're very enthusiastic and look forward to the launch opportunity, and we'll be ready."}, {"role": "user", "content": "Okay. Next question, please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Akash Tewari with Jefferies, you may proceed."}, {"role": "user", "content": "Hey, thanks so much. So just to clarify the moving parts on U.S. EYLEA, there was a 5% market share loss, a $70 million inventory impact and then lower price. Any color on what the net price impact was on the quarter, and how it should evolve in the back half of '23? And additionally, should we expect EYLEA market share to hold at 70% going forward, or potentially start to grow again as high-dose EYLEA launches? Thank you."}, {"role": "assistant", "content": "So let me take some of the items, and others may want to jump in here, too. But first, I would say that some of the calculation related to market share shift is not exactly correct. There was some decline in the quarter, but not to the height that you mentioned. When I look at market shares through the entirety of the first quarter period, then as described, it is a more competitive market, a variety of, obviously, competitors, very low cost and others."}, {"role": "assistant", "content": "And overall, EYLEA performance is in a very strong situation as we look today to planning for our future portfolio and the aflibercept 8-milligram launch. As to the specifics of pricing and calculation to the net, I can't give you specifics on that number. But I do think that we gave you some transparency on the overall item related to inventory, overall competitive pressures and then our preparation for our next launch in the category coming up shortly, we hope, following FDA approval."}, {"role": "assistant", "content": "Obviously, as Marion mentioned, on a sequential basis, demand was modestly up. So obviously, we were offset by the factors that Marion referred to."}, {"role": "user", "content": "All right, next question, please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Chris Schott with JPMorgan. You may proceed."}, {"role": "user", "content": "Great. Thanks so much. I just had a question on the IL-33 in COPD. I guess just the success you've had with your kind of study design and results with DUPIXENT increase at all your confidence in that program. And just, I guess, maybe just elaborate little bit on, how you see kind of those two agents kind of interacting as we think about the space overall? Thank you."}, {"role": "user", "content": "Yeah. We are more optimistic, obviously, that all of our decisions, all of the data that led us to do the particular study and the particular population of patients in COPD with DUPIXENT was made based on a lot of factors. And we also had, from our Regeneron Genetics Center, very strong human genetic evidence suggesting that it would have activity particularly where we actually saw activity. And so all of that gives us confidence -- since we use the same criteria, the same approaches and so forth to plan and design our IL-33 study, certainly, the fact that everything that went into one and it all worked so remarkably well gives us confidence that the same approaches will lead to success with the IL-33."}, {"role": "user", "content": "The results with DUPIXENT were really outstanding, as we've already mentioned. Not only a clinically meaningful reduction in exacerbations, but we hit all these other important endpoints, most importantly, improvement in lung function, as well as you rarely hit these quality of life improvements unless you have a really active agent that the patients can really feel the difference for their function and for their quality of life."}, {"role": "user", "content": "With IL-33, the genetics is very strong. We have a Phase 2 study in the subgroup that we're doing the Phase 3 study in. It was in that group. We have demonstrated a 42% reduction in exacerbations in the Phase II study. This will be an overlapping population with our DUPIXENT population. We think we already have a chance to really make a huge difference for this high unmet need population that really has had no new mechanism of action of drugs brought to help these patients for a very, very long time. We have one with DUPIXENT, and we're hoping to hit another one with IL-33. And this could make such a huge difference for these patients who have been suffering for so long without much hope. It could really make a big difference for this population."}, {"role": "assistant", "content": "I just wanted to repeat, maybe George said it probably two or three times, but maybe it's worth saying a fourth time. in yesteryear, the way you did drug development is you identified a target based on some biology or what have you, you did your Phase 1 and Phase 2, and you hope that Phase 2 was an indicator for how your Phase 3 was going to turn out. And obviously, that's how it is still done today. But what George mentioned is that we can layer on top of it in sort of a unique way our genetic insights and look and validate and say, is it reasonable to expect that if you block a certain target that you're going to have a beneficial effect? Is that target associated with the disease you're treating?"}, {"role": "assistant", "content": "And I know George said it three times, but I think it's worth saying a fourth time. That really gives you added confidence that's uniquely Regeneron in many respects, how we can get this genetic information. People ask us a lot, if you think about the number of people that have been sequenced in the world, George can comment when I'm done, I know we've sequenced a large part of them and coupled that with all this medical, anonymized medical information."}, {"role": "assistant", "content": "We use that in so many ways, not only to identify targets, but to validate the work we're doing in specific targets, specific diseases. George, how much have we done?"}, {"role": "user", "content": "We've seen about half of all the humans who have been sequenced."}, {"role": "assistant", "content": "So I mean, that's a large database of millions. And I think that, that is what you're hearing is that that's why we had more confidence perhaps than others did with Dupixent and now with anti-IL-33."}, {"role": "user", "content": "Since -- expand it a little bit, just let you know how it works. What we do is we identify genetic variations that mimic the blocking of a drug or exacerbation of this Type 2 pathway. And what we showed for Dupixent, for the genetic variations that mimic Dupixent, those people were protected from COPD, particularly the Type 2 COPD patients. Whereas increased activity of the IL-4/13 path was associated with more disease. And obviously, that turned out to be the case. I mean it's human genetics. It's a very, very powerful predictor. And we've done the same thing, as Len said, with IL-33, where we have genetic variation at mimics blocking the pathway or exacerbating the pathway."}, {"role": "user", "content": "And as I've said, this is one of the secrets to our ability to have high success rates in our studies is we use that as a criteria to make our decisions going forward."}, {"role": "user", "content": "Okay, Thank you. Next question, please Josh."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Yatin Suneja with Guggenheim Securities. You may proceed."}, {"role": "user", "content": "Hi. This is Eddie Hickman on for Yatin. I was wondering if you could talk about the draft guidance from the FDA on the anti-VEGF trial designs? And if that impacts your outlook on the high-dose program at all? Thank you."}, {"role": "assistant", "content": "I don't think that has any impact on us, on our program."}, {"role": "user", "content": "Thank you, Len. Next question please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from David Risinger with SVB Securities. You may proceed."}, {"role": "user", "content": "Thanks very much. I guess I'll just go straight to the question. Len, you had mentioned in your opening remarks the ongoing diversification of the company's revenues away from EYLEA. Could you please discuss your expectations for EYLEA U.S. sales growth in the near term, including the total EYLEA franchise prospects after Regeneron launches the HD? Thank you."}, {"role": "assistant", "content": "Let me go right to the answer since you ran right to the question. We don't give future guidance on specific quantitative measures of our sales. On a qualitative basis, Marion has said, that we're anticipating that the combination of EYLEA and 8 milligrams aflibercept will be a growth franchise over time for the company."}, {"role": "user", "content": "Thank you. Next question please."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Hartaj Singh with Oppenheimer. You may proceed."}, {"role": "user", "content": "Great, thank you. Just a quick question on linvoseltamab. At ASH, you presented a Phase 1 data, and these were your dose ranging, I guess, data. Really interesting data you present at ASH. At ASCO, what should we expect to see? Will it be dose expansion data? And then any duration also on the patients from ASH? And then what would FDA like to see before you can go ahead and submit the application? Thank you."}, {"role": "user", "content": "Well, I think you're going to actually see an update on our pivotal Phase II data, the actual data that was a little bit more maturing, with a further update we will be hoping to submit to the to the FDA for our BLA. So the data will be very close. We think the data will even get better as it matures. Because as we all know, response rates and so forth get better with time as you follow these patients. But these data are going to show what we believe are the potential to have best-in-class efficacy, as well as safety in the favorable dosing schedule based on the results that we'll show from our pivotal study at the upcoming ASCO."}, {"role": "user", "content": "All right. Thank you, George. I think we have time for two more questions."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Carter Gould with Barclays. You may proceed."}, {"role": "user", "content": "Good morning. Thanks for taking my question. Sorry to belabor EYLEA. I guess just simply, what's the pricing pressure that you guys highlighted in Q1. Was that a seasonal dynamic? Or would you characterize it as that? Or something more permanent around that market landscape going forward? Thank you."}, {"role": "assistant", "content": "Before Marion answers that, I just want to come back to the BCMA story a little bit, because it's one that I'm particularly excited about. The bispecific field, which was initiated by Regeneron in terms of using bispecifics, I think we were the first to put the biospecific into patients, has obviously become a very clouded space. and it's sometimes hard to differentiate what you've got compared to what the competition has and you look at somebody claiming one thing and you're claiming another and so on and so forth."}, {"role": "assistant", "content": "But if you take a dispassionate view, I think for the BCMAxCD3 program, you could really see differentiated molecules and the potential to be best-in-class. Antibodies are not all created equal. Bispecifics are not all created equally. You do see differences. Clinical trial programs and not all created equally. This is one I'd really encourage you to think a very careful look at and compare. Now there was some question on EYLEA. Marion, you're going to answer that."}, {"role": "assistant", "content": "Sure. And Carter, getting back to your question on the competitive dynamic and pricing pressure. I think if you look at the anti-VEGF category and look at it over time, go back multiple quarters, there has been increasing competitive pressure. And that does then have a corollary to some extent on pricing dynamic, and that would go forward."}, {"role": "assistant", "content": "But I just want to share and remind all that in the category in the VEGF category, what really is rewarded is product profile. And as we look at a product like EYLEA that launched and was a game changer in the category, that was profile not being the least costly, right? There's been a low-cost alternative, very low-cost alternative for a very, very long time, but it was the product profile that made the difference for prescribers and patients."}, {"role": "assistant", "content": "So that will always be a very important dynamic to look at going forward, and certainly has strong interest for prescribers as we bring a new product into the marketplace following FDA approval with aflibercept 8 milligram. But to your point, pricing pressure will continue in this category. But what's most important is product profile and the clinical attributes that the patient experiences."}, {"role": "user", "content": "Thanks, last question, please."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question is from Tore Svanberg of Stifel. Your line is now open."}, {"role": "user", "content": "Thank you. I was hoping you could elaborate a little bit more, Bernie, on your comment about the business conditions. Because it sounds like the design win momentum is still very strong. The activity is very strong but you sort of added there was uncertainty in certain ramp-ups. So maybe you could elaborate a little bit on -- especially when thinking about the second half which seems to be a period where industry could potentially recover."}, {"role": "assistant", "content": "Let me answer my -- Tore, let me answer the first. And -- so you look at all these industries, okay, we -- it's about servers, computing, including industrial servers and AI product that's about 10% of the MPS revenue. And we had a hyper -- we experienced this area really the -- all the entire companies experienced hyper growth, okay, in the last 2 or 3 years. And now the automotive too -- we're about 23% of our business total together and where it's about a 30-some percent. In AI other than, okay -- and across the board other than AI and automotive; and so far we still experienced very heavy demand. Other than that, all these design win activities that happened in the last 4, 5 years and they started to ramp last couple of years. A lot of -- because the reason we have all these inventory, we have expanded capacities and we grow much faster than the average."}, {"role": "assistant", "content": "And now to answer your question directly; there is -- our customers, all these products during ramp, they have a pause [Phonetic] and they don't know what's coming in the new product and they push out. And so, we just cut in the period which is not bad because in the last 2 or 3 years we have been in unsustainable growth and hyper growth; it's like 30%, 40% year-over-year and that will break the company. And I'm glad to announce we're coming back to the normal and we will ride the global market uncertainties, and we just adapted in the past."}, {"role": "assistant", "content": "Okay, Bernie, maybe you can add some more detail."}, {"role": "assistant", "content": "Okay. I think Michael has really laid out a very compelling case as far as the growth that we've experienced over the last 3 years and also identifying that the automotive market remains solidly intact but particularly in Enterprise Data with the exception of AI that we are seeing lag in ordering patterns and general weakness in other markets. So, I think things to reinforce here is that business model here remains intact. We've built MPS around sustainable growth over the long haul and right now are looking at a quarter where end-customer demand is not picking up as well as we might have anticipated a quarter or two quarters ago. But again, the business model is intact."}, {"role": "user", "content": "That's great perspective. And as my follow-up, you talked about gross margin coming down very moderately because of higher value inventory. Could you talk about how long you expect that to play out and even some ranges? I mean, I assume maybe you'll get to -- I don't know -- 55%, 56% [Phonetic] gross margin. But any color you can give on how long that lower gross margin would last?"}, {"role": "assistant", "content": "Sure. And good news here is that cycle times and pricing, both in the fab, assembly houses are coming down. And so we'll be able to participate in the lower cost after we burn down inventory which is currently at about 203, 204 days. So, I would expect that we'll see a downward pressure on margins through Q2 and Q3 and then perhaps a moderation leveling in around Q4."}, {"role": "user", "content": "Yes. Go ahead, Michael."}, {"role": "assistant", "content": "Yes. I might as well add and clearly, we see we go into a downturn situation and we don't know, I guess, some segment will grow MPS is because a very diverse companies and some area would be still good. In general, consumer products and even some notebook may come back in the second year. And the point I'll try to make is regarding to gross margins, and as you noted in the past when the industry starts to slow down and again, MPS will be more aggressive in price and to gain more consumer segment of market because it can do 6 months later when you turn the knob we actively pursue those products 6 months later. Those are fast design cycles and you will turn the knob in revenues in 6 months' time; so we care less about short-term gross margins but long-term gross margins is still the same. So we emphasize -- as you know, in the last 10 years or so and we'll still pursue those models. And in the consumer segment, we made a short-term focus in the short-term to maintain the growth [Phonetic]."}, {"role": "user", "content": "Makes sense to me. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from Quinn Bolton of Needham. Your line is now open."}, {"role": "user", "content": "Hey guys, thanks for taking my questions. Just wanted to follow-up on Tore's question. Really, Michael and Bernie, as you look into the second half of the year, that's normally a seasonally stronger period for the company. Obviously, it feels like there are lots of puts and takes, lots of uncertainty, customers delaying product ramps. But can you give us a sense of how you're thinking about second half of this year? Will you see sort of normal seasonal uptick in September or are you thinking September could be flattish with kind of 1Q, 2Q run rates? Any additional color would be helpful just to try to think about the second half."}, {"role": "assistant", "content": "Sure. I think that right now, normal seasonality still applies but in our case, it's a little more muted because so much of our growth in business is attached to new product introductions being made by our customers. So if we look in Enterprise Data in which our major customers or the products that we're supporting have had product delays. And when you look at other aspects of the business, for example, Communications, that's still what I'd refer to as lumpy. It's not necessarily trending in a seasonal pattern; so I think your comment is very balanced and I'm tilting to the new product introductions being delayed probably being a large factor than just seasonality."}, {"role": "assistant", "content": "Yes. I think we can't say really like a normal seasonality anymore, I mean, we experienced in the past. And you have some segments that grow really well. I mean some segments hit kind of bottoms in the last Q3 -- last year Q4, especially like the notebook side. I mean now you see it's a wakening up. I mean, MPS has won orders in design as those are reference designs and have power solutions. And we see second half, mostly all other rest of our businesses other than AI, automotive, we don't -- we have no clear views; and so that's the short-term."}, {"role": "user", "content": "Understood. I wanted to follow-up on Enterprise Data segment. Obviously, weaker results; it sounds like some of the products or customer delays are sort of focused in this segment. Do you still think the new server cycle ramps that you get your share of the Vcore Power [Phonetic] management market towards 20%? Is that still a right opportunity to be thinking about long-term, even if some of these customer programs have pushed out by somewhat?"}, {"role": "assistant", "content": "Absolutely, I confidently say that. I mean because we see all these projects has not really fully ramped yet. In the data centers, clearly, you guys know better, I mean now slowed down dramatically. I don't know whether they overexpanded last couple of years and now slowed -- took a pause, okay? We don't have clear views. And what we know from last quarter to Q1 -- Q4, Q1 [Phonetic] to now and kind of slowed out."}, {"role": "assistant", "content": "And if I can add to that, again, using -- I know that you're focused right now on short-term as far as second half of the year. But in the GPU space for artificial intelligence, we have a very senior market share position. And as we look ahead to even the next generation, we're in a very good position to take advantage of next generation of GPUs. So we're really still in early stages as far as being to leverage up our position and expand our shares."}, {"role": "assistant", "content": "Yes, yes. That's I didn't add that part. The GPU part came in the AI side, we have current design wins and as well as next design and the futures we will release by the end of this year or next year. And those MPS products will ramp to this. Earlier, I referred to is that all these data centers, CPU powers or data center power overall and we still have maybe -- just if it's not a single digit, just barely double-digit market shares. And lot of -- and from -- transition from VR13 to VR14, and it's not completed yet; we've won lot of design wins in VR14 and it will turn into revenues."}]}, {"messages": [{"role": "system", "content": "Our next question is from Matt Ramsay of Cowen."}, {"role": "user", "content": "Guys, I wanted to ask -- I guess two-part question on gross margin and this is sort of -- you guys have been in -- gone from sort of 54%, 55%, 56% on steady cadence of 10 basis points to 20 basis points a quarter and that was amazingly steady. And then during the period of supply-demand imbalance, we jumped up to 58% or so and now we've come back in and you guys discussed that in the short term. But as you look out over next 2, 3 years and you think about our strategy to be aggressive and grow in contrast to some of the opportunities that you have for new design wins and higher content, maybe you could level set us on long-term gross margin. Has anything changed there? And where is the new normal? And I guess, second part of that thought guys -- have you seen any specific price pressures in any markets as some of your competitors maybe get more supply?"}, {"role": "assistant", "content": "Yes. Okay, let me answer your last part first. Any high volume -- our customers have multiple suppliers and they always have price pressures other than last 2 or 3 years. Other than that and they couldn't ship, only MPS who came. Most of the companies have struggled in shipments and MPS, we have less. And so nowadays all the higher volumes as we expected. And in the last couple of years also remember we didn't talk that much. We introduced new technology which is much lower the cost and there will be a fight; so to answer that part of the question. But earlier, I said it, I care less about gross margin lately, okay but we're still operating within the models, okay? We'll not dramatically go down. Clearly, it will go down and -- but in long-term model to answer your question -- 2 or 3 years out, the business -- MPS business is still pretty much intact and we are focused on those high values. We're transitioning from IC solutions to cell solutions; that still remains our focus. Our long-term business will go that way and will generate and offer more value and we have higher gross margins."}, {"role": "assistant", "content": "And I think just to polish off the comment there is that as far as our model, we've been operating over last several years between 55% and approaching 60% as far as non-GAAP gross margin. And as we introduce these higher-value products, they tend to have higher margins. And what that allows us to do is manage mix of business such that we stay within our model. So while we sort of anticipated in the near term downward pressure with flattening in the next 3 to 4 quarters, we'll continue to look to be opportunistic and managing gross margin to accelerate revenue growth."}, {"role": "user", "content": "Got it. As my follow-up -- and I apologize for this being near-term question but with all different end-market volatility. Bernie, if you could help us on your guidance by segment, just the revenue trends that you guys see in the June quarter; that would be great."}, {"role": "assistant", "content": "Sure. I think that we said earlier in this call."}, {"role": "assistant", "content": "It's fair to ask short-term question because this is -- very uncertain period."}, {"role": "assistant", "content": "So, I think to sort of make a simple point on it is that, Automotive continues to be doing very well and there -- it's both, the market itself as well as the share gains that we're enjoying. I said earlier that Communications is lumpy and other areas including Storage and Compute, Enterprise Data and Consumer and Industrial are sort of flattish for the near-term."}, {"role": "assistant", "content": "Well, the Storage -- in AI segment and in data center, if we -- Computing segment is -- maybe is flattish, okay. I mean, I think majority of our revenues have come from -- still come from servers. And you see the ramping in the last 18 months or so in the AI and the total portion -- AI in the total revenues is still a smaller percentage. And the other things I'm pointing out, there's memory sections. I mean, they're changing new formats and they start to ramp now. This is the result that we're kind of flattish, okay? I mean it depends on how fast you ramp up to DDR5 [Phonetic]. MPS has -- have engaged with all the major memory companies that we have designs -- we have design wins. And if they ramp up faster then -- and we will -- we will again - we'll increase that portion of revenues. And it's depending on what the DDR5 will ramp up."}, {"role": "user", "content": "All right, okay. Thanks."}]}, {"messages": [{"role": "system", "content": "Our next question is going to be from Rick Schafer of Oppenheimer. Rick, your line is now open."}, {"role": "user", "content": "Thanks. I appreciate all the color so far, you guys. Maybe if I could ask one on 48-volt back on the AI for the question. I know you heard you say Michael -- sorry, Bernie said that, I think, he had said senior market share position there. I'm curious with your primary competitor in 48-volt apparently still struggling. I mean are we at a point now if we look at 2023, where you guys think you'll likely stay sort of sole source -- sort of A100 [Phonetic] and H100 this year? And I'm curious as part of that question; I heard you mentioned contents there. So is there any color you can give us around what contents as we transition to sort of more powerful accelerators overtime? I mean is it similar to what you guys have talked about with the move from VR13 to VR14 on Vcore Power [Phonetic] where you're talking about going from sort of $50 a comp sort of to something like $70? And then finally, Michael, for you; I'm really curious, are you -- who else are you seeing out there working on 48-volt power? This seems to be a pretty solid and growing market."}, {"role": "assistant", "content": "Okay. Let me answer my part first and I'll get in."}, {"role": "assistant", "content": "That's more fun part."}, {"role": "assistant", "content": "From the landscape, I truly say, like -- I mean, we don't -- we see some competition in the game. I think our products remained the best so far. And -- so that's why -- so we have -- and we do see some other competition, maybe as generation later came in. As that market segment grows and competition will come. And like -- I mean, the market is too big for MPS and we welcome other people. And we welcome -- as a matter of fact, that's what we're doing in that, okay. And as MPS is not big enough for that market but we will be glad to be leaders."}, {"role": "assistant", "content": "And again, reinforcing Michael's point there is that it actually we enjoy a leadership position and we expect to continue to, competition is very important as far as driving technology improvements. As far as your other question as far as dollar content, when we look at CPU market, generally we denominate it with dual processors. And so based on that we are able to offer expectations of what average selling price will be per server. With GPU's model still sorting itself out where you can have any number of configurations upto including 8 GPU boards; so it's very -- it's a little harder to denominate what our dollar content is. And again, we're still in early stages of watching this model ramp. So I think that we'll have enough experience in about 2 to 3 quarters to have more accurate reads on the dollar content but it's much higher than what we are experiencing with CPUs."}, {"role": "user", "content": "And for my follow-up, I'd love to ask you about 5G RAN [Phonetic]. I know you guys have said in the past you're selling to big 3 RAN [Phonetic] equipment OEMs. I'm just curious how you would describe the ramp there in terms of content, in terms of share? And what I am trying to do is get a sense of how big 5G is now versus how big it could be for you guys. And to something you mentioned earlier, Bernie I'm just really curious here, could the ramp in 5G sort of smoothen some of the lumpiness you described in Comm segment?"}, {"role": "assistant", "content": "Yes. If I was to draw a comparison of experiences with Enterprise Data where we started out with low dollar content and then graduated up the value chain including power management; we're probably about 3 to 4 years behind in Communications market where we're still focusing on low dollar content for -- like point-of-load and E-fuse [Phonetic]. Now where this is about to get very exciting is we are getting adoptions for later designs that include our power management for processors. So at this stage we're sort of moving with the market -- again, as an early entrant. But long-term, I do think you're going to see similar growth profile as what we expect to have with Enterprise Data."}, {"role": "assistant", "content": "Yes. And immediately now -- I keep saying MPS is a small company but we're not nobody anymore. And we engage with all these customers -- these 5G makers and it's only handful of companies as of speaking now; so we're in process of signing on contracts now, and so all of these -- and it's just a matter of time."}, {"role": "user", "content": "Thanks for the color."}]}, {"messages": [{"role": "system", "content": "Our next question is from Ross Seymore of Deutsche Bank. Your line is open."}, {"role": "user", "content": "Hi guys. Can you hear me?"}, {"role": "assistant", "content": "We have a high inventory, yes."}, {"role": "user", "content": "How about the channel inventory; we've heard bunch of companies talked about the channels coming down and that's a headwind to revenue growth. I know you guys proactively manage that. So you put it on your own balance sheet but what's the channel looking like?"}, {"role": "assistant", "content": "It's also on the high side."}, {"role": "assistant", "content": "Yes. About 3 quarters ago, we saw an increase in channel inventories and they've remained at about that same level. So there isn't any real new news as far as the sell-through characteristics."}, {"role": "user", "content": "Is that something that's weighing against your revenue right now? Or are you comfortable running at relatively higher level?"}, {"role": "assistant", "content": "No. We wanted lower and we want to lower, and particularly, in the first quarters and a lot of customer threatens and get much higher volumes, okay? That's why we shipped and they have kind of break [Phonetic]; and as a result, inventory didn't decrease that much in channels."}, {"role": "user", "content": "So, it went down on your books more so than in the channel?"}, {"role": "assistant", "content": "Yes. The way to look at another aspect to this is that the inventory in the channel, it depends on what our end customers' lead times are. And as we even commented in the prepared comments, we're seeing very unusual demand pattern in that we have 3 areas where we're seeing acceleration as far as ordering pattern. But they're doing it with a very -- an expectation of having a very short lead time. So as Michael said earlier that the channel is built up in anticipation that the customers are going to realize the sales gains with new products but as those have been pushed out, that left us in this position. So we're going to continue to manage channels as we always have; but right now, as I said, it's at an elevated level."}, {"role": "user", "content": "Got it. And then one on the gross margin for you, Bernie. When you talked about the headwinds, we see this across the board; so I don't think it's anything particularly different for Monolithic. But one thing you didn't mention was mix. I get that you are carrying higher cost inventory and it takes a while to flush-through. But as you go opportunistically into the consumer market, is that rising as a percentage of sales -- something that is also weighing against gross margins? And if so, when do you think that will kind of normalize as a percentage of sales, if not decrease?"}, {"role": "assistant", "content": "Yes, you can see it as normal because consumer market hasn't happened yet. We reduced -- we've down -- consumer down to the big percentage now, okay. And mostly it's a high-value inventory."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from William Stein of Truist. Your line is now open."}, {"role": "user", "content": "Great. Thank you for taking my questions. Regarding something you just spoke about a moment ago, you spoke about elevated inventory and push outs of projects. I think obsolescence risk is relatively small for Monolithic but maybe you can reassure us on that matter?"}, {"role": "assistant", "content": "Absolutely; actually, very helpful question. If you look at our history, we've never had significant inventory write-offs, and lots of the reasons around that is our products have long life in the market and long shelf-life. So, we're actually -- if you look back at 2019, we built up inventories and we're able to capitalize when the market bounced back in '20 and particularly when the pandemic, infusion of capital occurred. So, we don't see inventory on our balance sheet as a negative; and in fact, when markets do get more stabilized, particularly in Enterprise Data and in Storage and Computing, I think we're well positioned to take advantage of that uplift."}, {"role": "user", "content": "Great. And then, like -- to sort of ask a double question about supply and supply base. Other analog companies have talked about how their foundries are absolutely not cutting cost and they never see it happening but you've highlighted this trend in your business. Is it because you're on more advanced nodes and so that's just how sort of pricing in that market works? And then, maybe you could also comment on the manufacturing plans, both in terms of long-term capacity and geographic diversity?"}, {"role": "assistant", "content": "Yes. You know that we advance our technology every 2 or 3 years, and we're relentlessly cutting costs and utilize better technologies, get better geometries. The fab -- now in the last 3 years, the fab costs is not lower, higher, as a matter of fact. But we utilized the geometries and also new technologies that we implement; we will be able to lower costs. And so, the other question that you're making is a diversified manufacturing. So, we anticipated that -- again, we announced that we have a new partnership outside of China; that's in Singapore and we will continue to do so. But really outside, there's no U.S. manufacturing for our application, for our product. I mean, it's all resides in Asia, Korea, like Taiwan and Southeast Asia. And in all our module business, we can do it from our side outside of China."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] As there are no further questions, I would now like to turn the webinar back over to Bernie."}, {"role": "assistant", "content": "I'd like to thank you all for joining us for the Q1 2023 earnings webinar. I look forward to talking to you again during our second quarter conference call which would likely be in July. Thank you. Have a nice day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your first question comes from Logan Langan with Wells Fargo."}, {"role": "user", "content": "Thanks. It's Colin. I just want to follow up on the comments. I'm not sure if I misheard, did you say there's -- you're expecting $65 million of inflationary costs for the year. I thought the initial guidance was reflecting something that it would be not material for the year?"}, {"role": "assistant", "content": "That's correct. We've effectively increased the expectation of the net inflation cost to $65 million. It was relatively small in our previous guidance, but the increase as we've seen the continued escalation of supplier costs, predominantly noncommodity-related costs. But despite that, we're continuing to expect to hold our margin guide 10.0% to 10.4% for the full year."}, {"role": "user", "content": "Got it. Okay. And it's actually -- it's not related to the steel price, that's actually related to your supplier cost of pressure coming through?"}, {"role": "assistant", "content": "It really is. I mean, if you look at indices, commodity indices are a little bit all over the place. You have certain indices -- certain steel indices, aluminum are down on a year-over-year basis. You have copper, which is actually up relative to the second half of the year. And you have nickel and stainless steel that are actually up on a year-over-year basis. So commodities are a little bit of a mixed story, but the bulk of what we're seeing come through is really noncommodity-related, the other inflationary costs coming through the supply base."}, {"role": "user", "content": "And what helps you keep your guidance, I guess, actually slightly up but you [Indecipherable] sales, but with the $65 million incremental headwind, what's offsetting that?"}, {"role": "assistant", "content": "Yes, the continued performance of the business and conversion on incremental revenue. So we continue to have confidence in our ability to deliver on that conversion, which mitigates the impact of that $65 million."}, {"role": "user", "content": "And just lastly, Fuel Systems looked pretty weak in the quarter. Anything unusual going on in Q1? And should that sort of bounce back? Or is that kind of stay at these kind of levels?"}, {"role": "assistant", "content": "Yes. Fuel Systems was one of the segments most impacted by some of the China mix issues we saw, particularly China [Indecipherable]. So that had an impact on margin. In addition, the segment also saw some impacts from higher supplier related costs and higher R&D costs. But as we look at the business on a full year basis, we do expect much like the rest of BorgWarner, to see sequential improvement over the balance of the year and fully expect that business will continue to perform in line with where it's been performing in the last couple of years."}, {"role": "user", "content": "Got it. Thank you for taking my question."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Noah Kaye with Oppenheimer."}, {"role": "user", "content": "Good morning. Thank you for taking the question. Thank you for breaking out ePropulsion. Very helpful to get that visibility. I guess, would it be fair to say that getting to the high end of the revenue guide for ePropulsion really depends on production cadence and supply chain. And would that primarily be a function of your own supply chain for electronics and other components? Or is that more gated by the OEMs?"}, {"role": "assistant", "content": "No, I would say that -- yes, it's not demand related. It's -- if we get the chips we'll be at 1,800. If we don't get enough chips, we'll be at 1,500. So it's essentially linked to the ability to get what we need in order to deliver the demand."}, {"role": "user", "content": "And your thoughts on line of sight to getting the chips thus far in the year?"}, {"role": "assistant", "content": "Well, that's what -- I mean we have teams of people working really hard with our suppliers. And so far, so good, I would say. But we still have volatility. And as you know, the supply chain is -- has no buffer whatsoever. So do you have a little blip somewhere, and it impacts us in our ability to ship. So that's why you have that band of revenue that is still open from 1500 to 1800"}, {"role": "user", "content": "And then just the last one. I mean the margin trajectory in ePropulsion, should we potentially extrapolate similar incrementals moving into 2024. And I think the dynamics here of the gross profit contributions more than offsetting the R&D increases, is what we're seeing here from 1Q to 4Q kind of a fair trend line to continue?"}, {"role": "assistant", "content": "I think it's a fair way to think about it. I mean, it's what we've been suggesting all along is that as we start to get the scale and start to see the revenue ramp up. That revenue ramp up drives gross margin and the pace of that growth is outpacing the growth in R&D. You can see the R&D starting to flatten a little bit more relative to that growth. So as we get beyond '23 and into '24 and beyond, we do expect to see that continued improvement in the margin trajectory linked to the continued growth in the eProduct-related revenue."}, {"role": "user", "content": "Okay. Thanks so much."}]}, {"messages": [{"role": "system", "content": "Your next question comes from James Picariello with BNP Paribas. Your line is open."}, {"role": "user", "content": "Can you hear me?"}, {"role": "assistant", "content": "Yes. Loud and clear."}, {"role": "user", "content": "Good morning guys. So the PHINIA spin is now targeted by -- to be completed by the end of the third quarter. Any thoughts or color on the timing of the CMD and the capital structure potentially for PHINIA?"}, {"role": "assistant", "content": "Yes. I think nothing has changed really. We're getting more precise. The teams are doing a great job, and we'll come back to you when we have even more precision on those dates, but we're marching towards end of the third -- by the third quarter, and it's another work, but people are working really diligently and just wanted to give you a bit more precision."}, {"role": "assistant", "content": "And so as we get more honed in on a particular date, then we'll be in a position to talk about when those investor days might be for both companies. And at that time, we'll also talk about the capital structure of both businesses."}, {"role": "user", "content": "Got it. And then on the commodities front, so the net impact now for the year at $65 million headwind. As you think about the topline recovery component of this, as last year, I believe it was roughly $580 million flowing through your revenue in terms of commodity recovery. What does that number now look like within your revenue guidance?"}, {"role": "assistant", "content": "On a year-over-year basis, it contributes about a point to our revenue. So that -- and net of that recovery, we end up with $65 million of headwind."}, {"role": "user", "content": "Understood. Thank you again."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Emmanuel Rosner with Deutsche Bank."}, {"role": "user", "content": "Thanks so much. So just to clarify in the inflation headwind, so are you expecting $65 million on a full year basis as a net number? And then $28 million of that happened in the first quarter. Is that correct?"}, {"role": "assistant", "content": "That's correct."}, {"role": "user", "content": "And I guess the general drivers of sort of improvement in sort of like total incremental margins from the first quarter to the rest of the year. So you would have a higher proportion of recoveries, I guess, on that growth headwind -- inflation headwind? What are the drivers would you point to?"}, {"role": "assistant", "content": "Yes. I mean, fundamentally, the two things that really drive the performance over the balance of the year: One is, we do expect to start to generate some of the customer recoveries linked to the inflationary headwinds. So the biggest headwind is really in the first quarter. But second, we do see sequential improvements in revenues and converting on that over time. I mean if you look at our Q1 revenue is $4.180 billion. If you look at the midpoint of our guide, it suggests that the average quarter for the last three quarters is higher by $260 million of revenue. So there's still revenue growth coming over the balance of the year, particularly driven by the growth in our eProduct portfolio. So converting on that as well as mitigating some of these inflation impacts over the balance of the year are really what drives the conversion and gets us to that 10.0% to 10.4% margin for the full year."}, {"role": "user", "content": "And this is tied to the timing of your launches?"}, {"role": "assistant", "content": "Correct. It's really the ramp-up of our eProduct revenue over the balance of the year. And you can really see it in that ePropulsion segment disclosure that we had in the deck that the primary driver of that growth growing from $487 million of revenue in Q1 to $750 million to $850 million in Q4 is eProducts. And so really capitalizing on that growth is what we're looking for over the balance of the year."}, {"role": "user", "content": "Thank you so much. And then following [Indecipherable] just on that disclosure. So eProducts expected to be about 2/3 of the net segment sales. I guess what else is in ePropulsion?"}, {"role": "assistant", "content": "Predominantly electronics."}, {"role": "user", "content": "Understood. Thank you so much."}]}, {"messages": [{"role": "system", "content": "Your next question comes from John Murphy with Bank of America."}, {"role": "user", "content": "Good morning guys. I just wanted to focus on slide 13. Kevin, you kind of alluded to that 2/3 of actual electric product will be in this ePropulsion segment. And that kind of sort of indicated there's about $1.3 billion in 2023 that's outside of this segment, and I'm presuming that's all in Drivetrain and battery. If that's correct, are we looking at a similar progression in the profitability in that other $1.3 billion? PHINIA right now, and they'll get to breakeven or better by the end of the year?"}, {"role": "assistant", "content": "Yes. I mean I think your $1.3 billion is a little bit high when you're doing the math on that because we're guiding to overall the $2.5 billion to $2.8 billion of eProduct revenue. So when you do 1/3 of that, it's going to be a little bit less than that number. But where you see the other pockets of eProducts related revenue are really the battery pack business, which is in the Drivetrain and Battery Systems segment. You have a lot of our thermal products, which is in the air management segment as well as the charging stations, which are in the air management segment as well. So that's really where you see the other components of the eProduct related portfolio. In terms of the trajectory, I think it's right to think that what you see on slide 13 is the right template or a way to think about the progression of margin in any one of those eProduct businesses."}, {"role": "assistant", "content": "They start off by generating losses when they don't have much revenue scale because we're making a lot of upfront investment, particularly in R&D and other start-up costs. And as we start to get the scale and we start to grow revenue to the point where the revenue growth outpaces the gross than R&D, we start to drive profitability. So when you look at the eProduct portfolio within ePropulsion, we're already starting to get to that scale point. Some of the other businesses are simply at different points of maturity along the way. But as they get to the same levels of maturity as what we see in the ePropulsion, we expect the exact same type of trajectory."}, {"role": "user", "content": "Okay. And then just to follow up on that. I mean, the midpoint is $2.6 billion, that's 2/3 of your total eProducts that would indicate there's another $1.3 billion outside. That's the math. I mean is there something else -- am I just misunderstanding something?"}, {"role": "assistant", "content": "I mean $2.6 billion divided by $3 billion gets you about $850 million to $900 million. So it's..."}, {"role": "user", "content": "Oh you're saying that's the total? Okay. That's -- because the way this is shown is if that's what's in the ePropulsion segment, you're seeing that -- so you're saying that's the full number?"}, {"role": "assistant", "content": "The expected net -- the $2.5 billion to $2.7 billion, that's the ePropulsion segment revenue, 2/3 of which is eProduct related. It also happens to correspond to being 2/3 of BorgWarner's total eProduct revenue is also in this segment."}, {"role": "user", "content": "So basically, we should be thinking about $866 million outside of the segment. Is that correct?"}, {"role": "assistant", "content": "Ballpark."}, {"role": "user", "content": "Okay.Got it. I just want to make sure we got that right. Then just a second question. When we think about PHINIA, it sounds like this is going faster than expected so it sounds like there's good progress. How should we think about post separation potentially stranded costs and opportunities to work those down?"}, {"role": "assistant", "content": "If -- I mean, from a cost perspective, we'll talk about that more when we get to the Investor Day that we expect to have closer to the date of the spin. And when you think of the potential dissynergies we see from the transaction, one of them is just, as you're alluding to, some of the incremental costs associated with establishing a corporate cost structure for a new public company, PHINIA. So we'll give more details on that and the impact overall of that synergy, but as we look at it, the value creation opportunity of creating two separate companies, both focused on pursuing their independent strategies more than offsets the potential dissynergy associated with setting up the corporate cost structure for PHINIA."}, {"role": "assistant", "content": "John, the PHINIA is made of two reporting segments that we run under the board on a decentralized operating model. So besides the creation of a top co, there is not much stranded costs."}, {"role": "user", "content": "That's very helpful. Thank you so much guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Adam Jonas with Morgan Stanley."}, {"role": "user", "content": "Thanks everybody. So for your internal combustion businesses, across air management and within Drivetrain, given they're in some, let's say, early stage of a runoff phase, I would imagine that the capital requirements for these businesses in a runoff over the next 10 or 20 years, maybe very different versus the past 10 or 20 years. Can you confirm the capex and R&D spend, for example, as a percentage of sales for the ICE focused products can decline versus history? And can you quantify that? Thanks. First, I would say that what we're doing with the plant in Seneca, which is our biggest plant in North America is a good proxy of what we're doing to utilize the capital and the human capital that we have in our foundational products, putting battery pack in there. If you look at eHeaters and we announced more than four million eHeaters in 2025. We are using plant in Michigan and Portugal and China for motors, iDMs. We're using Wuhan and Xianjing and Korea and North America. Also in Mexico, we have a power to [Indecipherable] program were already about 300 engineers have gone through, and there are, I would say, now very up to their task in the world of [Indecipherable]. So we are focusing on utilizing both capital and human capital when we also make the transition from C2E. From a capital standpoint, R&D standpoint, we think that -- and Q1 is a good proxy, too. eR&D goes up. CR&D goes down pretty much equally or proportionally. Capital is very, very limited. And what we do when -- and since quite some years, combustion businesses are quoted with the amortization of the full capital in the length of the program with volume closes. So I think we're doing everything that is possible to limit debt risk. That's great, Fred. Just as a follow-up on your EV backlog, I would be very interested in your comments on how you see the Chinese-based domestic China EV players growing in your book vis-a-vis the legacy European, Asian and U.S. EV products. How is that backlog tilting?"}, {"role": "assistant", "content": "Yes, just give you a high-level set of numbers. So this year, we're guiding $2.3 billion to $2.6 billion of eProducts. And in 2025, about $5.6 billion. And that's 50% CAGR, just to give you a perspective on how fast we're growing in this field. In China, our business is 70% with the local Chinese. It was actually the other way around five, six years ago. But the vast majority of our business is with the Chinese OEMs. And out of that 70%, 50% of those are with the big guys, the top Chinese OEMs. I hope that helps."}, {"role": "user", "content": "It does. Thanks."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Dan Murphy with Barclays."}, {"role": "user", "content": "Good morning. Thanks for taking the question. I wanted to just start on the incremental margins. So I appreciate the exposure that ex the inflation in R&D would have been 19%. But just in light of an environment where some of the supply constraints seem to be dissipating and you're coming off of relatively, I'd say, easier comps -- more difficult situation a year ago. Is it possible that as the year progresses, ex-R&D, ex-inflation that, that incremental margin goes higher?"}, {"role": "assistant", "content": "Yes, I think we're pretty comfortable with where the guide is right now. I mean, when you cut through the math and you look at the full year guide, excluding the eProduct-related R&D, we're expecting to be converting at about 16-plus percent year-over-year, and that's inclusive of the $65 million net material inflation headwind. So it suggests without that headwind, we'd be converting even higher. So we're pretty pleased with that level of conversion in spite of the fact that we're seeing material inflation pressures in the year."}, {"role": "user", "content": "Okay. Understood. Thank you. And then as a follow-up, I wanted to just ask about silicon carbide. A, could you just remind us of your inverter backlog, how much of that is silicon carbide versus IGBT? And then, b, we heard a comment from Tesla at its Investor Day plans to reduce silicon carbide content by 3/4. I'm just wondering, in the future, how you're looking at the design of your inverters, whether you think that you can reduce silicon carbide content -- in general, what the direction is on silicon carbide?"}, {"role": "assistant", "content": "I'll start with the second half of your question. The way we use silicon carbide and if you do teardowns and analysis, we use silicon carbide with cooling on both sides. And the more power you can get through silicon carbide is related to how smartly you cool those chips, and we think we're actually more competitive from a power density standpoint, thanks to our thermal management and the cooling on both sides than some of the competitions. That's item one. Item two, some people are talking about reduction of usage of silicon carbide and we do exactly the same."}, {"role": "assistant", "content": "This is something that we all do and all those things are part of our product roadmap. It doesn't mean that the need for silicon carbide is reducing. It is still increasing, and we're very happy to have secured the capacity corridor with Wolfspeed in order to deliver on our long-range plan. The first part of your question was around what's the share of silicon carbide versus silicon on our inverter business, I would say that, if you look at the announcement that we've seen, we're more tilted towards high-end, high-voltage silicon carbide than lower voltage silicon type of products with an average price around $700 a top. So that's why I would say we're all tilted towards the most advanced inverters in the marketplace."}, {"role": "user", "content": "Thanks. And within the context of automakers trying to drive cost down to make EVs more affordable, is there -- are you seeing a push from automakers to sort of reduce the silicon carbide content to make the inverters more affordable?"}, {"role": "assistant", "content": "The puts and takes are a little bit more complex than this, and you need to put -- take into consideration the power output, the level of battery pack, the range, etc.. And it all depends about -- I think it all depends upon the what -- the carmaker wants to do, what car type, what end products they want to put in the marketplace. The push for efficiency such that we don't see a slowdown in the usage of silicon carbide. And most of the things that we see in the marketplace is pushing for more efficiency and more efficiency, more range or smaller batteries is sometimes linked to usage of silicon carbide. But overall, you should ask your OEMs that question because the strategy that we have -- that they have is more linked to their system and how they want to put their differentiation into the marketplace."}, {"role": "user", "content": "All right. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Luke Junk with Baird."}, {"role": "user", "content": "Good morning. Thanks fro taking my question. For starters, I was hoping we could just unpack what's currently reflected in your ePropulsion gross margins there about 15.5% this quarter, not far off from BorgWarner? And what's inherent in the incremental growth profit in terms of a margin assumption as you look through the rest of '23, especially what you'd anticipate gross margins to look like as you ramp volumes and launch new product eProduct business, should we expect that margin percentage to move higher as well in addition to just the higher GP dollars?"}, {"role": "assistant", "content": "Yes, yes. I mean you should expect the gross margin percentage to be improving. If you cut through the math of what's on that slide 13, it implies that there's improvement in gross margin. And one of the main reasons you see that is we're growing into the fixed assets as well because there's depreciation in the gross margin that's not fully up to scale yet. So by the time you get to Q4, you would expect to see an improvement from that 15% level you're calculating."}, {"role": "user", "content": "And then a follow-up question. Just quickly, did you say you're expecting now slightly higher recoveries if you just speak to what's driving that? And how that aligns with the remaining price execution this year versus what you've already achieved? Thank you."}, {"role": "assistant", "content": "Yes. Luke, it is obvious that those negotiations take some time like it did last year, we expect that it's not going to take as much time as last year since we have a pretty robust framework that was used last year to negotiate the inflationary headwinds. And the negotiations are happening. We're pretty pleased with the pace that it's going. It's just not happening in Q1. It's going to take Q2, maybe early Q3 to get to where we want to be."}, {"role": "user", "content": "I'll leave it there. Thank you."}]}, {"messages": [{"role": "system", "content": "We have time for one final question. Your last question comes from Mark Delaney with Goldman Sachs."}, {"role": "user", "content": "Good morning and thank you very mihc for takint the question. First one, sticking on the semiconductor side. I was hoping to better understand the flexibility that BorgWarner has as you think about procurement and supporting your customers either in terms of having multiple silicon carbide supply sources or being able to perhaps flex between IGBT and silicon carbide? I ask in part because you guys have made public your announcement in Wolfspeed, I think a few weeks ago, they talked about a slower ramp-up of their the Mohawk Valley fab. So anything you can help us understand around your ability to perhaps derisk from one supplier?"}, {"role": "assistant", "content": "Yes, so the -- we have full flexibility from a design standpoint, 400-volts, 800-volt silicon, silicon carbide, very modular, that is clear and we are pretty relevant in all those inverter types, full flexibility from a manufacturing standpoint also. Regarding the agreement with Wolfspeed, this is not an exclusive agreement. So we can get silicon carbide from other sources, and we can also work with direct source if the OEM wants to us to work with a particular silicon carbide maker. So we feel pretty comfortable about the different level of support and optionalities that we have related to our growth in inverters."}, {"role": "user", "content": "Very helpful context. And another was just on the design and environment. And you guys have had for a number of quarters, some good traction designing in your EV powertrain products. Given how competitive the EV market is for OEMs in terms of the prices in the market. And Chris, are you seeing any incremental interest from OEMs turning to BorgWarner for some of your powertrain products perhaps as a way for them to be more efficient in the near term using BorgWarner as opposed to maybe trying to do some of their own work in-house? Thanks."}, {"role": "assistant", "content": "We're very happy with the cadence of discussions that we have -- development, advanced development and bookings that we have with a lot of customers around the world. And the drumbeat is only increasing. It is absolutely clear that when we produce north of three million inverters in 2025 and two million to three million inverters, scale matters and scale brings competitiveness and scale brings the ability to design and manufacture in a very modular and flexible way. So we're happy with the scale that we've gained pretty rapidly. And what we hear from our customers is that, as usual, with BorgWarner, our products are at the forefront of efficiency without talking about fuel efficiency, but we're talking about electronic efficiency and low power losses. And I think we're doing a pretty good job here."}, {"role": "user", "content": "With that, I'd like to thank you all for your great questions today. Britney, you can go ahead and conclude today's call."}]}, {"messages": [{"role": "system", "content": "Our first question comes from the line of Julian Dumoulin-Smith from Bank of America. Please proceed."}, {"role": "assistant", "content": "Hey, good morning, team. Thanks for the time. Appreciate it."}, {"role": "assistant", "content": "Good morning here."}, {"role": "user", "content": "Hey, good morning. Thank you."}, {"role": "assistant", "content": "Look, nicely done, guys. I wanted to maybe kick things off quickly. Texas legislature looking at potentially using some of their surplus here potentially look at paying down some of the securitization here. Can you comment on that a little bit here? What are your expectations? Any nuances there? And then ultimately, I would presume that this would effectively never hit customer bills, but I just want to understand sort of the timing and mechanics as to how it's been collected, how it looks like for you guys specifically?"}, {"role": "assistant", "content": "Yes. From a technical basis, Julien, that is correct. We continue to follow that as well as other legislation across our entire system. So not going to try and predict or comment too much further on it than that at this point. If there are any questions or anything that comes up from the committees or those that are sponsoring that, obviously, we're standing by and prepared to answer that for them. But on a system-wide basis, on a legislative perspective, things have kind of been on a consistent theme, if you will, this year, that being damage prevention across all of our jurisdictions has been enhanced as well as some of our jurisdictions looking at energy efficiency programs at the state level as well."}, {"role": "assistant", "content": "So we're very pleased with that. And additionally, I don't know if you've seen out there, but a couple more states have come on to approve all fuels or customer choice legislation, which provides about 24 states, I think, now across the country that has done that as well as, I think, three states right now have approved legislation for freedom to cook in their particular jurisdiction. So that's a quick recap across our territory on legislative action."}, {"role": "assistant", "content": "Actually since you bring it up, maybe I'd love to get your perspective on this. Colorado has had some discussions of late across both the PC and then also, in particular, the legislative side on I suppose, gas bills broadly. Any perspectives therein on where this could go? I mean, it seems a little bit -- it lacks specificity, shall we say."}, {"role": "assistant", "content": "Well, no crystal ball here, Julien. I can tell you that for sure. But with that committee, with ongoing committees there in any legislature when we're asked, we'll certainly participate. We'll provide testimony, we'll provide feedback for our expert opinion. We're going to continue to watch that stay close to it, but also work with the PUC. If they come up with any questions, comments or open any dockets, we're certainly available to provide our feedback as well as our gas supply team that does a tremendous job each year in and out to make sure we get access to reliable supply for our customers."}, {"role": "assistant", "content": "Right. And just going back quickly, a little nuance. You alluded to it in your remarks. On O&M, I mean, seemingly holding the line fairly well here despite a consistently inflationary environment. Can you comment a little bit about what you're seeing out there? I mean, obviously, some of your peers had less success in managing their costs here. Can you comment a little bit about the clarity that you have and the line of sight here and just perhaps what that implies going forward as well?"}, {"role": "user", "content": "Sure, Julien. This is Chris. Working back closely with our operations team, just kind of looking really line by line opportunities where we could potentially defer items that are not compliance-related or safety related or with the system at risk. Similar to what we did there in the pandemic. A few levers there that we might be able to pull. Additionally, a lot just depends on timing of when contracts are executed in terms of locking in costs for a 12- to 18-month period, what we got in contracts kind of at the early part of our fiscal year."}, {"role": "user", "content": "So at that point, we had locked in some contracts. We have a better line of sight, at least in terms of labor costs with respect to some of these third-party services which leads the variable -- just the number of locates, for example, that we might have to manage. And we did some sensitivity work around that. So those are just a couple of examples of how we're trying to look forward, manage your O&M within what we're capable of doing, while it can certainly providing a safe able service on the system."}, {"role": "assistant", "content": "Yes. And I'll just close that, Julien. As Chris has said before and I've said before on these calls, we're not a just-in-time company when it comes to integrity work, O&M work, those safety-related items on our system. We like to stay well in advance of that, and that does provide some additional flexibility for us when we need it, certainly can speed things up or move things from one period to another. So that's an additional lever we have."}, {"role": "assistant", "content": "Excellent. Thank you, Tim, best of luck."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] I would now like to turn the call over to Dan Meziere for closing remarks."}, {"role": "user", "content": "We appreciate your interest in Atmos Energy, and thank you for joining us. A recording of this call is available for replay on our website through June 30, 2023. Have a good day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question will come from Susan Anderson with Canaccord Genuity. You may now go-ahead."}, {"role": "user", "content": "Hi, good morning. Thanks for taking my question and Congratulations on your retirement. You've done a great job setting the company up for future success. Yes. So maybe just I wanted to drill down a little bit first on the gross margin, the 400 basis points. I think you said 130 bps from the recalls with the HRA distributor. I guess, how much of that was the infant formula? And then also, if you could maybe just give a little bit more color on the rest of the drivers there between pricing, mix, maybe currency, etc?"}, {"role": "assistant", "content": "Okay. why don't I take, Eduardo, the first part, which I just want to sort of talk relative to the gross margin across the businesses and then you can break up the individual drivers. So yes, the gross margin from last year to this year was on CSCA, 310 gross margin points. So I think if you look at it, the important parts are -- excuse me, it was up more than 310. OTC was up 450, so it went from 25% last year to a 30% gross margin. Oral care went from 25.3% to 28.9%, up 360, but Nutrition had a significant decline and it had even a bigger decline from the fourth quarter to the first quarter, and that was related to the recall. I mean, you had a big hit on that."}, {"role": "assistant", "content": "CSCI actually had a 480 basis point increase. So every part of our business expanded significantly from a growth margin standpoint, and it's progressing just as we expected, but you had hits and Eduardo can quantify these on purposefully with the HRA, not recall -- moving from distributor to our own sales force and then you had two recalls that hit $17 million or roughly $0.10 of the business was so strong. It covered it. But I want to be very clear, our margin programs are working beautifully. They're not pricing driven or some in recovery, but they are all the kind of things that you want that will continue to expand and grow over time, especially as we have our highest margin businesses are growing the fastest in the company. Now Eduardo will get to your specifics on the drivers. Go ahead Eduardo."}, {"role": "user", "content": "Yes. So talking specifically there, Susan. So between the Good Start impact as compared to last year, we had about 50 basis points there. And also on the inventory transition on HRA about 40 basis points. And we also had around 40 basis points related to the OTC recall that we announced there. And so on the flip side, pricing had a positive impact of about 300 basis points and volume and mix about 160 basis points positively. And those combined more than offset the impact we had on inflation and input cost that was about 230 basis points."}, {"role": "user", "content": "Okay. Great. That was really helpful. And then on the infant formula business, I guess, do you expect there to be a sales impact, it sounds like the rest of the year or two with the changes from the FDA? And then also, how much will this pressure be on sales and margin and how long will it take you to get back in stock. And just in terms of raising prices, do you guys have an idea of what that will be and the timing? And then I guess pricing does increase across the category. I would assume this is actually helpful to your private label business, correct?"}, {"role": "assistant", "content": "Yes. Those were a lot of questions. So let me make sure I cover up, I don't get to every piece of it, just to ask it again. But let's just go back here a little bit. I think it's really important to say that this letter was sort of a shock to the system. It's very well intended. I'm not sure whoever wrote it fully understands the impact of manufacturing and output for the industry, especially during a period of time when there are shortages. But I want to be very clear that the Perrigo quality control system did not break down during the first quarter. If it had been three weeks earlier, prior to this letter coming out, there would have been no recall. So the quality control measures that were in place of how much product to throw away, etc, if you get any variation that has been in place for decades, there would not have been a recall. Okay?"}, {"role": "assistant", "content": "The FDA given what happened last year and pressure from Congress and others have tried to raise safety up to another level, very admirable, but it has an impact, and that's what you're talking about now. So we -- full plant sanitizations and shutdowns, there'll be more of them, it will have a negative input on product, but all of that including the sales will be offset by the pricing, okay? So what you lose in a little bit of volume, you're going to gain an additional pricing in cost, and then we still see it as making our original plan on the infant formula business, it will just be a little bit more back loaded. Pricing here, we don't -- we're not pricing relative to the competition. We're pricing to offset this higher cost and lower productivity."}, {"role": "assistant", "content": "And -- but it just so happens that after the pricing that is necessary to do that will be about 25% on our price value business, store brand business will be about 25% cheaper on an absolute unit. We give away couple more ounces on a cost per ounce basis, we'll actually be at a 40% discount after the pricing. Customers hate price increases. I just spent five days of NACDS, our biggest conference. They all understood this. They understood that there was a change and that we have to be able to produce and make a margin, and they understood that we weren't expanding margins on this. We were just literally addressing this regulatory change. So I think it will be very well supported. Nobody likes pricing when you're a value competitor. But in this case, it's absolutely necessary and we'll sell that through. I'm not worried about that. So yes, I think I've answered all of your questions."}, {"role": "user", "content": "Yes. That's great. And then just really quick on your inventory levels and then also at retail. I guess are there certain categories you had more of and how has your ability then to get back in stock quickly?"}, {"role": "assistant", "content": "Depends on the category. We're making progress, but I've heard of -- and I heard at NACDS too, I've heard of a lot of categories out there where they're fully back in inventory or even inventories could be a little high. That's not the case for us yet. We're -- we shipped a little bit more than was consumed during the first quarter, but we're still one week or 1.5 weeks on average of low in inventories out at the retail level. And that's before we begin to build our own safety stock. So listen, it's really right now for the company and our productivity is doing beautifully in the manufacturing facilities. We are running at record levels, we have two issues in terms of getting our inventories back cough/cold. And that's because, again, last year, we had an elevated cost call season right through the summer, which is supposed to be our down season where we build inventories."}, {"role": "assistant", "content": "We're running again at record levels, especially on liquids and pediatric liquids was an area of concern over the past four or five months. Based on the way the illness trackers are going and trending, we should be back in business with safety stocks for the full cough and cold season next year. The other business, as I said, is nutrition and on a nutrition basis, there's going to be some working through this new regulatory guidance. It is with additional full plant sanitizations and longer quality holds in order to comply. It will take some time before we can get inventories back. So it's hat's been a challenge for the last 18 months, it's probably been now extended. I can't put a time on it, but I don't see an end in sight yet when we are fully back in a safety stock position on Nutrition. But the good news is we did buy the other facilities."}, {"role": "assistant", "content": "So we have a lot more product to work with. And we are making those investments. We're not backing off those investments. And within another year, we should have an additional seven million pounds of capacity. So -- and on the rest of the business, we're back up to service levels. And service levels are not a concern in Europe. We're in the '90s in the U.S. Other than nutrition in cough/cold, I think we're back in the most recent weeks back into the '90s again too. So everything is going in the right direction."}, {"role": "user", "content": "Okay. Great. And if I could just ask one more on the week's AdCom on Opill. Curious, just any thoughts you could give around that on how they're going to think about this? And then also, if it is approved, your thoughts around just the market opportunity in the U.S., is this going to basically add to the market? Or will it take some of that share? And then any color you could give on the time line to launch and impact to the P&L?"}, {"role": "assistant", "content": "Well, I think I read it in your note, but it is not -- and I think everybody knows it at Investor Day, it's not in our current modeling. It's not in our any of the guidance we've given over the next few years because it's -- you're talking birth control, and this is a big change having -- so it's only upside, and I think we've been giving a year one estimate of roughly $100 million in revenues. And by the time the FDA got into a position, I think next two or three months or for them to make a decision once they review all the data and what the advisory panel has to say about it, you're talking in the very end of the year, beginning of next year. I don't think we have a set date yet. It depends how the FDA when they come to their decisions and any implications of those. But like philosophically, though, this is a product that has been on the market since the 1960s."}, {"role": "assistant", "content": "There is rims and rims and rims of safety data on this. And when taken in a whole, we believe the FDA should approve this application, period. There's a lot of pushback in there, which is their job and that's what they're supposed to do. And we have many extroverts who will be testifying. And we'll see how it comes out. Ultimately, we believe this will get approved. And hopefully, it gets approved this time through. But again, it's not in our numbers this year, next year. It's all upside. But this is a big idea for the company, and we're really excited about women's health."}, {"role": "user", "content": "Great, thanks so much. Good luck."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Fred Short with JPMorgan. You may now go-ahead."}, {"role": "user", "content": "Hi, This is Ethan Brown on for Chris Short. I guess, first off, you already talked about this a bit. But on the Nutrition segment, just how do you think about sales growth for the rest of the year as we move past the infant formula shortages, the disruption this quarter and then with the FDA update as well?"}, {"role": "assistant", "content": "Okay. Well, let's start with -- remember, last year, the way our business slowed, we stripped our safety stock last March and April. A little bit of February, but March and April were huge spikes. And then after that, once we had no safety sauce, and we actually had challenges as the year progressed on our base business, keeping up and running what was -- we have on our Vermont facility, older equipment, it really pushed that and we struggled in the back half of the year. So I think it just is going to be a bit lumpy, but I think this will be a growth year. And it's not like we're going to be getting back a ton. When we went into buying Nestle, we had estimates of tens of millions of pounds of unmet demand."}, {"role": "assistant", "content": "Even on the Nestle facility in here, it's not a demand question. It's a question of how much can we make and how much can we make under the new regulatory guidance and the dollar. So I don't have the forecast in front of me right now. Brad, can give you those numbers later. But we are not backing off plan. But from a flow standpoint, the pricing a little bit sort of the middle of the year, the back half will get bumped up because of it. It was depressed in the back half of last year. So there are not some big growth rates from, we'll call it, May, June, July onward until the end of the year in infant formula, which is driving our nutrition numbers."}, {"role": "user", "content": "That's great. And then on pricing outside of the nutritional segment, do 1Q results reflect most of the planned pricing actions or can we think about some further price opportunities as we move through the year?"}, {"role": "assistant", "content": "Well, it's a two-part answer, right? It is -- the second is -- first is that it took us almost to midyear. We were a touch -- when you look at the traditional CPG companies on national brands in the U.S. and I'm only talking the U.S. here, our international business is similar to any branded company. But in the U.S., you have to negotiate with customers on store brands. And we lagged in the beginning because most of our price increases didn't go into the midyear. So you're going to still get a pretty strong benefit, I would suspect, in the second quarter of this year on most of ours. And then you'll start to lap some of those. The great news is we have learned through this whole crisis when we need to, to price for cost, we can get that done."}, {"role": "assistant", "content": "So I'm not going to answer your question right now. You pay me as CEO to -- I have a toolbox, and sometimes I go to pricing and sometimes I go to cost and sometimes I go to new products and innovation. And sometimes I go to M&A and sometimes I go to supply chain reinvention and sometimes I go to capital structure, but we'll continue to look at which opportunities make the most sense to deliver on the guidance. I truly believe that Perrigo sitting at where it is in terms of its metrics at a 50% discount on valuation is all about credibility right now and delivering on the numbers. So we'll use any lever we have to, to try to consistently perform and deliver the promises we made for the year. And then I think everybody is going to benefit from that, including me and my lovely retirement."}, {"role": "user", "content": "And then maybe one last one for me. Can you just talk about the trends you're seeing on the private label versus national brands, given the current macroeconomic environment and anything notable to keep in mind there?"}, {"role": "assistant", "content": "Yes. Eduardo, perhaps feel free to jump in here. But what I see is our volumes growing and their volumes declining. You don't see the dollar swing of down trading as much because they're more aggressive on pricing. I don't want to price if I don't have to. That's our competitive advantage. We want to have a good discount versus the national brand and with good gross margins and then grow market share over the long haul as partnership with our customers. So you see clearly, most national brands, etc, have priced more aggressively than us. But on the other hand, we used to be in a situation where we were having making price concessions. Now we've gotten first to stabilization and now our ability to price for growth when necessary. As a result of all of that, we are gaining market share in volume. Meaning consumers are down traded."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Daniel Biolsi with Hedgeye. You may now go-ahead."}, {"role": "user", "content": "Thank you, Murray, on your well-earned retirement, I take it, you're also retiring from the Board?"}, {"role": "assistant", "content": "Correct. That automatically happens, yes."}, {"role": "user", "content": "Okay. And then I was wondering if you could quantify the product shortage impact on the CSCA Upper Respiratory segment, like what that was? And if it was lost sales or you consider it just delayed?"}, {"role": "assistant", "content": "No, they're lost sales. Right now, we were at -- Brad, if you have a number list. I just saw this. We had a forecast of, I think, about $25 million for the first quarter, we shipped about 25% more than that, but we had orders that we could have doubled that again. So I don't want to be too specific, but it could have been $25 million or $30 million additional in cough/cold and I'm being really back of the envelope here. But the point is we had elevated levels and as much as we could have made, we could have shipped. Now people buy it for the cough/cold season. So they had to buy something. So again, our cough/cold numbers were up, and our production in the factories was up significantly. They did a brilliant job, but there was still more demand than even that. And that's why I'm so excited. We haven't really talked about it this morning."}, {"role": "assistant", "content": "But that's why I'm so excited about the supply chain reinvention and what I talked about on the call of the simplification of over 1,000 and standardization of over 1,000 SKUs because what that does in combination with Redzone is it increases capacity because it wasn't -- we can continue to grow and build market share, but we're mindful of our return on invested capital. And we don't want to be just adding equipment and lowering prices than getting no return for that. So this is sort of an elegant solution to be able to where we see a path 25% to 50% more capacity in our cough/cold business through this supply chain reinvents and standardization and simplification of less line changeovers and better operational effectiveness or lower throw away and all those good things that are part of this program. And I'm excited to say in those three test lines we did in the first quarter, we got that increase in operational effect on this. So that's what we're pushing for. So -- do we get it back? We can get it back next cough/cold season when we play it out. It shows the potential is there, but it's not like it got pushed forward."}, {"role": "user", "content": "Right. And then just following up on that, what are your initial conversations been with your customers about reducing some of the SKUs? Has it been what you'd expected? Or have there been some pushback?"}, {"role": "assistant", "content": "No, no, it's better than expected. But we're going for the low-hanging fruit first. And if you've listened to Eduardo speak on this, the low-hanging fruit is the part that is not consumer-facing. So in the complexity between customers, it will be a more difficult decision when you're talking about what consumers actually see in terms of the number of pills in the bottle or the size of the bottle, etc. But 80% of the complexity we have now, believe it or not, is not consumer-facing. So it is one customer whose label is an eighth of an inch bigger than another one, but you have to -- and it's not even perceivable to the eye, but we have to stop the line and do a major changeover for the new label size or it could be a slightly different bottle size, where what really matters is corrugated. You've got the outer corrugated, the thickness of it, the dimensions of it might be a 0.25 inch, 1/8 inch, 0.5 inch. Inside, it could be packed in three shrink wrap together, six shrink wrap together, nine shrink wrap together, 12 shrink wrap together, where the national brands only get two variations."}, {"role": "assistant", "content": "And over time, Perrigo being a specialist, a complexity and customizations, builds all this complexity into its system working with customers, but sort of no one realized how much complexity it added. So again, I gave this example at Investor Day, but because of that complexity, we can't use automatic case factors. And it's the year 2023, that's not -- and everybody agrees they can get to like a standardized outer carton and at least that I've been in front of and same thing with label size and all of that, and they're like wow, we didn't even know we were different on those kinds of things. So that first 1,000 SKUs is easier. It will be years -- we'll be doing this for the next two or three years, then we will go back and say, \"Listen, everybody ought to be in 225 count acetaminophen, not somebody at 200, somebody at 250, we can still shrink wrap together and do bigger sizes, but we need to standardize as much as possible. And because we are a branded company, whether it's store brand or national brand, at the heart of when we get to the consumer facing is a massive consumer study that we did that will guide us in what consumers want when they go to the shelf, which is, frankly, not to have to get out a calculator and do math. They want to look at and see the products, know it's comparable to the national brand, that it will work as well, be just to say and cost less."}]}, {"messages": [{"role": "system", "content": "That's all we have time for and marks the conclusion of our question-and-answer session. I would like to turn the conference back over to Murray Kessler, President and CEO, for any closing remarks."}, {"role": "assistant", "content": "Yes. Just once again, thank you for your interest in Perrigo. Thank you for support and investing in the business and believing in me, whether it was here at Perrigo or Lorillard or UST, it's been a heck of a run, and I hope to see as many of you as I can before I actually say my final goodbyes, but I've worked hard for you, and I can tell you that everybody at Perrigo will continue to work hard for you and make your trust in us pay off then over the medium, short, long term, all of it. So thank you again for your interest in Perrigo."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question comes from the line of Mike Halloran of Baird. Your line is now open. Please go ahead."}, {"role": "user", "content": "Hey, good morning, everyone. Hopeful all is well."}, {"role": "assistant", "content": "Hey, Mike."}, {"role": "user", "content": "So can you just help provide some more context on -- on Vicente's comments about the cadence and changing. So I guess twofold, right? I certainly understand the 45%, 55% splits, 1H versus 2H. Any help on the segment details? And then when you think about what the underlying demand would look like, is there any front half, back half underlying demand cadence and not necessarily when it shows up in the revenue, but are you assuming anything, or basically how are you assuming the underlying demand cadences as you work through the back half of the year?"}, {"role": "assistant", "content": "Yeah. Hey, Mike, let me take a -- I'll take the first -- sorry, the second portion around the underlying demand and then Vik will talk about the cadence as you were asking. I mean demand continues to be pretty healthy. And we expect you saw a book-to-bill above 1 here in the first quarter, which speaks to the resiliency of what we're seeing out there in the market, on kind of both book-and-turn as well as long cycle orders. And our expectation is that here for the rest of the year we're going to continue to end with a book-to-bill of 1, which obviously assumes that the backlog continues to be pretty strong here through the rest of the year."}, {"role": "assistant", "content": "Yeah. And Mike, to your first question in terms of phasing and the segment implications as Vicente indicated, we're expecting that whether you look from a total company perspective at adjusted EBITDA or adjusted earnings per share using about a 45%, 55% first half or second half split is generally in line. And I would say the segments should follow a fairly close split to that. The same should be said for corporate, which the corporate spend obviously is pretty ratable over the year in line with our revised guidance. So I wouldn't say that there's dramatic changes in the context of the segments versus the total company. And then as we've indicated before, and I think is still the case, we're continuing to remain prudent in terms of the back half of the year, particularly on the organic volume side of the equation jJust given that you still don't necessarily have full visibility into the back half of the year."}, {"role": "user", "content": "Thanks for that, Vik. And then, Vicente following-up on the first answer there, could you maybe get some context to how the long cycle trends are tracking in the portfolio relative to maybe how some of the shorter, quicker turn stuff is tracking in the portfolio?"}, {"role": "assistant", "content": "Yes. Sure, Mike. I think the good news is that here in the first quarter we actually saw good resiliency on both kind of the short cycle and the long cycle, which was very good news to us to see that continue momentum on both, which is also the reason why on that shorter cycle why we were able to even out deliver some of the price, right? So in terms of long cycle, we think that the tailwinds of sustainability on ensuring all of that continues to be really front and center. And at least our expectation is that even things like IRA, the Inflation Reduction Act, all that funding still has to come through. We're seeing some early indications. funnels look very strong. You saw also a lot of communication activity around carbon capture. So at least on the long cycle side we think that there should be more to come from that perspective while the short cycle seems to be at least in our case and in our business fairly healthy."}, {"role": "user", "content": "Thanks, gentlemen. Really appreciate it."}, {"role": "assistant", "content": "Thank you, Mike."}, {"role": "assistant", "content": "Thanks, Mike."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Julian Mitchell of Barclays. Your line is now open. Please go ahead."}, {"role": "user", "content": "Yes. Hi, good morning. Maybe a first question, if you could just size the backlog in dollar terms at the end of March. I saw you gave the percentage deltas, but maybe just give us a sense of the dollar scale of the backlog. And then, as we're thinking about the cadence through the year, are we assuming revenues are sort of flat to up slightly sequentially each quarter, and then EBITDA margins are up slightly sequentially each quarter? Is that kind of the main framework for the guidance?"}, {"role": "assistant", "content": "Yeah. Maybe Julian, I'll talk about on the backlog. The backlog, as you recall, on the last earnings call we said that we have roughly $2 billion of backlog, and that sequentially that has grown about 10%. So I mean that can -- that why that you can say, obviously you do a very simple math. So clearly above that $2.2 billion, right? And Vik, on the cadence?"}, {"role": "assistant", "content": "Yeah. Julian, on the cadence generally speaking, I would say we expect, again I'll refer back to the 45%, 55% split. As Vicente indicated, we do see potential of some revenues shifting from Q2 into the back half of the year as Vicente earlier indicated. But generally speaking here, the way we would think about it is, with the guidance ray of the strong Q1 performance and still seeing 35% to 40% incrementals, we do still expect to see margin expansion on a year-over-year basis in each quarter and obviously the second half of the year will as it typically is continue to be the strongest performance both on the revenue side as well as the margin profile. Our next question comes from the line of Josh Pokrzywinski of Morgan Stanley. Your line is now open. Please go ahead."}, {"role": "user", "content": "Hi, good morning guys. This is Brandon on for Josh."}, {"role": "assistant", "content": "Yeah. Hey, Brandon."}, {"role": "user", "content": "How much of the order strength was driven by particularly the inflection in process markets? And then as a follow-up on that, when would you potentially see some of these major LNG and hydrogen projects that are being discussed showing up in your pipeline?"}, {"role": "assistant", "content": "Yes. Maybe Brandon on the orders, as we said, I mean, I think good momentum, good strength on both kind of the short cycle and the long cycle. If I get your question correctly, I think you were asking about maybe how much was price versus volume."}, {"role": "user", "content": "Yes, exactly."}, {"role": "assistant", "content": "Yeah. So I think in the first quarter, price and volume is roughly 50:50. As we go into the second -- into the rest of the year, we think it's going to be more like 70:30. And so that kind of give you an indication of kind of how we're thinking about price volume here."}, {"role": "assistant", "content": "In terms of your second question about LNG, hydrogen, are we seeing -- I mean we're seeing definitely some clearly the -- on the long cycle, I'll say maybe more continuation what we see the most is on air separation systems and large, call it, carbon capture activity. So I think a lot of good momentum on these kind of good sustainability tailwinds that we have been speaking about for now the past few quarters. And so again funnel continues to be pretty strong and -- but like I said on the prior answer, I don't think that we have seen the full scope of a lot of these IRA or other green deal funds come through fruition yet. So that hopefully will give us a good indicator of that more -- a little bit more tailwind here to come."}, {"role": "user", "content": "Got it. Very helpful. Thanks guys."}, {"role": "assistant", "content": "Good. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Rob Wertheimer of Melius Research. Your line is now open. Please go ahead."}, {"role": "user", "content": "Thank you. I wanted to ask, I mean, obviously ITS compressor orders are very strong, and you've touched on a couple aspects, but would you qualitatively talk about what is driving that order of strength? I know you have your oil-free, I know you've done a lot on demand generation, but is this mega projects coming through? Is it energy efficiency; is it just general capex renewal? Because there's a certainty in the economy and you're seeing really strong orders, so I just wonder if you can give any color around that."}, {"role": "assistant", "content": "Yeah, Rob, I hate to say this, but I mean it's pretty much really broad-base and I think it has to do for a couple reasons. I mean, clearly you mentioned oil-free, oil-free strong order rate at roughly as we said, 28%. So clearly very, very strong order and on a revenue perspective, even way above that. But demand generation, as we clearly indicated on that slide, I mean we do hundreds of demand generation campaigns and activities throughout a single quarter. And you saw some example of some of the things that we have done in the first quarter with kind of six examples, six out of the hundreds that we do. So that tells you that in our view, we continue to be solid momentum on MQLs, the Marketing Qualified Leads that then lead into some of these order momentum."}, {"role": "assistant", "content": "As it relates to large projects, I mean, clearly, renewable natural gas, which is very -- continues to be a really great sustainable way here in the US particularly. Carbon capture, we spoke about that on the prior earnings to as well with a large order that we received on the last time, on the last earnings call, but now even this time, how we're even capturing some of these kind of new technologies or new partners to continue accelerating carbon capture technology. So it was really a little bit of everything, strong book-and-turn as well, and good pricing momentum. So I'll say, Rob, I mean we -- the team did a phenomenal job heating across all aspects in the business."}, {"role": "user", "content": "Okay. Thank you. And if I may do another one that's a little bit less directly quarterly related, but the battery fluid pump you have on Slide 14, it's Seepex nine months from start to finish on i2V innovative value. I mean, that's fast even knowing how fast you guys move. I wonder if you could give us a quick sketch of just how that looks start to finish and how you -- how that process runs and how it goes so fast. Thank you."}, {"role": "assistant", "content": "Yeah. Rob, thanks for that question. I tell you, this is the exciting piece and it speaks tremendously to a lot of things that we've been saying in the past. And this is just a clear example of that. And that is that we're taking basically products that are call it you could argue standard products. And then we point these demand generation canon to specific end markets that we're seeing some very good growth momentum, and then we are able to attract customers to then work on very specific solutions. And in this case, we took configure -- I mean, items and components of standard products, and we were able to reconfigure that pretty quickly based on the request and from some customer and doing a lot of voice of customer and going to customer visits."}, {"role": "assistant", "content": "So I think it's -- it speaks to the process that, that holistically is connecting all the dots from how we connect to the customer, how we generate the demand, how we instigate that customer to come to us, to utilizing processes then like i2V the innovative value process that we have internally to then redesign the product and then utilize all the other IDM, IMPACT Daily Management, which is part of the IRX to then execute in a pretty rapid way and flawlessly all along the lines by making sure that we're satisfying that customer unmet need that is today in the market."}, {"role": "assistant", "content": "So I think it is a beautiful example on how we have been able to connect all the dots and obviously many of these are happening throughout the entire Company today, but this is just one that we thought it was great to highlight again new acquisition, but it speaks tremendously about how quickly we can continue to change the cultural perspective even on new M&A."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Andy Kaplowitz of Citi. Your line is now open. Please go ahead."}, {"role": "user", "content": "Hey, good morning, everyone."}, {"role": "assistant", "content": "Good morning, Andy."}, {"role": "assistant", "content": "Hi, Andy."}, {"role": "user", "content": "Vicente, the last couple of quarters of PST you've averaged I think something like 70% incrementals. You obviously gave us an update on the Seepex improvement, which I would imagine is a decent tailwind and your margin comparison is again I think pretty easy in Q2. But is there anything else going on within PST in particular that you're doing to really ratchet up performance? I would assume price/cost is helping, and I remember some acute supply chain issues earlier last year, but maybe you could elaborate on what you're doing there."}, {"role": "assistant", "content": "Yeah. Andy, I think definitely price/cost is definitely helping. And as you also alluded the continue acceleration of the M&A bolt-on acquisitions that we have done, that's helping too as well. Seepex being one, but even I point out to someone like ADI air dimensions, which again we acquired that at 50% EBITDA margins, and today it's above kind of call it 60%. So again, it's a combination of a lot of the things that we have put in action. So, yeah, good price/cost, good synergy execution and the teams as we have said before, we're a little bit delayed on getting things like i2V in place at PST, but that is now ramping up and that's what we get the excitement that there should be more to come here."}, {"role": "user", "content": "Got it. And then maybe you could give us a little more color into the M&A environment. Your funnel still seems significant, as you said. You reiterated the $200 million, $300 million inorganic target for 2023, but you mentioned you had the five LOIs left, I think you had 11 last quarter. I know you said that you had several potential targets close the LOIs stage. So is that really just timing or there fewer near-term opportunities than usual?"}, {"role": "assistant", "content": "Sure, yeah. I think you said it very well. Yeah, I mean, I -- so five LOIs now which is obviously less than what we said on the park order, but that's because I mean, we closed some and we departed from some, but I think the good news is that we still have a good handful of those at the stage that is right before signing the LOI. So that's why it continues to give us that confidence that we will be able to reach the target that we set and nothing that we're worried about that."}, {"role": "assistant", "content": "In terms of the activity, we continue to see strong momentum activity out in the market. Again, it has to do because of a lot of the sales searching that we do in terms of finding good transactions that could be part of our Company. So I think momentum continues to be pretty good on that M&A bolt-on strategy that we have."}, {"role": "user", "content": "Appreciate it."}, {"role": "assistant", "content": "Thanks, Andy."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Joe Ritchie of Goldman Sachs. Your line is now open. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning, everyone. Nice to hear and sorry to hear about the cyber issues. The maybe -- can we just try to square some of the commentary on the cybersecurity stuff? So appreciate the color that you gave earlier. I was just trying to size like the -- like sales and EBITDA impact and who knows whether my numbers are right. But my ballpark numbers were, call it, like roughly a $30 million to $50 million EBITDA impact. So I don't know, maybe $100 million to $150 million revenue like am I ballpark correct in how much is shifting away from 2Q?"}, {"role": "assistant", "content": "I think, Joe, you're definitely on the high side on that perspective. I think if you do the math in terms of that 45%, 55%, you come with a much lower number, I mean, roughly half of what you just said."}, {"role": "user", "content": "Okay. All right. That's helpful. Thanks for clarifying. And then -- and then I guess maybe, Vicente, just is there any concern that some of the sales you were expected to ship in 2Q to push out, is there any concern that those sales go away? Or do you have high degree of confidence that you'll be able to ship in the second-half?"}, {"role": "assistant", "content": "Yeah. Joe, I think, not at this point, because keep in mind that we're still living in a long lead time environment. So I think adding maybe kind of a couple of few weeks of extra lead time is not going to create any impact on what we have in the backlog that -- so I don't think the answer to that no. And keep in mind that this is not -- this incident did not disrupt the majority of Company, right? So I think it's one that we think we have pretty good control sized and working diligently to get back in normal operations for -- by next week. And in the meantime also as we said, our team continues to minimize disruption by implementing workarounds. So there's ways on how you can continue to support customer and with different workarounds that, that you can do locally at some of the sites."}, {"role": "user", "content": "All right. Great. That's great to hear. And look, you gave a lot of really positive order data across your different businesses. I guess, I'll be the one that asks about power tools. It's really nice to see that that pick up a little surprising honestly. So maybe just kind of provide a little bit more color on what you're seeing in that business."}, {"role": "assistant", "content": "Yeah, Joe, thanks for the question. I'm sure the team -- the power tool team will be glad to hear that you asked a question of power tool. I can tell you that the team has done a phenomenal job on new product development. So believe it or not, similar to the story that we talked about here on Seepex on kind of how we get to short lead time and then launching new product and audience solutions, the power team -- the power tool team has done just a phenomenal job on that kind of reinvigorating the line and reinvigorating the channel and reinvigorating customers to come to us."}, {"role": "assistant", "content": "So, I think it's been an innovation story and it is basically what we said all along. The first we needed to fix the cost situation, and then we were going to start accelerating investments to keep the business growing. And with the help of IRX, we've been able to accomplish the first step, which was fixing a lot of the cost although continue to see improvement on that and then move pretty quickly to innovation. And that's what the team is doing. I mean, they're doing a lot of good nice products and launching now in the market."}, {"role": "user", "content": "Okay. Great. Thanks, guys."}, {"role": "assistant", "content": "Thanks, Joe."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Joe O'Dea of Wells Fargo. Your line is now open. Please go ahead."}, {"role": "user", "content": "Hi. Good morning. Thanks for taking my questions."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "I wanted to start on the updated guide and back half of the year expectations. I think going back a few months ago talked about embedding some prudence at the time just based on sort of macro uncertainty. Sounds like a continuation of that. But the way things sort of transpired over the course of the quarter certainly evidence of pretty strong demand. So if you take the cyber item aside and Vik, I think you talked about still seeing some or still sort of applying some prudence to the guide, but has anything changed in your underlying back half of your guide relative to sort of three months ago?"}, {"role": "assistant", "content": "Yeah, Joe, I'll start with that. I think obviously when you look at the revised guidance now at the mid-point, the 7% organic guide versus our previous guides, which is about 4% at the mid-point, 300 basis points of improvement. And I think the way you could think about it in just broad strokes is about two-thirds of that is driven by the Q1 beat with the other third really coming in the back half of the year. So the answer is, yes, we are actually seeing slightly better second-half growth than our original guidance would've implied."}, {"role": "assistant", "content": "And as Vicente indicated in his opening comments, we're still seeing a split of approximately 70-30 price versus volume. And I think we would also say that at this point in time, we're still continuing to take a prudent view on volume in the back half of the year. Still continues to probably be the biggest source of potential upside. Backlogs are still strong, but like I said before, still don't necessarily have full visibility after the back half of the year. So we're going to continue to execute. And if that continues to be a source of upside, that's something that we'll execute, Joe."}, {"role": "user", "content": "Thank you. And then I also wanted to ask on cost opportunities, and as you see sort of raw materials coming down and supply chain easing, how you're approaching that in terms of the cost opportunity set and going out to suppliers, whether or not sort of the pricing that you've seen sort of applied to you on the -- on sort of the sourcing side of things. You've got some opportunities to push back on that and then similarly, are you seeing any of that from your customers and in any sort of more active kind of negotiations on the pricing side?"}, {"role": "assistant", "content": "Yeah. Thanks, Joe, for the question. Again, on the cost opportunity, absolutely, we see a lot of cost opportunity and as you can imagine, we're leveraging some of our IRX tools to drive a weekly cadence on how we go after we call it price clawback, which is kind of looking at 2019 prices from some of our suppliers and how do we want to get as much as possible as we see some deflationary marketing happen in some areas."}, {"role": "assistant", "content": "Now, I will say too as well, that there's some areas that we see some continued price inflation and reason why we continue to do some pricing activity out in the market. So it's not a -- but net-net we see stability and maybe going down and to your point, absolutely you can expect, I mean, we started this process, I would say maybe a couple quarters ago, going back to suppliers and start doing a lot of what we call reverse auctions through our process."}, {"role": "assistant", "content": "In terms of our customers, I'll say it's a slightly different, because, as you know, our customers, they don't buy our product basically every week or every month. Or I mean, if they buy a compressor today, they're not going to buy a compressor until a few years later down the road. And in many cases, it's configured to the specific order. So it is difficult, I say to compare price to price or difficult to argue for a price reduction when there's different features and different options that are being selected. So, no, I will say as long as we continue to add incremental value to the product with the innovation that we're launching, we should be able to still continue to generate price."}, {"role": "user", "content": "Very helpful. Thank you."}, {"role": "assistant", "content": "Yeah."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Nicole DeBlase of Deutsche Bank. Your line is now open. Please go ahead."}, {"role": "user", "content": "Thanks, guys. Good morning."}, {"role": "user", "content": "Good morning, Nicole."}, {"role": "user", "content": "Maybe just starting with price/costs. So I know it was positive on a dollar and margin basis for the quarter. What is the expectation like of how the cadence of price/cost benefit trends through the year? Are you kind of at your maximum price/cost benefit at this point, or is it spread kind of evenly throughout 2023?"}, {"role": "assistant", "content": "Yeah, Nicole, it's a great question. I think the answer is, first of all, your commentary on Q1 quite accurate. We do expect to be price/cost positive and margin accretive for the balance of the year. It is worth noting here that obviously the pricing levels in the first quarter quite strong. Remember, we did take a number of our pricing actions in 2022 in that first quarter timeframe. So now as those start to anniversary, the price realization as we move into 2Q in the back half the year obviously does step down. But our expectation would be that, so does the inflationary levels as we're now comping that."}, {"role": "assistant", "content": "So they actually kind of move somewhat in tandem. And that actually speaks obviously to the fact that we took those actions really either in advance or in concert with when we saw those inflationary levels rising in the first place. So I think the answer to your question here is we would expect to continue to see good price/cost delivery, and the requisite margin expansion with it as we move to the balance of the year."}, {"role": "user", "content": "Got it. Thanks, Vik. And then, just with respect to the order trends through the quarter, did you guys see like acceleration into March? How did things go from month to month? And if you're willing to comment on April, that would be awesome too. Thank you."}, {"role": "assistant", "content": "Yeah. Nicole, I would say throughout the quarter, yeah, we continue to see in Q1, we saw -- I'd say maybe a little bit more sequential improvement, yes, as -- I mean, but that's I think typical that you see in the quarter in Q1 particularly, right, as people kind of come out from vacation December and now into January. So I think but that, I mean, nothing of note that I will kind of call out to be just a massive acceleration into March. Just basically the regular cadence that we see in a usual typical Q1 quarter and in April, I mean, continue to be the same as what we have seen here so far in the first quarter."}, {"role": "user", "content": "Thank you. I'll pass it on."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Nigel Coe of Wolfe Research. Your line is now open. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning, everyone. Thanks for the question."}, {"role": "assistant", "content": "Hi, Nigel."}, {"role": "user", "content": "Hi. So we covered a lot of ground, but maybe just going back to the cyber attack, I mean, any more color on in terms of which business lines and geographies perhaps that have been impacted by this unfortunate incident?"}, {"role": "assistant", "content": "Nigel, I mean, I'll say that the only thing I will say is that, only certain IT systems were disrupted that -- and that that did not impact the majority of the Company. And as I mentioned, where things were impacted were proactively took immediate actions to maintain business continuity and minimize disruptions. And we expect to begin restoring the impacted systems to normal operation here coming next week. So I think it's -- it speaks volumes and I think you can read that as well in terms of what we're saying that we don't expect this incident to impact the full-year guidance, and we felt it was prudent just to kind of give you even more color as to what we see here in the second quarter. But yeah, that's we're not probably going to get into any more specifics on that."}, {"role": "user", "content": "Okay. That's fair. And then, Vik, on the 45-55, obviously the simple math gets you to 2Q EBITDA slightly below, maybe flat slightly below 1Q. Obviously very abnormal compared to normal seasonality. And there's been a pretty pronounced pickup in the last couple of years from 1Q to 2Q. So is this just the cyber incident with perhaps a little bit of conservatism baked in as well? Was there some 1Q pull-in from 2Q? Any sense on just how would you think about that?"}, {"role": "assistant", "content": "Yeah, Nigel, I'll answer that. In the context of your second part of your question, were there any pull-ins into 1Q or any of that nature, the answer is no. I think the way you described it is very accurate. We mentioned that we're being prudent in terms of the phasing as a result of the cyber incident. And then as such, I think the way you're thinking about it and even how you've kind of thought about the EBITDA levels is fairly appropriate. So I wouldn't read into it any more than that."}, {"role": "user", "content": "And since you answered the question really quickly, can I just throw in one more please. On these reassuring projects in the US, [Indecipherable] this has been quite top zero this quarter. I mean, from your perspective, how much roughly of these large projects have had the air compression bid out this stage, in terms of kind of what have you seen so far in terms of the order book and what's on the come?"}, {"role": "assistant", "content": "Yeah, Nigel, I -- yeah, the one thing is that it's difficult to quantify specifically only because I mean when we take the order it could be reassuring or it could be something else. I mean, clearly we know what goes into the CHIPS Act as an example and what goes into other things like that. But what we can tell you is what we said about the Buffalo facility, right? That we reopened Buffalo facility and that that business saw over $40 million in orders last year pretty quickly. And the momentum continues on that facility too as well. And a lot of that is really driven by the reassuring."}, {"role": "user", "content": "Great. Thank you very much, guys."}, {"role": "assistant", "content": "Sure."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Chris Snyder of UBS. Your line is now open. Please go ahead."}, {"role": "user", "content": "Thank you. Volume growth for the Company really stands out versus broader industrial. Seems like it was up low-double digits range or so for Q1. And when we kind of look at the rest of the year, it seems to imply not much of any volume growth over the next three quarters. Does that more so reflect the macro uncertainty or potential supply chain uncertainty? What's that reflecting, because it does feel like a pretty sharp fall off?"}, {"role": "assistant", "content": "Yeah. I think the way to think about it is fairly simple. First of all, I think your reading to Q1 is quite accurate. I'd say a couple things. One, remember our -- the comps as we move to the year, they do get more challenging, right? That's just the reality of kind of last year and the math and the comps."}, {"role": "assistant", "content": "The other thing I would say and I'll go back to kind of what we said before, particularly in the second half of the year, one, we have taken the organic guidance up. So obviously, we are seeing slightly better organic growth in the back half of the year than our original guidance would've implied, which obviously speaks to kind of Q1 dynamics as well as backlog levels. But I do think that there's just a matter of continuing to be prudent in terms of back-half expectations. And we would tell you right now that that organic volume growth in the back half of the year is probably the area we're being the most prudent on. So, Chris, I wouldn't -- again, that's kind of my view in terms of -- in our view, in terms of how the organic volume side of the equation's playing itself out."}, {"role": "user", "content": "I appreciate that. And the company really good track record on price and holding that price. When we see some of the year-to-date reflation in metals, does that change the way you think about incremental price throughout the rest of the year, because potentially some of these commodity inputs are going higher into next year. Thank you."}, {"role": "assistant", "content": "Yeah, I'll say, Chris, I mean so we take so maybe two-folds to answer your question. I mean, we go after the suppliers when we see definitely declines in our commodity or some other commodity numbers that we -- whether steel and things like that. Now if we see the inflation, same things coming back up again, yeah, I mean, we definitely stay pretty nimble and we'll go out in the market with more price. Yes, absolutely. I mean, that's how we did it as we were seeing the inflationary markets, and we'll definitely do it again."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our final question comes from the line of Nathan Jones of Stifel. Your line is now open. Please go ahead."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Good morning, Nathan."}, {"role": "user", "content": "I'll go for a question on SPX Flow. You guys have highlighted many examples over the last few years of leveraging the portfolio to accelerate growth and significantly improving the margins of acquired businesses. Maybe you can give us some what kind of organic growth acceleration you're expecting and margin expansion you're expecting to be able to generate out of that business."}, {"role": "assistant", "content": "Yeah. Nathan, as we say -- as we -- so I mean, first of all, I'll tell you we're super-excited with our business only roughly about a quarter into it. And anything that we see is really exciting. I mean, five incredible brands within that portfolio that we're leveraging and doing a lot of work, as you can imagine, on demand generation, i2V, and the team is super-engaged on really accelerating that."}, {"role": "assistant", "content": "I think in terms of growth, yeah, I mean, we see no reason why this set of businesses should accelerate the growth based on all the initiatives that we're doing much faster than what they were growing before. And in terms of margin expansion, yeah, same thing that we said when we acquired the business that we see that this business could get to roughly in the 30% EBITDA margins."}, {"role": "assistant", "content": "Yeah. And Nathan, I would say say --"}, {"role": "user", "content": "Where is it today?"}, {"role": "assistant", "content": "Yeah. We said it was largely when we had done that acquisition largely in line with kind of ITS segment margin. So it's fairly close in line with the overall ITS segment margins. And as Vicente said, we have good funnel and strong runway ahead of us in terms of good margin expansion opportunities. I would also say, now that we're at one quarter in from the acquisition here first quarter execution the team did a fantastic job and integration continues to move very nicely. So we're quite pleased with how things are trending."}, {"role": "user", "content": "And then just on the power tools business, I think at the merger, the strategic plan was to divest that business. Has that changed or is that still the plan here at some point in the future?"}, {"role": "assistant", "content": "I mean, we -- no change in plans. I mean, we still continue to be same aligned in terms of our long-term strategy."}, {"role": "user", "content": "Okay. Fair enough. Thanks for taking the questions."}, {"role": "assistant", "content": "Thank you, Nathan."}]}, {"messages": [{"role": "system", "content": "Thank you. As there are no additional questions raised at this time, I'll hand the conference back over to Vicente Reynal for closing remarks."}, {"role": "assistant", "content": "Yeah. Thank you, Cathy. Once again, I mean, the Ingersoll Rand team has demonstrated their own manageability to execute despite these ongoing macroeconomic volatility. We're very appreciative of our teams and the outperformance this quarter truly demonstrates the power of IRX and the ownership mindset from our employees. And with that, just want to say thank you all of you for joining the call today and your interest in Ingersoll Rand. Have a great day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And your first question comes from the line of Arun Jayaram from JPMorgan. Your line is open."}, {"role": "user", "content": "Good morning, Tom. Nice results from your team. I wanted to see if I could delve into your commentary around the potential activity in the Marcellus. You mentioned that your original plan was to go down to 2 rigs and 1 frac crew, but you also signaled that you may stay at this level for a certain amount of time, given -- macro. I was wondering if you could give us a sense of do you think you could hold your Marcellus production relatively flat at, call it, that 2.1 Bcf a day? And what would that mean for capex if you did go down to that level because I think this year's capex guides around $835 million at the midpoint?"}, {"role": "assistant", "content": "Well, Arun, we -- you just kind of repeated what I've said. So I'll try to give a little bit of detail there. We -- what I said is if we were to stay at the 2 rig and 1 frac crew, that's not a plan. That's kind of a guide as to what would happen. We kind of -- as we look at the macro right now, we kind of like that and where it positions us. Our Marcellus team has done a really nice job of smoothing out their cadence and getting on to a regular program. So as we look ahead at that level of activity, we think we will be able to shave off significant capital in the Marcellus and have the opportunity to redeploy that elsewhere. We would hold our production flat or actually slightly grow within that range we've already telegraphed and it's really a nice place to be right now. Because strategically, what we'd like to do is keep that Marcellus production flattish and be ready to go when the gas macro improves. And that's exactly the position that our really great team in Pittsburgh has put us in."}, {"role": "assistant", "content": "So everything you said is true. I'm not sure what other color we can give. But one of the things we really like is the flexibility to pivot and we're maintaining that gas production. We don't want to see it decline. So it will indeed maintain if we were to hold those 2 rigs and 1 frac crew."}, {"role": "user", "content": "Yes, Tom, I don't know if you could follow up just one question with how much lower capex would it be if you went to that program?"}, {"role": "assistant", "content": "As we -- with current costs, we think a few out years would probably be a couple hundred million below what we're currently spending in the Marcellus."}, {"role": "user", "content": "That's super helpful. The second question perhaps for you and Scott. Tom, you have been handily surpassing the 50-plus percent minimum cash return threshold to shareholders. You're at 76% this year. I was wondering if you could get some color on thoughts over the balance of the year. And I know that you're framework -- under your framework, you like to keep around $1 billion of cash on the balance sheet. You're essentially at that level at the end of March. So any thoughts on the ability to kind of sustain this, call it, mid-70s type of cash return over the balance of the year because you really don't have much debt due until a little bit into 2024, I believe?"}, {"role": "user", "content": "Yes. This is Scott. Great question. We worked -- everything you said is exactly correct. We did reaffirm the 50-plus percent. We're very comfortable with that. That affords us really, as we shared with our Board yesterday, the ability to be very opportunistic. When you go back and look at the report card for the last 5 quarters, including this first one this year, we have surpassed the 50-plus percent. It is a floor depending on market conditions and where we want to be and what the commodity strip is doing. We will -- it's an investment decision with all three pieces playing into it. Do we want to lean in more on the buyback? Do we want to hold cash for some other strategic opportunity? Or do we just want to kind of stay on path and just rely more on the base dividend. We have all that optionality. I'm sorry to come across as a little coy, but we're very comfortable with that framework, and we're set up tremendously for this year in terms of that optionality."}, {"role": "assistant", "content": "Arun, if I could just follow up on, I'll say this, Scott and his team have really been masterful in how they've executed our buyback, taking opportunities when the price dips. We're going to continue to be disciplined there. But the fact that we're reaffirming our 50-plus is not arbitrary. We really want to maintain flexibility in our balance sheet. And if we were to have a quarter in the future where we returned exactly 50%, we have nothing to apologize for. We want to be really clear with people that that's our intent, and that we think that there may be alternate uses of cash. It could be -- I hope it's a constructive buyback program. But if we don't think that's the right way to go, we're just not going to embark in an arm's -- of cash return. We just don't think that's in the best interest of the Coterra owner, and we have great opportunities within our portfolio, and we're fairly constructive on commodity pricing going forward. So we're right where we want to be."}, {"role": "user", "content": "Sounds good. It does give you a lot of flexibility. Thanks a lot, Tom."}]}, {"messages": [{"role": "system", "content": "And your next question comes from the line of Umang Choudhary from Goldman Sachs. Your line is open."}, {"role": "user", "content": "Hi, good morning and thank you for taking my questions. My first question was just wanted to get your thoughts around the macro, both oil and gas. I mean definitely a lot of concerns around demand for oil and the pace at which it will affect supply to balance the markets in natural gas. And given these concerns, as you think through your program, one of the goals has been to maintain consistent activity to maximize efficiency. How do you -- what are the levers you can pull, right, to maximize your free cash flow outlook over the next 3 years?"}, {"role": "assistant", "content": "Well, Umang, that's an excellent question. I think we've described it as the fact that we do have the optionality to liberate some capital out of our Marcellus program and redeploy it to more liquids-rich opportunities would be a pivot to maximize our cash flow in the next few years. We have historically not done a really good job of predicting commodity swings. And as I said in my opening remarks, 6 months ago, the situation looked entirely different. It's changed and yet now we're all highly confident that we know what the future looks like. And so having that flexibility really allows us to get up every morning and make good long-term business. We don't make those decisions based on the daily spot price. We make those decisions as we see macro trends. Right now, as we look forward, we are in the long run, highly constructive on gas. Over the next year, we're going to be cautious. That's why we want to maintain our gas production but not go nuts there. So we think our program does answer the question you've asked as far as maximizing our cash flow."}, {"role": "user", "content": "Yes, that makes a lot of sense. And then I guess the follow-up on that would be the other way to ensure and manage risk would be around hedging. So any thoughts around oil and gas hedging over the next -- for the next 1 or 2 years?"}, {"role": "user", "content": "Yes. In terms of hedging, obviously, we haven't moved away from our strategy around -- organization and all the opportunities. We don't have to lean in on hedging. The last thing you want to do is lean in on hedging when prices are low. History will show that, that always kind of comes back to bite you. We're looking at a more calculated, more refined way. We're in the early stages of that. More to come on it. But right now, we don't feel the need to lean in, in either oil or gas to protect the downside. We're pretty comfortable with where we're at and we'll show some optimism on both products or, at least particularly on the gas side, going out farther. So we'll stay on path right now but we are open to looking at disconnects farther out of the curve. One dynamic that may -- you may see in place with the team we're working with is maybe we look a little further out than just the 12 months that we've been doing historically. And I think that behooves us to really open our minds to be more open-minded to how we hedge going forward."}, {"role": "user", "content": "Thank you. Thank you for the color."}]}, {"messages": [{"role": "system", "content": "And your next question comes from the line of Doug Leggate from Bank of America. Your line is open."}, {"role": "user", "content": "Hey, good morning guys. This is actually Kalei on for Doug. My first question is on inflation. So as the commodity has pulled back a bit, activity seems to be softening. What are you guys seeing on leading-edge pricing at the moment? And how are you guys positioned to respond to it?"}, {"role": "user", "content": "Yes. Kalei, this is Blake. I'll take that one. We are seeing the softening across the whole market. It's been slight, but it's starting to pick up some steam. I'll start with OCT. We've seen pipe prices roll over. The way we order pipe, that really won't impact us to Q3 or Q4 but we estimate that could impact our program $15 to $20 per foot if we realize all that. On the frac side, we talked about last time on how our contracts work for the year. We have quarterly renegotiation points and semiannual renegotiation points on our frac crews. We saw some very slight reductions from Q1 going into Q2, but it was a reduction. And right now, we're having the conversations to Q2 to Q3, and they're different conversations than we were having just a quarter ago. So we'll see how those progress."}, {"role": "user", "content": "On the rig side, we're really in really good shape. Most of our long-term contracts are actually falling off within Q2. By the end of Q2, only 20% of our rig fleet will be under any type of long-term contract. We're seeing movement there. We are seeing some deflation. We're in discussion with all those folks right now. But we have really long-term service partners. Folks we've been through a lot of cycles with and their productive discussions. I think everyone understands the market we're in today is not the market we are in a year ago."}, {"role": "user", "content": "I guess to press a little bit, if you were to renegotiate some of those contracts, is that more of a benefit to the back half of '23's capital budget? Or is this more of a '24 consideration?"}, {"role": "user", "content": "I would think of it more as it would impact second half '23 and kind of set up a run rate going into '24."}, {"role": "user", "content": "I appreciate that. My next question is on the revised oil guidance. You guys raised it by 1,000 barrels per day. And I guess I'm wondering if you can really call it with that much accuracy or the intention here is to send a signal. And if it is to send a signal, what are you trying to convey about the performance that you're seeing so far? Is it sort of continues at this pace, do you see further upside risk to guidance as we go through the year?"}, {"role": "assistant", "content": "Kalei, this is -- I think it speaks for itself. We're seeing great performance on these projects. We are optimistic. We try to guide as we see it. But we don't sandbag but we're really seeing some surprises to the upside. And I think that we would love to see further surprises to the upside, but we really try to call it as we see it."}, {"role": "user", "content": "I guess if you raised the guidance, is it based on what you saw in 1Q continuing? Or is it sort of assuming that you get back to a more normal level? Or what does it say about the expectations for the balance of the year?"}, {"role": "assistant", "content": "Well, it says that we're seeing increasing results that recalibrate our analysis. And as we look at the projects coming forward, we think that's appropriate recalibration. We learn along the way, and we love to learn on the upside. But you know what, every now and then, you go the other way. But right now, our oil assets are really, really performing well."}, {"role": "user", "content": "I appreciate those comments, Tom. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Michael Scialla from Stephens. Your line is open."}, {"role": "user", "content": "Hi, good morning everybody. Tom, you talked about being ready to grow your Marcellus production when the market signals you should. I want to get your view on constraints on pipelines or, I guess, Blake talked about the rig and crew situation softening, but any potential constraints on getting rigs or crews back when you decide to pivot back to growth mode?"}, {"role": "assistant", "content": "Well, I'll tell you that and turn it over to Blake. We do have some available capacity to grow. It's not unlimited. It's not without boundaries. But over a few year time period, we've got a lot of availability on that market takeaway. Blake, why don't you..."}, {"role": "user", "content": "Yes, just to echo Tom, we do have options to grow our gas volumes there. There is the pipeline space. It might come with a little higher cost than our current differentials. So that would be something that would have to go into the discussion. As far as rig and fracs, you just got to stay ahead of it. It's not something we could knee jerk, but we could get the crews and rigs as long as we play out in time."}, {"role": "user", "content": "Appreciate that. And I wanted to ask on the Upper Marcellus. We've talked about delineations there. When you look at your 529 Upper Marcellus locations that you had in inventory at the end of the year, if the delineation works, I guess, what would be the impact on the number? Are you talking about potentially like doubling the inventory? Or is it modest increase? I'm just looking for some sense of what delineation could mean for the inventory?"}, {"role": "assistant", "content": "No, that inventory is really with our current acreage footprint. We are back to leasing in the Marcellus and filling in that acreage footprint. And our team in Pittsburgh has done a really nice job of that. But that is with our current model of spacing, with our current acreage. So that's what -- that's the number."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Neal Dingmann from Truist Securities. Your line is open."}, {"role": "user", "content": "Good morning, thanks for taking my question. First is on, I guess, an M&A-type question specifically. I'm just wondering could you discuss opportunities to sort of trade and block up your Delaware acreage specifically in New Mexico, where it looks like you have a little bit more scattered position there?"}, {"role": "assistant", "content": "Well, New Mexico is a tough fair walk up. The ownership is like a quilt work patch. There are some assets on the market that we've looked at. But even at today's prices, it's being -- assets are marketed at full retail. And we're going to be very cautious on M&A. With our balance sheet and our organizational capacity, we would love to find a transaction that adds value to our owners and it increases our opportunity for operations. Quite frankly, a lot of the assets out there have peaked production. They've really drilled to increase production over the short run and have rather short inventory behind that. And that doesn't do much for us. We've also traded and done a lot of swaps to increase our ability to block up our drilling spacing units and have long laterals. So there's a lot of that type of activity. That's the benefit of us and the operators we trade with. But we look at everything. We're very active in that market, but we're going to be really cautious and preserve value for our shareholders."}, {"role": "user", "content": "Yes. Like your strategic nature, Tom, it's always paid dividends. My second question, maybe just sticking with Del [Phonetic]. Could you give me an idea of sort of -- I know you mentioned or you or Scott mentioned six rigs likely to continue active on the Del this year. Could you remind me kind of what area that will focus? And as a result, really any notable change in the GOR this year versus last?"}, {"role": "assistant", "content": "No. That tends to move around depending on the nature of the program, where we're permitted. This year, looking ahead, we're heavily in reach. We're heavy in Culberson. Eddie is a lower share. Lake County is still very active. It's in our deck, our breakdown of where our activity is. But it does tend to ebb and flow. But you're probably going to see the majority of it on any given year and being ready for [indecipherable] just because of their [Phonetic] say of Texas, the time line between project inception and moving dirt is pretty short, whereas you get into Mexico, you have state and federal permit constraints and it's just not as nimble, but it's going to happen flow."}, {"role": "user", "content": "Very good. Thank you, Tom."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Your next question comes from the line of David Deckelbaum from TD Cowen. Your line is open."}, {"role": "user", "content": "Good morning, gentleman. Scott, thanks for your time today. I was curious -- I wanted to ask a bit -- I don't know if my eyes are just playing tricks on me, but when I look at presentations, are you including greater activity at this point for the Harkey zones? And I guess you didn't touch on that specifically I guess, with this presentation, but can you update us on how the Harkey performance is relative to sort of the other programs in Culberson? And how you're thinking about that zone? And perhaps the more challenged commodity environment today?"}, {"role": "assistant", "content": "Well, we love the Harkey. I'll say the Harkey, like many, is highly variable. It's not a one size fits all. So around the basin, it's going to vary. But in a lot of our position, it's highly and competes very nicely with Wolfcamp. We've very active in the Harkey as you can look at our Slide 12. We've got a lot of Harkey in our program. I think we'll continue with that. And it depends on where you are. There's places where it's right on top of the Wolfcamp. There's places where it's a little lower than the Wolfcamp, but it's one of the best landing zones in the basin. I'll say that flat out."}, {"role": "user", "content": "I appreciate the color there. It doesn't sound like necessarily a composition has shifted from quarter-to-quarter, per se, though."}, {"role": "assistant", "content": "No, no."}, {"role": "user", "content": "Okay. Shifting just to the Marcellus briefly, just to revisit lateral length progression over the next several years. The upper obviously, has a greater weight, I think, and I think you all said in the '23 program versus what you expect to do in '24, '25. Should we expect that future upper wells that are in the program in '24, '25 are still in that, call it, 11,500-foot range? Or how do you think about the average lateral length for the upper versus the lower in the next few years?"}, {"role": "assistant", "content": "Well, the average lateral length in the upper is going to be on the longer end of that. The upper is fairly wide open. So I think you're looking at average lateral lengths, they're going to be 10,000 to 15,000 feet, probably closer to the lower end of that, depending on what our units look like. So a lot of the average lateral length of the Marcellus program is really a combination or a function of the upper versus lower mix. As we fill out the lower, we're going to have shorter lateral lengths because we're filling in islands that are undeveloped. Yes, hopefully, that answers your question."}, {"role": "user", "content": "Yes, appreciate that. Thanks, Tom."}]}, {"messages": [{"role": "system", "content": "And there are no further questions at this time. Mr. Tom Jorden. I will now turn the call back over to you for some final closing remarks."}, {"role": "assistant", "content": "Thank you all for joining us. It's nice to generate and discuss great results. We've always been a team that likes to talk about results more than promises, and I look forward to continuing to talk about results as time marches on. Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first caller is Matt Niknam with Deutsche Bank. You may go ahead."}, {"role": "user", "content": "Hey, guys. Thanks for taking the questions. Just two quick ones if I could. First on bookings trends, can you comment at all in terms of linearity and whether you saw any potential slowdown going to some of the Macro choppiness that really picked up in March. We've heard maybe similar theme from some others across tech."}, {"role": "user", "content": "And then just the second one on capital allocation. Specifically, just related to potential inorganic opportunities, just wondering what you're seeing in terms of opportunities both domestically and abroad, whether seller expectations have become more reasonable just in the context of leverage now sitting just shy of 3.5 turns. Thanks."}, {"role": "assistant", "content": "Thanks, Matt. Yeah, look. I think overall, as we said in the script. I think we continue to feel good about the demand level. I think definitely, customers are feeling tighter budgets, looking to stretch their dollars, but I think their commitment to digital is strong and I think how they're using us in terms of looking to capture savings in a variety of areas, and again, long-term digital transformation equipments are driving pretty solid activity levels. So I think with the overall, we did about 4,000 deals in the quarter with 3,000 customers, very much in line with kind of what we've done in prior quarters. Our linearity was pretty good and so we probably saw a few more deals slip in the following quarter than we would have in previous -- in previous quarters."}, {"role": "assistant", "content": "And then on sales cycle, just to give you a more of a concrete data point to hang your hat on, we usually see about 45%, I'm sorry, about 40% of our deals extend beyond the 90-day sales cycle. And that rose in this last quarter to about 45%, so a little bit of an increase but not particularly material, and as we saw a little bit of slippage, actually our linearity in Q2 is already looking pretty good. So we started with a little bit of richer funnel. And so we're off to a -- off to a good start in Q2. So again, I think that clearly, you're feeling a little bit of caution in the macro market. But overall, I think in terms of what people are -- how they're thinking about digital, how they're thinking about Equinix in that context, we continue to see a pretty good overall environment."}, {"role": "assistant", "content": "Relative to your second question on capital allocation. Look, our balance sheet, thanks to our team's efforts, is in a really good place. And as I've said in a number of settings, you know, I do think there's going to be opportunities for us both organic and inorganic. I don't think we're -- we're starting to see I think some softening in multiples. And I think that's likely to continue depending on kind of overall sort of recessionary sort of dynamics and that kind of thing. And so we'll -- we'll keep an eye on that. I do think as a market leader and we've got a long track record of being able to unlock value from M&A and we're definitely positioned to do that if the right things come along, and so, I do think that we probably expect some capital allocation towards that, and I think our balance sheet puts us in a really good position."}, {"role": "assistant", "content": "And Keith, anything to add there?"}, {"role": "assistant", "content": "Yeah. Matt, if I could just maybe add a couple of quick points to what Charles said. The other part about the leverage being a little bit lower than we typically run at is part, just because the money that we raise and the opportunity -- the opportunity that we sort of went for us to go into the market and drawn some, particularly on the debt capital in Japan, that put more cash on our balance sheet and so that cash is going to get consumed."}, {"role": "assistant", "content": "But one of the things I wanted certainly, you and the rest of the listeners to walk away with is that we do have the cash, we have the flexibility, both operationally and structurally. But we're going to consume the cash, and in many ways, we're paying today for one, we're fully-funded for all that we see, but you look forward in time and say, well, what are we going to do in 2024 and what are we going to do in 2025 and so you're already, we're already thinking ahead, enhance my comments that we want to continue to raise capital, because we know our dividend, our dividend is going to grow. We know we're going to continue to spend capital and the like, and we want to have that flexibility that Charles sort of alluded to when you know, when things shake themselves free, if it makes sense for us, then we would certainly strike and you need a good strong balance sheet."}, {"role": "assistant", "content": "All that said, at the end of the day, we're going to consume the cash, we're going to consuming it into our growth cycles and our leverage is actually going to go up because we're measuring it on a net debt basis, and again, I just think we all like the flexibility and the liquidity we have as a company and we can use that to our fullest advantage - advantage going forward."}, {"role": "user", "content": "That's great. Thank you, both."}, {"role": "assistant", "content": "Thanks, Matt."}]}, {"messages": [{"role": "system", "content": "Our next caller is Jon Atkin with RBC. You may go ahead."}, {"role": "user", "content": "Thanks. I got a couple of questions. One on slide 10 where you have the stabilized growth of 11% top line. I think that's a record, and I just wanted to get a sense as to what was driving that. And then another metrics question, just the Americas cabinet equivalents actually was down sequentially in MRR, just a bit. In APAC and in EMEA, the cabinet's billing number didn't grow at all, the footnote referenced timing of installs and churn. And I'm wondering if you can kind of drill down on that a bit. Thanks."}, {"role": "assistant", "content": "Yeah, great question, Jon. So on stabilized growth obviously, incredible results fueled obviously in part by PPI, the power price increase. So a 11% is definitely really high. And if you take out the effects of power price increase, that still takes you down to about 7%, so really attractive. And if you take out the new stabilized assets, which are obviously less mature and probably growing faster than others, it takes -- would take it down to about 5% from the previous sort of portfolio of stabilized assets."}, {"role": "assistant", "content": "So and that's still at the high end of the 3% to 5% that we've been talking about, but this is pretty typical of the dynamic as you very well know when you add in sort of a new set of stabilized assets, sort of saw to the growth a little bit up, and then as you -- as you increase utilization and sort of tap out that growth, it might tend to sort of come back down a little bit. And then ROIC, it goes a little bit in the opposite direction. It's sort of impaired by the fact that these are less mature, but then I think it would tend to rise back. And so overall, we feel really good about stabilized assets and I think they are a reflection of the -- of the strength of the business model."}, {"role": "assistant", "content": "Billable cabs. Yeah, for sure, definitely, a good -- good solid quarter in Americas. APAC is coming off a really strong quarter last quarter. And so it was flat this one. EMEA has actually had sort of no meaningful adds the last couple of quarters, and I know that creates a little sort of mental dissidence for people to see a couple of quarters without billable cabs, but I think it's important to remember that really the dynamics of the business are such."}, {"role": "assistant", "content": "In EMEA actually, if you look at a 8 quarter, 12 quarter trend, we've actually had a lot of -- a lot of strength there in terms of cabinet adds, and you get into a situation where essentially you start seeing high utilization rates in certain markets. Therefore, you're probably going to see a little less large footprint and then you actually start a process -- started the cycle and looking for good churn to try to make room, and that kind of can lead to some flat spots I think from the billable cabs, but we always encourage people to really look at a longer-term trend. We clearly will grow, can, will, and need to grow billable cabs across all three regions and with the size of the development pipeline that we have, that will happen."}, {"role": "assistant", "content": "But let me give you just a data point on Europe. One of the things, this happened in Europe and it gives -- I think it's something to sort of hang your hat on and really reinforce why we talk so much about our strategy and maintaining discipline in our strategy because we could turn ourselves into cabinet flingers and that's really not what we want. And so if you look at Europe, we actually had a churn this quarter in a market that is very tight, about 440 cabs and that was a -- it was a pretty low dense implementation from a power density standpoint and not really well-interconnected. And so we were getting a cabinet yield that are well below our average."}, {"role": "assistant", "content": "When we go to resell that, we will likely resell that in significantly more small to mid sized deals than sort of one big footprint. And when you -- when you look at what's likely to happen there, we're probably going to increase the revenue, and therefore, the yield per cabinet, when you get more interconnection, higher power density and a higher price point, we'll probably increase the revenue from those 440 cabs, 50% from that capacity when all is said and done. And so, the significant growth with no billable, essentially zero increase in billable cabs and no incremental CapEx."}, {"role": "assistant", "content": "And so this is why when you hear us talk constantly about right customer, right application, right asset, and that's more than just a sort of a clever thing for the earnings call, that's a way of life here in terms of how we drive our sales team and I think that gives you a kind of a good reflection. So we will -- you will see the billable cab growth, but I think -- I think right now, you're seeing good healthy growth across those because I think we're playing every lever, power density, price point, interconnection, and I think it's really driving health in the business."}, {"role": "user", "content": "And then if I could follow up on AI. You mentioned some wins there and what are we seeing in terms of rough sizings. Are they -- do they tend to be very cross-connect rich or more density rich or what -- or how would you kind of qualify or characterize the AI demand you're seeing so far?"}, {"role": "assistant", "content": "Yeah. I think it's a -- it's a little early to tell, but we have seen, it's interesting because ChatGPT has created a media frenzy around AI, but the reality is, we've seen AI-related opportunities in our pipeline for the last several years. And for those that are familiar with the story and out on the investor circle with us, you've heard me talk about that. And I think that most typically, it is people thinking about how to use their data and where to place their data. And what we're seeing is actually a trend towards people saying we want to take our data and place it sort of Intercloud. And we want to have control of that data, we want to intersect it with other data sources and we want to be able to move it into and out of Clouds as appropriate for these things, and so -- so we have seen some large training, model training opportunities. And those are partially economically driven. And just it's actually cheaper to do on sort of dedicated hardware, if you have sort of a sustained commitment to doing AI training. And so we've seen some of those."}, {"role": "assistant", "content": "And then inference deals, which I think are going to be a bit more interconnected are -- where people are actually deploying inference -- AI inference use cases that are sort, and I think where we're going to be uniquely well-suited is when insights are both one, when datasets are dynamic and they're updated frequently and they are taking in a lot of new data. And secondly, where insights are real time and mission critical. I think and that -- that really doesn't sort of fit the profile of the way current large language models like ChatGPT are being used. And but we do think that what's going to happen as people are going to build vertically oriented sort of AI use cases on top of foundational models that are going to be sort of cloud centric. And I think that we're going to be well-suited to responding to some of those opportunities."}, {"role": "assistant", "content": "So I think it's going to be a mix, I actually think some of the training stuff, Jonathan, is going to be more suited to our xScale portfolio, and I think some of the inference stuff is probably going to land in the retail portfolio at the -- at the digital edge, and so that's sort of the current dynamic but -- in early days, but I think it's an exciting incremental opportunity and we're going to talk a little bit more about that at Analyst Day."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our next caller is Nick Del Deo with MoffettNathanson. You may go ahead."}, {"role": "user", "content": "Well, hi, and thanks for taking my questions. First, Keith, I thought -- I thought some of your comments about Singapore and the opportunities to better monetize that space are pretty interesting. I mean, is the plan to just move those customers across this -- across the street to Johor or some other market or are they going to be let go? How impactful do you think this might be over time, and when might hit your results? And are there other markets where this might come into play or is Singapore kind of a unique situation."}, {"role": "assistant", "content": "Well, first, it dovetails nicely into what Charles was really talking about in the European theater. Where you have a tight market, you make some decisions about -- about looking to optimize the environment, and with that, sometimes customers move out some of the large deployments. As it relates specifically to Singapore, my reference was no different really than what -- again, what Charles was talking about. But we do see an opportunity, there happens to be a larger installation related to -- to our customer, and maybe it does move to a different market for us and that would be fine. But the real focus is getting capacity in the Singapore market, getting a price uplift."}, {"role": "assistant", "content": "And again, going back to what Charles talked about, that had -- we are sort of maybe with the breadcrumbs that we see something that we're looking at right now, that is going to be upside, and of course, when we do that, it has an impact on the net cabinets billing, and of course, that has an impact on our churn metric. I maintain though our churn is going to be at the lower end of our range for the year, so I'm not worried about that. But this billing cab -- net billing cabinet metric is the one that we are always sort of looking at. It causes us a little bit of discomfort because we know we're doing the right thing for the business, and yet, it presents itself maybe a little bit unfairly to us and so."}, {"role": "assistant", "content": "But bottom line is that, that's an initiative that we would embark upon. And that -- and Singapore is not the only market, any place that we see that opportunity, again, I will refer back to Charles's comments, where we don't need -- where we can get an uplift, an optimization of the asset, we don't have to put more capital to work and you're driving value into the equation. And so that's just a real good outcome for us, and if we can do that in places, we are tight and there is the demand, we'll make sure that we do it."}, {"role": "assistant", "content": "Yeah, Nick, and I'd add a little bit more color on that thing. We have a few more examples where I think we have footprints that probably would have been better suited to xScale facilities that we had them at the time that we took them. That now, we are sort of saying, hey, that we would really, we really need that capacity for -- to fuel the retail footprint, and obviously in Singapore, where there is a broader sort of capacity, constraint concern, it's really critical that we -- that we recapture those, and so. But there are other -- there -- other markets where I think we see some of that opportunity and other markets in which, you know, some of these capacity constraints may come -- it might come into play. And it's also one of the reasons why I think we have to continue to lean in on sustainability."}, {"role": "assistant", "content": "And the connection between those things is I think for us to make sure that we are going to be in line to get the power allocations needed, the permits needed, et cetera, to continue to drive capacity in markets where jurisdictions are quite reasonably looking at how to manage their -- their energy needs. I think it's going to be important that we -- that we are able to say, hey, we're the responsible party to partner with to continue to be a digital leader, but be that in a -- in a really responsible way. So, a lot of sort of interconnections between those various thoughts and threads."}, {"role": "user", "content": "That's great. That's great. Thanks for that color. And Charles, can I ask one on interconnection. You talked a bit how -- how adds came back in Q1 versus Q4, still below trend though. And can you share any updated expectations regarding when we should see that grooming dynamic abate and get adds back to more normal levels?"}, {"role": "assistant", "content": "Absolutely. Yeah, as you noted, there's a few, noted on last call and in the script, there's few factors that play out interconnection. Overall, one thing I'd say is the traffic levels continue to be really attractive. You're seeing that in exchange, you're seeing that in terms of in Fabric, overall provision capacity. It's a little tougher for us to tell on physical cross-connects, exactly how much traffic is flowing because we don't -- we don't like the electronics on those things. But it's fair to say that I think what you're seeing is a trend towards significantly higher speeds to support higher and higher traffic, and by the way, I think AI is going to only to add fuel to that fire."}, {"role": "assistant", "content": "So gross adds have been strong, and that's one of the things that we really look at and say, how many gross adds are there and I think that's a primary indicator of health and those have been very much in line with the four-quarter averages. There is some grooming activity, as I said last quarter, and we think -- we thought that would moderate. It did moderate to some degree, but was still there at an elevated level, I do think people are going to run out of low-hanging fruit on that one. And so I think that we'll eventually see more moderation there and that will help the net adds further."}, {"role": "assistant", "content": "I think this trend towards higher speeds though is a more sustained trend, and so I think we're just going to have to look at kind of how -- where things settle out. We've seen this in the past where traffic is sort of catching up to provision capacity a little bit. And so, but again, I think the long-term trend here is very high degrees of traffic flow, higher degrees of interconnection. The diversity we're seeing in the interconnection part system and ecosystem is increasingly rich, so more A to Z and sort of unique connections. And overall, just the strength that gets a 12% revenue growth, a little lighter on the unit side. I do think we'll see some more moderation of the grooming per se, but I do think that that will be offset, that we'll still see a little bit more in terms of fewer higher-speed circuits, and so we'll just -- we'll continue to track that."}, {"role": "assistant", "content": "But I'll give you the punch line here. Interconnection is well north of a $1 billion dollar business for us, growing at 12% at very, very attractive returns on capital. And I think that the opportunity for us to continue to sort of lean into that and grow that business, particularly as we grow Fabric, and as we think about what the bigger cloud networking opportunity looks like and what our role in it is continues to be a big part of the Equinix story."}, {"role": "user", "content": "Okay. That's great. Thanks, guys."}]}, {"messages": [{"role": "system", "content": "Our next caller is Simon Flannery with Morgan Stanley. You may go ahead."}, {"role": "user", "content": "Great. Thank you very much. Good evening. I wonder if you could talk a little bit more about pricing, outside of the power price increases. We certainly heard a lot on the hyperscale side of prices firming and you referenced some of the capacity constraints in the market. So what are you seeing both in xScale and then also just in your core business around the opportunities to continue to take price, both on new business and on renewals. And then maybe a little bit on metal, both in terms of customer adoption and in terms of your continuing to rollout the product across your footprint. Thanks."}, {"role": "assistant", "content": "What's in there. So let me try to hit them all. So, yeah, pricing definitely firm. Obviously, PPIs have gotten a lot of airtime, but I think, perhaps, an even more important trend is our ability to sort of sustain pricing power on sort of the broader -- on the broader portfolio of service offerings. And so we have elevated our costs on space, power and interconnection, and from a list price perspective across all our markets. And so I think you're going to see that continuing to sort of roll into the business."}, {"role": "assistant", "content": "Our xScale pricing has definitely firmed and -- across the world, and so I think we're seeing attractive -- attractive price points and good solid cash-on-cash returns on the products -- projects that we're underwriting. And as we said, we've got a very high degree of pre-leasing there. And so -- and again, we've raised pricing both on the -- on the retail side space, power and on the interconnection units."}, {"role": "assistant", "content": "So -- and so we have and then you have the escalators and we are -- our escalators are also going up. And so in some cases, we're doing CPI or other index-based escalators and then -- but then more broadly, if we're doing fixed escalators, they are much higher than they have been in the past. And so I think we're seeing all of that roll through as a clear dynamic in the business in terms of -- and you're seeing that show up in MRR per cab, right. I mean, we gave you a headline stat there and key script about how MRR per cab is increasing. Yes, a big chunk of it due to PPI. But even absent that. I think our yield per cab, which is an absolutely critical metric for us continues to rise."}, {"role": "assistant", "content": "And so, and then on Metal, we talked a couple -- about a couple of really nice wins. And we are really cultivating early users in -- in what is more of a product-led growth motion that's probably a little bit more typical of SaaS providers. And so, we're cutting our teeth on that to be candid, but we're getting the hang of it, and we are seeing some uptake from developers and from sort of digitally-native service providers, and we're also seeing some pretty big opportunities in our funnel about more traditional service providers or large enterprises looking to reduce the pain of managing the technology lifecycle and Metal really helps with that."}, {"role": "assistant", "content": "So -- and so we'll probably talk more about that at the Analyst Day as well, but we feel -- continue to feel good about the underlying drivers of that business and kind of why we -- why we did that acquisition in the first place."}, {"role": "user", "content": "Thanks a lot."}]}, {"messages": [{"role": "system", "content": "Our next caller is David Barden with Bank of America. You may go ahead."}, {"role": "user", "content": "Hey, guys. Thanks so much for taking the questions. And I guess, so Keith, I just want to make sure we all have the right jumping-off point. So thank you for the waterfall for the 2Q EBITDA guide and I just wanted kind of to understand the combination of forces of the kind of impact of the roll off of the hedges and you kind of increased usage as they kind of merged together to kind of create this $43 million kind of move down at the midpoint. And then assuming that that's the right jumping-off point, these hedges are the right levels for the rest of the year. And it implies about a $14 million sequential EBITDA growth in 3Q and 4Q to get to the midpoint of the full-year guide. Could you talk a little bit about what the drivers of that will look like. Is it going to be kind of a steady cost structure with pretty much volume and price being the drivers of the margin. And any color there would be super helpful. Thank you."}, {"role": "assistant", "content": "Sure. Well. Thanks, David, and thanks for sort of laying it out there. And I think, first, if you start at the revenue line and you look at sort of the quarter-over-quarter movement, the first thing you notice is that, that is not a normally substantial increase quarter-over-quarter coming off such a big number from Q1 relative to Q4 last quarter. But one of the things that you'll appreciate and it was -- hence, it was built into my comments -- in my -- in my script, non-recurring revenue is moving around quite a bit."}, {"role": "assistant", "content": "And right now, we're making the underlying assumption that it's -- it's not hitting in any specific quarter. And so what you're seeing is a meaningful step down in non-recurring revenue between Q1 and Q2. So that's the first thing. And so you feel -- you feel that in many different ways, but you certainly do feel on the EBITDA line as well."}, {"role": "assistant", "content": "The second thing and sort of attached to that is xScale is we are, as Charles alluded to in his script, we sold out one complete asset in Frankfurt, and we are very active in some -- across all three regions of the world, and we anticipate a lot more xScale activity. And so you'll see that play itself out into the year or throughout the rest of the year. Right now, our NRR trends about 5% of revenue. For the year, I think is probably going to be roughly 5% of revenue. But the range is going to be somewhere between 4.2% and about 7% between the next three quarters, and we don't know exactly where, so we haven't really guided well -- as well as maybe we want to given the set of circumstances."}, {"role": "assistant", "content": "And then the last piece, I would just say, look, there is an element of conservatism built into our model here for obvious reasons. And again, we're trying to be very prudent about what we look at. And we gave you, we know what we did for the first quarter. We're running a little bit ahead. That was again associated with xScale, the xScale fees. But as we look forward, we really just wanted to, at this stage of the game, give you the FX and then continue to look at what's going on in the business."}, {"role": "assistant", "content": "As it relates specifically to the power and the power costs, again no surprise. We've been very thoughtful about the power dynamics for this year and the power price increases. And we had to factor in and look exactly at what was the cost going to be for the year including when does the hedges roll off and when does some other start and what's going on in the regulatory -- the regulated environment. And then there's some other markets that we are going to be putting price increases through effective May 1 and that's Hong Kong and Tokyo."}, {"role": "assistant", "content": "As we're looking at all of that more specifically and our hedge -- you know, our costs are going up and so you're going to feel that throughout the rest of the year. It's baked into the guide already, it was baked into the original guide so this isn't a shift. And what you -- what you should see is really EBITDA profitability continue to increase throughout the rest of the year. And so again, I think we've got the making of a really good plan here but we're -- we're going to -- we're sort of holding firm on what we've shared with you when we started the year, knowing that one other thing that's really working in our favor is currency."}, {"role": "assistant", "content": "And again, we get a little bit of currency, but we're all sort of reading the same thing. If you look at what the US dollar could do anywhere between now and the next 12 months, some are calling for a 5% depreciation, some are calling as high as a 15% depreciation of the US dollar and 60% of our revenues reside outside of the US and you don't have to go very far to figure out what is the implication of that if 60% of our revenues move 5% or 15% before taking into consideration of the hedges, you have a really substantial move on top line and on bottom line, and that drives a lot of value on a per share basis."}, {"role": "assistant", "content": "So hopefully, that gives you sort of a full look at all the things we're thinking about and trying to share with you. But at this point, we felt really comfortable just sort of holding firm on our guide and just giving you a little bit of FX and some operating performance coming out of Q1."}, {"role": "assistant", "content": "Yeah, maybe a -- Dave, I'd add a little bit of more color is that I think, I will tell you that we are also focused on every element of the business model. So if you look at the revenue line, say P times Q, I feel very good about P, continue to feel good about Q and we're going to continue to work the heck out of that. You know, I would say that at the next sort of a click down on cost of goods, we're continuing to drive efficiency sort of projects across the business to try to improve cost of goods and gross margin."}, {"role": "assistant", "content": "And then when you look down further, I also think just given the broader market. We're going to continue to be diligent on spent. We did spend, we opened up the wallet a bit to make sure we can add some more headcount and we're trying to bring them up to productivity as quickly as possible, but you saw a flat SG&A spend quarter-over-quarter. And we're going to continue to be very disciplined about -- about that as well. And so, we're going to -- we're going to work every element of the model, and continue to do what we need to do to try to deliver the long-term performance."}, {"role": "user", "content": "Thank you, both, so much. It's really great."}]}, {"messages": [{"role": "system", "content": "Our next caller is Michael Elias with TD Cowen. You may go ahead."}, {"role": "user", "content": "Great. Thanks for taking the questions. And then first, you talked about organic and inorganic opportunities, just wondering if you could give us a sense of the markets that you're prioritizing or perhaps regions that you're prioritizing from that perspective. And then also, there were some press reports out earlier today suggesting that Equinix is exploring the sale of its Hong Kong data center assets. Maybe without commenting on that specifically, just at a high-level, do you view capital recycling this year as a likely option? Thanks."}, {"role": "assistant", "content": "And while we -- I'll take the first one and then Keith, can comment on the second one there relative to Hong Kong. But, on M&A, as I said. I do think there's opportunities for us. And we've talked about what are some of those markets might be. I think, Southeast Asia is going to continue to be an area of opportunity we believe over time. And there's several key markets there that I think we've got our eyes on. We've actually done a couple of organic projects already in Indonesia and Malaysia and we're going to continue to stay, so our eyes are very wide open in terms of opportunities for us in that -- in that area."}, {"role": "assistant", "content": "India, we've announced a new build in Chennai, but I do think there's a lot of opportunity in India and I think that could be a combination over time of organic and inorganic. And I think that we also, I think one of the things that we have not done a lot of, where we haven't done anything yet, but I think that could be on radar is thinking about opportunities from an xScale perspective in partnership, with our partners. All of those probably represent some level of opportunity for us M&A."}, {"role": "assistant", "content": "And I think as we look at some of the dynamics and opportunities in the market including AI, I think that could be -- those could be all very relevant for us. So that's the -- that's the first question, and then I'll kick it over to Keith and he can talk a bit about the -- this capital recycling question."}, {"role": "assistant", "content": "Yeah. Thank, Charles. And so Mike, I'll say a few things. First and foremost, we typically are not a recycler of assets, and you have to step back. And we've said that, that we said is that actually when the Analyst Days, I think it was might have been the last one. We're basically we're a platform and all assets are very important to the platform. And in particular, Hong Kong is a very important asset to us and something that is important to our platform. So we don't think about the businesses selling assets, but we do also -- we do think about ways, innovative ways to allow us to scale and grow the business, and an example of that is our Jakarta business, where we recently entered into a partnership with a -- with large conglomerate, so that we go into that market in tandem, and it just -- it's an innovative -- sorry, innovative way actually to raise capital."}, {"role": "assistant", "content": "And so overall, we're not in the business of selling assets, but we're always looking across our portfolio and trying to figure out how to optimize the capital structure, and I think that sort of best reflects our view that the platform, the Equinix platform is critically important to all the different assets that we have in our portfolio."}, {"role": "user", "content": "Great. Thanks for the color."}]}, {"messages": [{"role": "system", "content": "And our next caller is Michael Rollins with Citi. You may go ahead."}, {"role": "user", "content": "Thanks. Hi. A couple of questions. First, and I realize it's still somewhat early in the year. But as you're looking forward and trying to manage the power cost, what's your sense of where these power price increases or maybe future decreases are heading from what you see across the market portfolio for 2024?"}, {"role": "user", "content": "And then just secondly, as we take a step back and the market tries to contemplate the forward growth opportunity for Equinix, is it helpful to consider the company's position on three vectors? The percentage coverage of core global markets, the percent penetration of key customer cohorts and where the wallet level is, especially when you break out past the top 50 customers. And is that something that you can give us a bit of an update on today."}, {"role": "assistant", "content": "Sure. And I'll -- I'll start and Keith can jump in here a bit. And obviously, very hard for us to predict anything on power. I would say that I would expect in general, more volatility rather than less, right. I think we're living in a volatile world, I think there's a lot of still dynamics at play in terms that could impact power pricing broadly speaking and now the good news is, is that I think that again, this opportunity for us over the last, almost year to really educate our customers about how we go about energy procurement, and what it means and how it dampens volatility and why that's good for them and why it gives them budget predictability, et cetera, are all things that I think have been really good for us."}, {"role": "assistant", "content": "Obviously, you look at in sort of deregulated markets where we can hedge, we're going to dampen that volatility out. And so, and again, we don't know. There definitely have been markets that have come down in price over the last several months, but recognize the customers were enjoying a very different price point than what would the spot was at in sort of the latter part of 2022 and early 2023. And so they were -- they were really, that was a huge benefit to them, and now some markets have moderated substantially and some people predict that they will continue to moderate further, but I think others predict particularly in Europe that unless we get some sort of resolution to the conflict in Ukraine, that we likely have more volatility and even I think the fact that we had an energy transformation is underway in Europe under any circumstance, that is going to be decade long, multi-decade long in nature, I'd expect more volatility rather than less, and I think our approach to that market and how we've approached hedging, et cetera, provides real, real benefit."}, {"role": "assistant", "content": "So -- but we -- we'll continue to sort of monitor that. I do think in some cases, we're seeing some benefits in terms of power prices being a little lower than we expected in some places. We are going to have some of the hedges roll off in Q2 and we've talked about that in the script. So you're going to see some elevation there and so that shouldn't be a surprise in the next quarter, but I definitely think it's going to continue to be a volatile -- volatile overall market."}, {"role": "assistant", "content": "Before I go to the other questions, do you want to add anything on power?"}, {"role": "assistant", "content": "The only thing I would add Michael to Charles's comments, the other aspect of it is operationally, we are highly focused on running the business more efficiently. We're very sustainable -- renewable and sustainability focused, and as a business, we want to continue to make sure we drive -- drive down the overall cost of the business. And so that's going to be an important aspect on a go-forward basis."}, {"role": "assistant", "content": "And Charles also made the comments in his prepared remarks around PPAs and our desire to go into -- into contractual arrangements, whether it's wind or solar developers and create capacity for the market and we see that as a bigger part of our business going-forward as well. I think it's sort of attempts down the -- some of the volatility, because it is predictable over an -- over an extended period of time, at least those arrangements are. But overall, it's the combination of all those things and our commitment to a 100% renewable, and that's a critical aspect of our energy strategy as well."}, {"role": "assistant", "content": "Yeah, and then, Mike, on the other one, I think I don't want to steal any of my thunder for Analyst Day, but I would say that I think we -- we've always talked about multiple revenue or -- your multiple growth drivers and levers in our business, geographic expansion is one of those, so recovering more markets. What's the core market that evolves and changes over time, obviously, we continue to get a huge chunk of our bookings and profits from the sort of scaled markets."}, {"role": "assistant", "content": "But what you see is a market start to break into that group and they mature to a certain level and I think we're going to continue to see that dynamic. The nature of distributed infrastructure continues to drive that and so you're seeing hyperscalers expand their edge or their presence in both their edge and their core, and we want to be a partner to them in that, and so I think you'll expect us -- you should expect us to see continued investment to align with that."}, {"role": "assistant", "content": "And where the digital edge is, is continuing to evolve, but I do think our commitment is to continue to be that best manifestation and so I think we're going to continue to see a geographic expansion as a driver. And then in terms of wallet share, I think it's one, we are -- we're sort of -- we're an underlying provider to these companies as they scale their infrastructure."}, {"role": "assistant", "content": "And I think that is allowing us to play in a very significant way, but then also capturing net-new markets. I think if you look at service providers, for example, the number of service providers and the lifecycle from a small service provider to a scaled service provider is changing in this sort of more cloud-centric world and so, so I think we're going to continue to have opportunities against both new market expansion, product-line extension and new customer growth."}, {"role": "assistant", "content": "All of those things I think are going to be drivers of growth for us over time."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "And our next caller is Brett Feldman with Goldman Sachs. You may go ahead."}, {"role": "user", "content": "Hi. Thanks for taking the -- yeah. Thanks for taking the question. So Keith, it was good to hear in your comments your expectation that you're going to continue to see full-year churn towards the low end of the range that you've targeted. I think as a casual observer, that would sound very surprising, right, it's just sort of a broadly difficult macro-environment. We talked here about slowdown in spending on cloud, and obviously, you pushed through some pretty significant price increases recently and so. And I was hoping you could maybe elaborate on what gives you confidence in that you're going to continue to see low churn and then just maybe remind us when you do see churn, what is driving it and has that shifted at all from what you've historically seen. Thanks."}, {"role": "assistant", "content": "Yeah. I think first and foremost, it's a great question and our confidence really comes from the fact that the team does a deep analysis into our customers, and no surprise to you when you look at our top 10 customers, again it's still on the charts, but top 10 customers represent about 18% of our revenues, the top 50 represent about 37%, 38% of our revenues. We have a really long tail and so we have great visibility into -- particularly into our larger customers and what they're doing. So that's the first thing."}, {"role": "assistant", "content": "The second thing is, its critical infrastructure. And it's not to suggest that companies don't struggle financially or there's consolidation or they choose to bifurcate their infrastructure, choose -- or they even just choose to do something completely different. But overall, when the majority of our growth comes from the installed base and we're continuing to deliver very high-quality assets with a very high operational standards around the world, we just tend not to suffer the same level of churn that we -- that we had previously. And from my point of view, it's the deep analysis that the team has done and the visibility into what we see going forward that It gives us confidence that we're not going to see any meaningful churn beyond what we've guided to."}, {"role": "assistant", "content": "And Brad, the other thing -- and the last thing I would just say that if there is visibility is something that comes in size, we're going to telegraph that anyway. But there's just no indication that, that exists and it goes back to what is the customer fundamentally doing inside our business and can they grow and scale. And that's what we're seeing as those customers continue to buy more services, enter into new services and then as we introduce new service offerings, I think it's just an enhancement or even a limiter to the amount of churn that we're going to experience as a company because we provide alternatives. So we're not a one-trick pony."}, {"role": "assistant", "content": "So that -- that'd give -- that's what gives you, I guess, the overall sense and let me leave it there."}, {"role": "user", "content": "Perfect. Thank you."}, {"role": "assistant", "content": "Charles, could you add anything,"}, {"role": "assistant", "content": "No. I mean, I think in terms of character of the churn, I think there's a certain amount of ours that is more frictional churn associated with people evolving their footprints, how they're serving end customers that's particularly true in network providers and some other service provider types. I think that -- I think you are seeing, you are going to continue to see some level of cloud migration, workloads that are well adapted to the cloud ought to go there. I keep sort of reiterating that. And so, I think we see some level of that, but more typical -- most typically, that is in the context of a sort of an evolution towards a long-term hybrid multicloud architecture state that really plays to our -- our strengths."}, {"role": "assistant", "content": "And last comment I would make is that we keep it, we always say this with regard to churn, the best defense against churn is getting the right opportunities to begin with. And so sales discipline and executing as I talked about earlier in the script, that's really central to sort of maintaining that churn and I think our teams have done a great job on that. And interestingly, I guess, the last category I'd give you. When we do M&A, you find that there is often sort of a churn tail that comes from that because people underwrite to a different sort of an approach. And so you saw that in Verizon and you look at that, we now are reaping the other side of that, as we sort of manage through that, and I'd tell you that, that transaction is looking super attractive, right. And so I think you'll see some of that, that comes on the back end of M&A transactions so that's sort of a third category."}, {"role": "user", "content": "Thank you, everyone. This concludes our Q1 earnings call."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] We'll go to the line of Robert Fishman with MoffettNathanson."}, {"role": "user", "content": "Good morning, everyone. I have a couple of related questions, if I can. Lachlan, after the Dominion settlement, is there anything that you can share to better understand the future settlement risk? And then related, can you discuss whether the departure of Tucker Carlson will lead to changes in the prime-time programming strategy and then potential opportunities for more national advertising?"}, {"role": "user", "content": "And then for John and Steve, just if you can expand on the early confidence you have from recent MVPD renewals? And after seeing the acceleration in retrains growth this quarter, any more insight on whether you can get better pricing to outpace the elevated levels of cord-cutting or just more economics from your affiliate partners? Thanks very much."}, {"role": "assistant", "content": "Thanks, Robert. I don't know where to start. I'll talk about the seven questions. So -- but thank you very much, and good to hear from you. On -- so let me start and hand over, I suppose, to Steve, for that -- the final questions. So I'm obviously limited about what I can say about any ongoing litigation, but I can make the following comments in regards to Dominion. And I referred to some of this in my prepared remarks."}, {"role": "assistant", "content": "Look, as we've stated many times, we always acted as a news organization reporting on the newsworthy events of the day. We certainly included allegations being made by the sitting President of the United States and his lawyers in the aftermath of a hotly-contested presidential election."}, {"role": "assistant", "content": "Now we have been and remain confident in the merits of our position that the first amendment protects a news organization's reporting and allegations being made by a sitting President of the United States."}, {"role": "assistant", "content": "However, the Delaware court severely limited our defenses and trial through pre-trial rulings, one example of being not being able to point to the newsworthy nature of the allegations. So we determined that the best course of action for the company and its shareholders was to settle instead of proceeding with a 6-week trial and potentially two or even three years of appeals."}, {"role": "assistant", "content": "As you know, we have a pending case with Smartmatic, which is a fundamentally different case than Dominion and that all of our full complement of First Amendment defenses remain, and we'll be ready to defend this case surrounding extremely newsworthy events when it goes to trial, likely not until the calendar year 2025."}, {"role": "assistant", "content": "As regards to our programming strategy in prime time, there's no change to our programming strategy at FOX News. It's obviously a successful strategy. And as always, we are adjusting our programming and our lineup, and that's what we continue to do. We are pleased with the strength of the advertising demand throughout our schedule, but particularly prime time."}, {"role": "assistant", "content": "Steve, do you want to talk to the MVPD?"}, {"role": "user", "content": "Yes, sure, on the affiliate. So Robert, yes, listen, we're pleased with the way our affiliate negotiations are going. You know that this year, we had roughly 34% the total affiliate book up for renewal. We've been successful in generating and establishing new pricing benchmarks for the network in FOX Sports or retrains and Fox Sports in those negotiations. And so with another sort of one-third of our book due for renewal in fiscal '24 and a touch under 30% during fiscal '25, we feel pretty confident that we can continue to deliver pricing gains in subscribers. If the subscriber rate of attrition stays at the same level, we expect to post ongoing affiliate revenue growth for the company."}, {"role": "user", "content": "Operator, we can take the next question."}]}, {"messages": [{"role": "system", "content": "And that will come from the line of Ben Swinburne with Morgan Stanley."}, {"role": "user", "content": "Thanks. Good morning. I just want to ask about advertising. As you guys look into the rest of the year and head into the upfront, does Tubi give you guys an advantage as you go into what is, at least, I would describe it as a soft demand environment for advertising and trying to drive pricing kind of across your properties, particularly with the new Tubi Media Group, just wondering if you think that's going to matter enough this year for us to maybe notice as we head into the fall."}, {"role": "user", "content": "And then just on the direct response weakness at FOX News, do you guys have any visibility on sort of whether that's improving here in Q4 or what the drivers of that are? Any relationship to sort of some of the broader volatility around FOX News? Just wanted to get your updated thoughts on that. Thanks very much."}, {"role": "assistant", "content": "Thanks, Ben. I'm glad Robert left your question. But on advertising, look, we -- I think you've alluded to a softness in the market. We're really not seeing that across our major platforms. I'll give you a bit of the detail. The national market, the sports market for us is very strong, very robust. Obviously, as we enter the summer, it's a slower acquired, a quieter -- always is a quiet period for us until the fall when our key marquee sports programming is on air, but we are seeing pretty robust demand for time and availability in the sports market. So we're very confident with sports."}, {"role": "assistant", "content": "In news, the direct response issues, which is a market issue, it's not a FOX News issue, has stabilized. So we're not seeing any more deterioration in direct response pricing. So we feel pretty confident in the stabilization of that piece of revenue. Again, that's really a product or a result of oversupply in -- with our competitors with direct response. It's not so much a FOX News issue, but it's something that certainly has affected our ability to achieve the premium pricing that we've been used to. But again, that issue has stabilized, and we think it offers us a pretty good platform going forward."}, {"role": "assistant", "content": "Another thing to mention on news, which is just a small data point, we're seeing political revenue earlier than we've ever seen before. It's still small, but it's sort of unheard of to have it this early in the political cycle. So again, we think that bodes well for the fall and as we enter the more significant part of the political cycle."}, {"role": "assistant", "content": "And then coming on to Tubi, the revenue is accelerating there. It's -- revenue is -- while it's accelerating pretty strongly -- Gabby doesn't want me to give the number. It would break most of your models. But it's not keeping pace with TBT. TBT continues to grow even faster, which is a great metric. So we have the avails. We're looking forward to Tubi being a central part of our upfront negotiations. It's clearly not only a strategic driver for us but have been an important driver going forward."}, {"role": "assistant", "content": "Then when you get down to local base markets, that's where we're seeing more mixed results in the different kind of verticals of revenue. We're very pleased to see auto, again, continuing its rebound with strong growth in the auto category. The entertainment category, we're also seeing growth in and the restaurant category, where we're seeing growth in. But this is offset by weakness across other categories such as retail, telecom, and sports wagering and betting. So the local market does feel -- overall. But again, we're looking forward for our businesses. Particularly in sports and news, we're looking forward to a strong -- a decent summer and a strong fall season. I think that's all the questions. Thanks, Ben."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "We'll go to the line of Phil Cusick with JPMorgan."}, {"role": "user", "content": "Phil Cusick"}, {"role": "user", "content": "Hi, thanks. A couple of questions and then a quick one. On tub, it sounds like your TBT is still outgrowing revenue, but are you starting to unleash the revenue and profit there a little bit. And then on the legal side, any direction on legal expenses from here? And then one stand-alone, any thoughts on appropriate leverage and capital return from here? We appreciate the $1 billion, but how should we think about this? Are you still going to sit on the cash until we get to the next sort of legal view? Or should something happen between now and then?"}, {"role": "assistant", "content": "Lachlan Murdoch"}, {"role": "assistant", "content": "Thanks very much, Phil. On -- let me start with Tubi and apologies, Steve, for the capital management element of the question. So on Tubi, we're going to continue to invest in Tubi. It's at the same levels. We've been investing over the last year or so. We just think it's a tremendous opportunity for us. As I mentioned in my comments, the fact that we're now -- Nielsen's Gauge now has us over 1% of the U.S. television viewing is a tremendous sort of benchmark to have hit, and I see continued growth there. So from a consumer aspect and from a marketer's aspect, Tubi is becoming more and more a central part of usage and sort of an opportunity. And this is really because the focus Tubi's had or not -- we think of it over the last three years with our involvement, but obviously, the team there has done a tremendous job not only over the last three years but before that in really sort of driving sort of the best-in-class personalized AVOD experience, building an incredible library with nearly 55,000 titles in the U.S. alone. And again, to put that in context, that's 5 times the size of the Netflix library and now really being able to monetize that viewing in a more efficient, better way. So we're incredibly optimistic. And I would say the results are -- and we're incredibly pleased with the performance of tb going forward, and we think it's an appropriate area for us to continue to invest in. On the -- I'll turn it over to Steve on the -- on sort of capital management. But just on it, I'll just start by saying, look, we have a $7 billion buyback authorization. I think we spent about $4.4 billion of that. So we've -- my math's incorrect this time of the morning, a $2.6 billion remaining of the authorization. We fully expect to deploy all of that capital back to shareholders through our buyback. And any litigation has no impact on that at all. Yes, Steve."}, {"role": "user", "content": "Steven Tomsic"}, {"role": "user", "content": "Thanks, Lachlan. So Phil, just to go back on legal costs, legal costs over the last two orthree3 quarters have been elevated. Obviously, we've been deep in the depositions and pretrial preparation for Dominion. So I'd expect that to subside over the next couple of quarters. And then to just pick up on Lachlan's point, listen, we -- the leverage is the debt we have, $7.2 billion, we've got a maturity in January, which we'll make a call on as to whether to repay or refinance. But the leverage feels about right where we are at the moment and our cash position is strong. And so we would anticipate whatever happens with future litigation, we can continue to continue to go with our buyback pacing as it has been over the last couple of years now or a few years now as well as leaving us flexibility to invest in the business or take advantage of any inorganic opportunities, but we'll be balanced about it as we've been saying since the formation of the company."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "And that will come from the line of John Hodulik with UBS."}, {"role": "user", "content": "John Hodulik"}, {"role": "user", "content": "Great, thanks guys. Maybe getting back to the sports theme, where viewership remains strong, I'd say, across the board. I mean First of all, how would you gauge the success of the USFL? Second, anything you could tell us about your appetite for additional sports rights, especially to fill in the summer months? And then how does the sort of relative weighting on sports versus entertainment programming position you guys given what could be a protracted writer strike?"}, {"role": "assistant", "content": "Lachlan Murdoch"}, {"role": "assistant", "content": "Thanks, John. Look, USFL, it's still -- it's just the start of the second season. We're very pleased with it. We're pleased with both its ratings, the quality of the games, its performance on television and ratings. And also, frankly, it's a performance on the ground with ticket sales and engagement with football fans. So early days, but we couldn't be more happy with it -- with how it's tracking today. In terms of additional sports rights, we look across our portfolio of sports rights. We're constantly managing them. We look at sports rights as they come up. And we also look at them as they get renewed just to make sure that they are efficient for us and that we're paying a responsible and appropriate amount for those rights. So we're constantly adjusting, but we do it with, I think, a real commitment to discipline in terms of what rights we would acquire or dispose of. So it's a moving -- it's always a moving feast, but I wouldn't expect anything dramatic at all in that area."}, {"role": "assistant", "content": "What was the last question? The writer strike. So thank you. On the writer strike, look, I think for us, we are well positioned for the writer strike. We think that with our strategic priorities and sort of strengths in sports but also in news, these are 2 areas that are not affected by the writer strike. And the audience will pivot on a -- when they're watching television to those categories. In entertainment, you have to remember as well, we only program 2 hours of entertainment at night. That's a mixture of both scripted and unscripted content. So we feel very well positioned there with that not to be affected by the writer strike really at all. There'll be some scheduling changes with some of this descriptive content, but it's not something that'll have a significant financial impact on us."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions]."}]}, {"messages": [{"role": "system", "content": "Today's first question comes from Keith Weiss with Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Thank you guys for taking the question and nice quarter. Maybe, one topline, one bottom line question. On the top-line side of the equation, you talk do you, strong bookings performance in the quarter particularly with Guardicore. Is that a broader security kind of commentary and maybe part of what kind of sustains on your confidence in the double digit growth throughout the year. Perhaps maybe even sort of - could we see some acceleration on - on a go forward basis based upon that bookings. So one is kind of like a perspective on real-time what's going on the security. And then on the - that our operating margins on a go-forward basis. Can you give us some sense of where the head count reductions are coming from in that 3% headcount reduction and when we think about the better margins that you guys are projecting. How much of that comes from this - this recent round of headcount reductions. How much [Indecipherable] better Opex controls that you guys exhibited thus far in the year. Thank you."}, {"role": "assistant", "content": "Great. I'll take a first part of these and then turn it over to Ed who will get into more of the details. Yeah, we saw strong bookings in Security across the board. You know, it is a challenging environment out there for sure, especially with commits on larger deals. On the other hand, we - we do see a little bit of a silver lining, especially in the financial vertical, which is large for us. With everything that's going on in the banking sector, you there is more concerned than ever around Security and reliability and I think the last thing, a major financial institution wants to see is some kind of problem now, an outage or some kind of half be successful and I think that helps us. Akamai is widely recognized as the best when it comes to reliability and in terms of Security and so I think that is also helping us, especially vis a vis the competition. We're also pretty excited about Neosec, a lot of very positive conversations early on with customers on top of Guardicore and of course the whole suite of Security products. In terms of margins, the the focus of the reduction in force on the go to-market side was really in the management layers and so that we can actually get more feet on the street in services, we can get more people helping our customers particularly in the areas of expertise with Security and compute and in some cases in geographies that we feel are untapped and that we can - we can get more leverage and I think probably, I'll turn it over to Ed now in terms of how this shapes up with all the other things we're doing to improve operational efficiency. Ed?"}, {"role": "user", "content": "Yes, thank you. So we talked about taking a restructuring charge, about half of that was severance related so that the headcount savings and then the other half was - roughly half was related to real estate. In terms of thinking about the headcount savings in our payroll is little over $1 billion, we reduced little less than 3%, so on an annualized basis think of that as kind of in the $40 million range give or take. We'll get about 3/4 of the benefit of that this year. In terms of the real estate, we've probably saved about 25% to 30% of our current spend. More to go there, I expect we can reduce that probably by a similar amount next year. The big savings to come is going to be in third party cloud. We did see a reduction this quarter, which was nice. We reduced our spend as we started to optimize and start to move some things over, but that's - that's a big one, that's about $100 million in total spend or a little bit more and we'll start to see that benefit next year, a little bit more this year, but mostly into next year and into 2025. Team is doing a great job with vendor management, including being able to engineer out certain functions that we may be using a third party for. So, I would say it's a combination of things, but just to sort of put it in perspective that headcount savings is call it roughly a little over a point of margin on an annualized basis. That also gives you - giving you that sort of kind of run rate payroll number, we'll give you the math necessary to build your models to factor in that annual increase that we give every year in the third quarter."}, {"role": "assistant", "content": "[Multiple speaker] Also [Indecipherable] talked about in terms of the reductions, obviously we're directing a lot of resources that were on the delivery side of the house into compute and in many cases is the same person changing what they're doing, but also in this reduction that we're taking, you'll see that effect as well."}, {"role": "user", "content": "Got it. And just to be clear, the the lower Capex intensity, it sounds like that's more efficient sourcing. Not any change in the scope of build out that you guys are expecting for the cloud side of the business."}, {"role": "user", "content": "Yes, so the way to think about that Keith is two things. One, we were able to benefit pretty significantly, actually with pricing reductions in the server pricing. My understanding is that and one of an industry phenomenon, but also just given our buying power, a big chunk of that decline in Capex is related to that. The other thing that I find pretty exciting is we envisioned when we sort of built the models that we'd be able to integrate with our supply chain to really tight with our demand and builds, meaning, not having to overbuild for demand. We've been able to knock-down the time that it takes for us to deploy. So the initial builds that we're building out would be a little bit smaller than we originally anticipated because we expected a longer lead time with our supply chain, so that now that we've been able to shrink that down, we can tighten that up a bit. So those are really the main factors, a little bit of question in terms of a couple of sites that push into 2024 with those two factors are pretty significant and we're very happy that we're able to deliver that just quickly."}, {"role": "user", "content": "Excellent. That's super helpful guys. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from James Fish of Piper Sandler. Please go ahead."}, {"role": "user", "content": "Hey guys, thanks for the question here. Wanted to build-off [Indecipherable], now that you rolled out your objectives for 2023 here. Are you thinking about not just the Capex intensity for this year, as you're starting to kind of get the savings greater than you expected. Is this the right way to think about next year's capital spend being. And I think Tom you actually had alluded to getting to that long-term 30%, is there an update on the timeframe there."}, {"role": "assistant", "content": "Yeah, let me take a first pass at this. This year is when we're doing the initial build-out for our compute and obviously very substantial and future years will depend on how fast we sell the capacity that we're building out now. And so if we're able to sell that quickly, then there would be more Capex spend next year. If it takes us longer to fill that capacity, then you would see Capex be much less next year. So it really depends on how rapidly we get uptake on the initial build-out that we're doing. And on the 30% we're not issuing a specific timeline there, but obviously we're having I think really good success in our efficiency. And we're taking actions to improved margins and so we'd like to get back to 30 and beyond just as quickly as we can subject to making the investments for future growth. And - and I'm very optimistic about our ability to do that. Ed, was there something you'd like to add there."}, {"role": "user", "content": "No, I think that - that covered it, Tom."}, {"role": "user", "content": "Great. And just a follow-up on the Security side as well. It sounds like you guys are pointing to this being kind of swap in growth but as you think about network security offerings, in particular, including the Zero trust overall portfolio not just Guardicore, how do you feel about your go to market- are you go to market is aligned, we're selling these types of solutions, they tend to go through indirect sales that really are MSPs that you guys have historically been lined-up with. Thanks, guys."}, {"role": "assistant", "content": "Yeah, I do think we should see improvement in security growth from here, and particularly now that we're adding API security into the mix. I think the channel is really important for us, and it's something we're putting a lot of effort into it, especially on the enterprise security side. For example, Guardicore is [Indecipherable] the channel and very successful partnerships and it's something we'll be focused on with API security as well."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question today comes from Jonathan Ho with William Blair. Please go ahead."}, {"role": "user", "content": "Hi, there. I just wanted to understand a little bit better about maybe your confidence level around the macro-environment, what you're seeing out there and why is it not potentially taking a more conservative stance. I think you said that you expected macro to remain consistent."}, {"role": "assistant", "content": "Well, you know, I think our guidance does reflect our the current situation and our view we're not assuming that the macro environment will improve. And so I do think we are taking a reasonably conservative view going forward. We are very happy with the strong start to the year on several fronts as we talked about. Ed, would you like to say a little bit more about that."}, {"role": "user", "content": "Yeah, sure. I mean in terms of some of the negatives that we're seeing, obviously sales cycles are a little bit longer. We are seeing difficulty with adding new customers, with the exception of Guardicore, Tom alluded to the fact that Guardicore brought a pretty good channel organization with them and we're seeing pretty good new logo acquisition there, that's probably the exception to that rule. We're seeing some pricing pressure from some verticals, which we are seeing I mentioned better pricing environment for some of the higher media delivery business. Inflation obviously causes some challenges, we've seen some bankruptcies in the retail space and a couple in the financial services, none that's overly material and as I said, we're not anticipating things to get worse. If things do get worse, potentially, we'd see a little bit more of that on the pro side, we are seeing lower turnover of employees, faster time to hire, but which is a much of a surprise and with rates going up and we have cash interest rates better for us from a reinvestment perspective, the dollar is slightly weaker that mean as the dollar gets weaker that helps our benefits. And then also just from the vendor side, just continued focus on pushing vendors for better pricing and things like that. So it's a mixed environment obviously, a challenging environment. I think we're navigating through it pretty well and we've built-in what we thought we could could achieve, based on what we see today."}, {"role": "assistant", "content": "[Multiple speaker] On the silver lining side, as we get our compute offering prepared to take on major mission-critical enterprise workloads, there is the potential that because we can do it less expensively, particularly for applications involving large amounts of data and delivery of data that - that could be a net benefit for us competitively in a time when companies are looking to cut costs and something a lot of our customers have told us, particularly customers with large volumes of data that they need to cut the cloud expense and I think we'll be in a position to help them do that. And as I mentioned earlier, at a time like this, when there's a lot of concern in the financial sector Akamai's reliability and security really becomes paramount and that's helpful to help mitigate the the impacts of a difficult macroeconomic environment."}, {"role": "user", "content": "Excellent. And then just as a quick follow-up in terms of the delivery business, I think you talked about some favorable trends around the traffic side, can you talk about what you're seeing in terms of those improvements and maybe the sustainability of that as we think about again the Delivery traffic. Thank you."}, {"role": "assistant", "content": "Yeah, about March really of last year is when we really saw traffic growth take a hit. Part because of the economy as a whole, part because of the war in Ukraine, and now we're lapping that. And so when you look at the year-over-year rate indeed they did start improving in March. And so we're optimistic about that and hope to see that be more sustainable just because you have a more reasonable compare. Ed, you want to add more color on that."}, {"role": "user", "content": "Yeah, the only thing I would add, I did touch a little bit on just slightly better pricing environment, which makes sense given the volumes, they're still not back to pre-pandemic levels better than what we saw last year. Also we've seen in some accounts, larger accounts, some vendor consolidation and we've been a benefactor of that, which makes sense, some customers will have four or five CDNs, you can get to be pretty expensive, sometimes build-up teams they have. Technology they used for load balancing and things like that. So as they consolidate vendors and a lot of us have volume based tiered pricing, so you can take advantage of lower unit economics as you consolidate to one or two vendors. So that's been a positive trend for us, it's another reason why we're seeing a little bit of an uptick in traffic."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question comes from Frank Louthan with Raymond James. Please go ahead."}, {"role": "user", "content": "Hey guys, this is Rob on for Frank. So, who do you run into in the marketplace now for compute specifically and how would you guys evaluate the outlook for that business in particular going-forward and what's driving that outlook, primarily."}, {"role": "assistant", "content": "Yes, the hyperscalers, and also do it yourself, and I think the outlook for us is positive. We're not trying to take 30% market share, it's a $100 - $200 billion market, but we do think we can be very competitive for certain kinds of applications, particularly in the verticals where we do a lot of business. The media vertical, entertainment, obviously video gaming, commerce and that's because - those customers, they know us, they like us, they use us for the Delivery and Security and I think we're in a position to offer them a very compelling capability in terms of better performance and a lower-price point. So we'll see - but so far I think we're very pleased with what we've been hearing for customers, making good progress, getting our connected cloud platform built-out, upgrading Linode that really take on large scale mission-critical enterprise workloads."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question comes from Rudy Kessinger with DA Davidson. Please go ahead."}, {"role": "user", "content": "Hey, great thanks for taking my questions. Just want to double click maybe on Securities that Guardicore 7 million license revenue Q1 last year. Was there any license revenue for Guardicore in this Q1 this year."}, {"role": "assistant", "content": "Yeah, no, nothing material."}, {"role": "user", "content": "Yeah okay, got it. And then maybe just a follow-up on Delivery certainly stronger revenue performance than we expected. Is there - I guess is there anything in the quarter, you talked about maybe some customers consolidating from four or five vendors, maybe the three. Anything in particular in the quarter that would give you hope that Delivery maybe could potentially turn that back to a flat or maybe only of 3% to 5% decline in business as opposed to a 10%ish declining business as we've seen over the last few quarters."}, {"role": "assistant", "content": "Yeah, it's obviously continued traffic growth. I think if we get back to kind of pre-pandemic levels, that's certainly going to help, we've done a pretty good job on pricing, especially with the larger customers in the all web verticals, especially commerce, we're still seeing some pricing pressure there. So really it's a combination, but I'd say that the stronger traffic growth is going to be the main thing. As we get into Q3 - Q2 and Q3, we've got slightly [Indecipherable] recall last year, we had significant renewals in our top 10. We have renewals all the time, but that was an unusual year for that, so the double digit declines I wouldn't expect that, certainly next quarter or the quarter after that. I mean Q4 is always the toughest quarter two call but things will get - should get a little bit better from a year-over-year compare standpoint, but in terms of getting to sort of flat or even plus or minus a point, you're going to need to see stronger traffic growth that what we're seeing now."}, {"role": "user", "content": "Got it. Fair enough. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question comes from Ryan McDonald with Guggenheim. Please go ahead."}, {"role": "user", "content": "Great, thanks for taking the questions. Tom, maybe first for you. Another question around security go to market. I know you touched on the focus on the channel, but you did mention you were also redeploying go to market resources within the security group as well. Can you talk more specifically to the changes made in that organization. And is there any early results to 0.2 from those changes that give you confidence that you will be able to reaccelerate growth here in the rest of 2023."}, {"role": "assistant", "content": "Well, we're - we're just taking the actions as we speak. So nothing to see directly from that yet. I would say there in three areas, one is less investment in management and more in say feet on the street. The next would be more focus on Security and compute and getting the right expertise in front of the customer and that would be both in pre-sales and also in services; and then the third is a shift in resources to some of the I would say under-tapped geographies where we think there is the potential for a lot of growth. So, I think all three of our very helpful and then of course channels particularly for our enterprise Security solutions were, I think, a much better way of doing it. For our established web app firewall, we do have a significant channel's presence, but also a significant direct presence and we expect to start seeing the benefits here towards the end of the year as we hire the - the new resources in these areas."}, {"role": "user", "content": "Okay that makes sense. And - and then maybe just a follow-up for you on Linode, I believe you've kind of outlined an expansion of 14 core data centers by the end of the year, and 50 distributed sites, I believe. Is that still the case and maybe just following-up on one of your comments earlier. Can you talk about how much smaller the compute footprints are this year. It's a magnitude of size and how comfortable you feel in terms of the lead times to add capacity if the macro-environment or demand turns more quickly than you expect."}, {"role": "assistant", "content": "Yeah, want to start with the last part first. In terms of the timing, I think we've got it down to probably 60 to 90 days, we think we can add capacity pretty quickly. We're building up, working with our suppliers. We've had long-term relationship structuring. Deals with them to be able to very quickly get our hands-on on equipment and building up some inventory and that sort of thing. So we feel pretty good about that. So I think - and also these sales cycles are not immediate, right. So, there is usually a trial period and that sort of thing, you started the conversations now, so it's not like CDN where you can shift overnight and just move traffic within a day or two. So we will have good lead times there. In terms of the actual size I'd just say they're small, I don't have the specific number to throw out, we're on-track to deliver all of our core sites. There's a couple of coming online in Q2 and a bunch coming online in Q3, no change there. As far as the distributed sites, we will be building out a bunch of those, I don't have an updated figure for you, some of them may push, those are much smaller in terms of Capex. So that really doesn't have a major impact on Capex, which one of those sites are a relatively smaller, not going to have a material impact. But in terms of what we're seeing with the supply chain, we feel pretty good. We've done a lot of work - great hats off to the team, they've done a fantastic job working with our suppliers to be able to really tighten things up and you can see that in the updated guidance."}, {"role": "user", "content": "Great. Appreciate the color."}]}, {"messages": [{"role": "system", "content": "Next question today comes from Amit Daryanani with Evercore. Please go ahead."}, {"role": "user", "content": "Hi, this is Lauren on for Amit. So just to kind of double click into buybacks and how you guys are thinking about the second half of the year after a fairly aggressive first quarter. I'd be great."}, {"role": "assistant", "content": "Yeah, our policy in strategy really hasn't changed, and that includes there are times when we do buyback more shares than are needed to offset dilution from employee equity programs and those are opportunistic. And in Q1, what we felt there was a substantial opportunity to buyback more than the usual allotment and of course we have a programmatic buyback that buys back more when the stock price is lower and buys back less when the stock price is higher. And so when the stock goes lower the programmatic or automatic buying also increases. And as you know, the stock price was lower through a lot of Q1. So there's really no fundamental change in strategy, prior to this year, over the last 10 years, we've bought back an extra percent a year over and above the equity program dilution offset. Obviously Q1 was more than that, but - so there's not a specific change in strategy that would say, we're going to buyback what we did in Q1 every quarter, so no change in strategy."}, {"role": "user", "content": "Got it, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. And our next question today comes from Mark Murphy with JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi, this is Cameron Toler on for Mark Murphy. Thanks for taking the call and congrats on the quarter. Maybe just on compute, I think in the past you've mentioned that Linode hasn't faced the same optimization headwinds that the hyperscalers have. I'm curious if anything has changed on that front."}, {"role": "assistant", "content": "As in face what headwinds."}, {"role": "user", "content": "Sorry, the same optimization headwinds that the hyperscalers have been calling out the last few quarters."}, {"role": "assistant", "content": "Yeah I think Linode is really in a very traditional - Linode a very different market and much more affordable. And it's really not servicing the major enterprises, major enterprises, at least the customers that we talk to are very worried about their rapidly growing cloud costs and that's something that I think we're in a position to help them with as we get our infrastructure built out and get it ready to take on mission critical workloads."}, {"role": "user", "content": "Great, thank you so much for the additional color. I'll leave it there and pass back to the operator."}]}, {"messages": [{"role": "system", "content": "Thank you. And then we have no further questions at this time."}, {"role": "user", "content": "Okay, well thank you, operator, and thank you, everyone. In closing, we will be presenting at several investor conferences and road shows throughout the rest of the second quarter. Details of these can be found in the Investor Relations section of akamai.com. Thank you for joining us and all of us here at Akamai wish continued good health to you and yours. Have a nice evening."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from Trey Grooms, Stephens."}, {"role": "user", "content": "Hey, good morning, Tom, Mary Andrews, and Mark. Hope everybody is well."}, {"role": "assistant", "content": "Hi, Trey."}, {"role": "user", "content": "Good morning, Trey."}, {"role": "user", "content": "Nice work on the quarter and aggregates pricing particularly strong. So, hats off to you and the team for such strong execution there. And Tom, I was hoping maybe you could talk a little more specifically about the overall pricing environment and your thoughts on kind of the rest of the year as we look through the balance of the year for pricing."}, {"role": "assistant", "content": "Sure, Trey. As you saw, prices above 19% mix-adjusted for the quarter, so a great start. Our genuine price increases were successful and they're really broad-based. So, I appreciate our team's hard work on earning price. And based on that success, you saw us raise the guidance to 15% for the full year. Trey, as we said, the pricing comps will get a lot tougher in the second half of the year. So, a good start to the year, but as always, work to be done to earn price. And we feel really good about the 15%. But remember, you still have to take that price to the bottom-line, which is what happened in the first quarter where we improved our unit margins by some 23%. And that kind of unit margin expansion is generally consistent well within in our guidance. And that's just the Vulcan way of offsetting and the Vulcan way of selling at work."}, {"role": "user", "content": "Trey, one other thing on that note, on the margin side, we were pleased to -- for aggregates' gross margin to expand 170 basis points in the first quarter after being compressed each quarter year-over-year last year, as we took those rapidly rising costs through the P&L. And our pricing efforts in 2022 that Tom talked about and have begun now into 2023 returned us to gross margin growth. And we would expect the year-over-year improvement continue to accelerate as the year progresses."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Stanley Elliott, Stifel."}, {"role": "user", "content": "Hey, good morning, everyone. Thanks for the question and congratulations on the strong start. Tom, you mentioned kind of some nuances developing within the end market. I think that's one thing that's different this year versus maybe some other cycles in the past. Would love to get your kind of thoughts around what's happening on the private non-res side since there seems to be more moving parts as we're looking forward."}, {"role": "assistant", "content": "Good morning, Stanley. Yeah, you're right. Non-res construction shipments continues to be really healthy and we saw that evidenced in the first quarter. We would continue to expect the nonresidential sector to maintain the really high levels that we came off of last year. And it's really driven by warehouses, distribution, and now manufacturing and industrial. If I had to risk and reward that sector, I would put the risks in that sector would include maybe some slowing in warehouses. We have not seen that yet, but we're watching it. And the other question I would have is does, like non-res, the follow subdivision, does it start to slow? Again, we haven't seen that yet, but watching it."}, {"role": "assistant", "content": "Now the flip side -- the potential upside to shipments in nonresidential construction, for me, would include the number of massive industrial and manufacturing projects that are on the horizon or just starting to shift. To give you some color around that, we have now have some 20 -- or, excuse me, some 12 major industrial projects, most of which are in our backlogs, that total 8.5 million tons. Now some of those are multiyear projects. All that's not going to go in '23. So, I would describe non-res right now is very healthy, so far so good for a healthy nonresidential demand in 2023."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Anthony Pettinari, Citi."}, {"role": "user", "content": "Hi, good morning."}, {"role": "user", "content": "Good morning, Anthony."}, {"role": "user", "content": "Hey. I think previously you talked about ag shipments to public projects expected to be up maybe low-single-digits in 2023 with IIJ maybe flowing through in the back half. And I was wondering if you had any sort of updated thoughts on the cadence of those public volumes over the remaining quarters of the year, or maybe between the first half and the second half, how we should think about the flow-through, especially with IIJ projects?"}, {"role": "assistant", "content": "Yeah. I would tell you back-half loaded, simple answer to that question. The sector -- the highway sector is really -- the whole public sector, but particularly highways, is set up for a really robust future. Funding is at all-time record levels. And importantly, all three areas of funding of government are at record levels. You've got federal, state, and municipal all at all-time highs. And all of that is starting to flow into lettings. To give you a little color around lettings which are really healthy, in California in the fourth quarter of last year and first quarter of this year, combined, those letting will be over $2 billion, which is an all-time high for two quarters in California. Moving to Texas, it's even better. In the first, two quarters of 2023, the lettings will be at some almost $8 billion, again all-time high. So, highway contract awards is, as we said, are now over $100 billion. And we still -- so, we still see -- we'll see 23 shipments, we predict in low-single-digit. And that is just -- that is indicative of how much time it takes for those big lettings to flow through shipments. So, a solid '23, but a much larger growth in '24."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Jerry Revich, Goldman Sachs."}, {"role": "assistant", "content": "Hi, Jerry."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Hi. Good morning, Tom, Mary Andrews, Mark. Nice quarter. I wanted to ask a couple of things, is that in the quarter on the volume side, if we just think about normal seasonality off of your first quarter run rate, that suggests your volumes could actually be up year-over-year in the second quarter and I'm just wondering is that consistent with the cadence that you're seeing in the business? And similar vein, really strong gross margins for aggregates in the quarter. Normally, your margins are up 10 points 2Q versus 1Q and I'm wondering is that the cadence we should be thinking about here as well. Thank you."}, {"role": "assistant", "content": "Yeah. I'll take the bar, but let Mary Andrews handle the margin. I think the volumes were in the quarter, we were down 2% and weather had a big play on that. Weather in California, Texas, and Arizona were a drag on us. But the weather in the East and Southeast were really positive. And in the East and Southeast, we probably had some volume that pushed from the fourth quarter last year, which had really wet weather into the first quarter of this year. As far as our outlook, it really hasn't changed. The 2 -- negative 2 to 6. We've got challenges in single-family, which are going to be more second-half loaded. Non-res, as you heard me say, is really solid. And highways, it's coming on, but it takes a little time. I think for me, the timing is going to be key of how fast those highway shipments go from lettings to shipments. But in all of this, I think it is a backdrop, we've got the Vulcan way of selling and the Vulcan way of operating, which gives me confidence that we'll continue to improve our performance regardless of demand challenges which you've seen us do quarter-in and quarter-out over the last few years."}, {"role": "user", "content": "Yeah. And Jerry, in terms of margins, yeah, I think the -- a typical sequential improvement is what we should expect. And as I've said on a year-over-year basis, we'll see significant acceleration quarter-to-quarter as we progress off that 170 basis points from the first quarter."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Mike Dahl, RBC Capital."}, {"role": "user", "content": "Good morning. Thanks for taking my questions. Mary Andrews, with respect to the other parts of the guidance, I think last quarter, I'm not sure if it's this formal guidance, but you talked about cost inflation being up high-single-digits and maybe you said that the cost in ag was tracking consistent with expectations. So, I'm wondering kind of if that's still the expectation. And then if it is, is it right to think about from a gross profit per ton standpoint, the new price on top of that might suggest something in kind of like low-20% year-on-year increase percentage-wise for gross profit per ton?"}, {"role": "assistant", "content": "Yeah. Quickly, you're correct on your assumption on gross profit per ton improvements. If I step back and look at cost, we're still facing the impact of stubborn inflation in parts and services. If you looked in the first quarter, weather on the West had negatively impacted the first quarter cost. As -- but remember, as we progress through the year, our comps on costs get a whole lot easier. So, we're still guiding to the high-single-digit cost inflation. And I would describe that as probably higher-than-expected parts and services, and also delays in delivery as costs in those just because it keeps equipment down. That's offset some by probably better-than-expected diesel costs. We'll -- but all that being said, we'll continue to work on our operating efficiencies to the Vulcan way of operating. But at this point, I think we're still very comfortable with that high-single-digit guide."}, {"role": "user", "content": "Yeah. And Mike, just on the gross profit per ton and -- the cash gross profit per ton improvement from the beginning, we thought that'd be much more consistent this year, and so that 23% we saw in the first quarter in the low-20%s for the rest is a good assumption."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Kathryn Thompson, Thompson Research Group."}, {"role": "assistant", "content": "Good morning, Kathryn."}, {"role": "user", "content": "Good morning. Great quarter. I just have a clarification. Based on our channel checks, we're seeing, as you already described, pretty robust demand in your -- and even possibly some tightness in materials in some key markets or multiple markets throughout the U.S. as we entered the construction season. In light of the strong, I think the commentary, you had in the quarter, this has opened up the possibility for additional pricing actions midyear. And then also along with that, more of a mid- to long-term view when you look at reshoring population shift and government supported funding for IIJ, Inflation Reduction Act, and the CHIPS Act, how does this play into your mid- to long-term view on pricing? Thanks so much."}, {"role": "assistant", "content": "Yeah. I think that, as far as pricing in the rest of the year, we did not assume a second-half price increase in our 15% guide. That said, we are -- have announced midyear price increases in most -- in the vast majority of our markets. We feel like you've got to earn that first. So, we'll report on our progress on those midyear efforts. In August as far as bid work, we're pushing price day-in and day-out on our bid work, and that's just part of Vulcan way of selling. As far as the -- you're spot-on on the large projects, both on the public side, highways, and non-highway, we're going to see a lot more large projects and a lot more money flowing. We're also, as you said, starting to see the big manufacturing and industrial projects which we think continue well into the future. All of that bodes extremely well for pricing because that gives us and our customers visibility to coming demand. And those large projects, both public and the big industrial ones tend to be -- there's more surety those projects that once they announce them, they're going to happen. And so, that also gives surety demand which is a very good backdrop for pricing."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Keith Hughes, Truist Securities."}, {"role": "assistant", "content": "Hi, Keith."}, {"role": "user", "content": "Hey. Thank you very much. I guess, switching to the discussion on nonresidential, specifically on heavy. It's a lot of positives out there right now. How far of visibility do you have on that business? In other words, will we be seeing several years of really strong heavy work to be done?"}, {"role": "assistant", "content": "Yes. That -- you are going to see number of years both in manufacturing, industrial, and in the big energy projects along the coast. There is a healthy pipeline of that both in, A, their budgeting, their bidding, or their engineering. And so, I -- like you said, I believe we'll see years of this, and I think it will really bode well both for volumes and price."}, {"role": "user", "content": "And on that light business, given a shorter cycle, your visibility is not nearly that long on light, is that correct?"}, {"role": "assistant", "content": "That's correct."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Brent Thielman, DA Davidson."}, {"role": "user", "content": "Hey."}, {"role": "assistant", "content": "Good morning, Brent."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Hey, good morning. Hey, Tom, I was just curious on the balance. What was the hit from the residential sector this quarter, because with volume only down 2% including weather, just on the surface, does it -- it doesn't look quite that much?"}, {"role": "assistant", "content": "So, if you look at it, about half of our markets took a hit in res and about half were positive. So, I'd tell you, by mid-single-digit. But as we said, the -- we'll feel the impact of the fall and starts, permits and starts, in single-family. We'll really feel that in the second half of the year. So, pretty much as expected right now. I think it's a -- and plus weather in Arizona, Texas, and California masked some of that, so it's harder to see. But I -- we think that is more of a second-half play as those starts have to go through the pipeline."}]}, {"messages": [{"role": "system", "content": "The next question comes from Phil Ng. Jefferies."}, {"role": "assistant", "content": "Hi, Phil."}, {"role": "user", "content": "Good morning, Phil."}, {"role": "user", "content": "Hi. Good morning. This is actually Collin on for Phil. I just wanted to touch on the geographic mix. I know pricing was aided by that favorable mix. But could you talk about how that mix might have helped gross margins and how we should think about that mix benefit going forward? Thank you."}, {"role": "assistant", "content": "I don't think it's going to -- I don't think it has a big play on gross margin. It was only 1% on on price. So, it really did not -- it really didn't have an impact on -- much impact on price or on margins."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Timna Tanners, Wolfe Research."}, {"role": "user", "content": "Good morning, Timna."}, {"role": "user", "content": "Two things I haven't heard you address, and I would like to hear from, please. One is just, with the labor markets broadly, I know it's been a bigger issue for your customers, but would appreciate an updated thought there. And then it's been, I think May will be a year anniversary since the Mexican operations were shut and there has been some noise down there, so would love your take on that as well. Thanks."}, {"role": "assistant", "content": "Yeah. I would describe the labor market is easing. I think it's a combination of -- the labor market is easing and I think we've gotten better with retention over the last year, done a lot of work on that. So, it is still an issue, probably still a bigger issue for our customers, but not like it was 12 months ago or 18 months ago. On Mexico, really not a lot of change. We remain a legally shut down and the proceedings with the NAFTA Tribunal continue. We would hope to get a ruling on that sometime in 2024."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Adam Thalhimer, Thompson Davis."}, {"role": "assistant", "content": "Hey, Adam."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Hey, good morning, guys. Great quarter. Hi, I'm starting to get questions from clients on the debt ceiling. If we.don't get an increase, do you think there is a risk to federal infrastructure support?"}, {"role": "assistant", "content": "Well, I mean, that would be the first time that's happened. So, I would doubt that while everybody is wringing their hands over that, I think we'll solve this problem and we'll continue with our infrastructure spending."}, {"role": "user", "content": "Yeah. I mean, prior government shutdowns haven't been a big deal, have they?"}, {"role": "assistant", "content": "Well, I don't want to see one, but I don't think it's going to impact our infrastructure projects."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Michael Dudas, Vertical Research."}, {"role": "assistant", "content": "Hey, Michael."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Good morning, gentlemen and Mary Andrews. Mary Andrew, just can you share your thoughts how operating free cash went through Q1 and how it looks for the rest of the year? And then maybe, how you can discuss the M&A pipeline and really [Indecipherable] do we see any visible activity by year end with what's happening in the marketplace? Thank you."}, {"role": "user", "content": "Yeah. So, we were pleased with our free cash flow. It's obviously a very cash-generative business. Over the trailing 12 months, our free cash flow conversion has stayed over 90%. So, we are pleased with that result and we'll be -- take our consistent disciplined approach as we think about how to allocate that capital among our waterfall priorities."}, {"role": "assistant", "content": "On M&A, it remains -- I guess, we have a number of smaller bolt-ons in the pipeline along with a number of greenfields that we're working on. I would tell you kind of normal from the smaller bolt-on and greenfield perspective. As far as large projects or large M&A, those tend to be lumpy. When they come along, we'll be in the game and we'll take advantage. And as always, we'll be disciplined in all of this about what markets we're in, what synergies are unique to us, and what we pay for it. So -- and we look forward to reporting that as they come about."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Garik Shmois, Loop Capital."}, {"role": "assistant", "content": "Hey, Garik."}, {"role": "user", "content": "Good morning, Garik."}, {"role": "user", "content": "Hey, good morning. Nice quarter. Wanted to ask on the highway outlook, you're counting on demand showing up later this year. Curious, just how is the lag between project starts and when volumes occurred, has that changed at all just given the size of the projects in the pipeline?"}, {"role": "assistant", "content": "I think it's a little bit. We would always call that nine to 12 months. But larger projects can take longer just because of more complex engineering, more complex permitting, and more complex planning around those. And when they run into a snag, it stops a big chunk of work. Our whole -- pushes it back. I would not change the the nine to 12 rule of thumb except for every once a while now you will come across a multi-million-ton highway project that can get pushed out past that limit. But. I think the nine to 12 is still a good rule of thumb."}]}, {"messages": [{"role": "system", "content": "Our next question comes from David MacGregor, Longbow Research."}, {"role": "assistant", "content": "Hi, David."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Hey, Tom, Mary Andrews. Congratulations on a strong quarter. Phenomenal performance."}, {"role": "assistant", "content": "Thank you."}, {"role": "user", "content": "Yeah. I guess, I'd be interested in just any update you've got on transportation. I know, you've got some long-haul tonnage there. You're talking about strengths down along the coast. How is that changing for the better? Do you view that as a potential risk? And have you been able to lock up capacity, and if so, for how far forward?"}, {"role": "assistant", "content": "I think, as we talk about rock is still short on all coast, and it's driven primarily by bottlenecks on railroads. I think the railroads are working hard to improve and they're making progress, but there's still gaps there. And I don't know that I see it as risk for 2023. It has its challenges. But I think we'll work our partners and we'll work through those challenges and be fine in 2023."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Michael Feniger, Bank of America."}, {"role": "assistant", "content": "Hi, Michael."}, {"role": "user", "content": "Good morning."}, {"role": "user", "content": "Good morning, guys. Thanks for taking my questions. Just two. So, the first one, the pricing, obviously, is very strong, at 18.5%, and your full-year range of 15%. So, does pricing kind of finish the year, actually the year below that range? Do you think we're still in the double-digit territory? I'm just trying to figure that pricing cadence. Then the second question, just the operating leverage in aggregate. I think you typically target like a 60% flow-through. Are there periods where that can be above that level? I guess, I'm just trying to think out midyear price increases, potential sticking, diesel rolling over. Could we see flow-through above that target range for certain periods? Thank you."}, {"role": "assistant", "content": "You can. First of all, on the flow-through piece of this, you can see that above, and you can see it below. Inflation, your big inflationary jumps put pressure on that, as we said, as does fuel. I think if you look at this year, I would be a little bit cautious because you're still going to have some really sticky inflationary pressures on parts and services. I think as what we've said is that as we progress through the year, the percentage price increase won't stay up at the 20% range because you're comping over such a sequentially high march through 2022 in price. The flip side of that is in cost. As we said, you're seeing really high year-over-year cost at this point, they should ease as we go through the year because the inflationary comps ease as we go. That -- all that fill, and together, we think we're pretty consistent in that 20% range improvement in unit margins."}]}, {"messages": [{"role": "system", "content": "Our final question comes from Dillon Cumming, Morgan Stanley."}, {"role": "user", "content": "Hey, good morning. Thanks for the question. Just wanted to ask if you could put a finer point on some of the non-res commentary? I think there are just some concerns out there with regards to the entire financing environment, how that can impact both the light and heavy non-res kind of side of the equation. Just curious if you're hearing something around that from customers and looking kind of latest update what I'm thinking there is?"}, {"role": "assistant", "content": "I would put it this way. So far, what we're seeing in non-res is really solid. Some shifting towards heavy industrial and manufacturing. But we've not seen any impact on our markets yet on nonresidential. Now that being said, we're watchful, and we're watching it, but so far, so good in non-res for 2023. But to your point, I think everybody is watching that. But we haven't seen any impact at this point."}]}, {"messages": [{"role": "system", "content": "I would now like to turn the call back over to Tom Hill for any closing remarks."}, {"role": "assistant", "content": "We appreciate your interest and your time this morning. We appreciate your interest in Vulcan Materials. We look forward to seeing you throughout the quarter to update you on our progress. We hope that you and your families remain healthy and safe. And we'll talk to you the next quarter. Thanks."}]}, {"messages": [{"role": "system", "content": "Ladies and gentlemen, we will now begin the question-and-answer portion of today's call. [Operator Instructions] Our first question comes from C.J. Muse from Evercore. Please go ahead."}, {"role": "user", "content": "Yeah, good afternoon, and thank you for taking my question. I guess, I'd love to get a sense for where you're seeing demand stabilize versus where you still see pockets of inventory. And as part of that, I guess, embedded in your revenue guide, it looks like you're kind of suggesting HDD down maybe 10% to 15%, SSD down 5% to 10%. So I guess, is that kind of the right way to think about it? And then as part of that, where do you think we're seeing stabilization and where do you think we need to -- to work down inventory some more?"}, {"role": "assistant", "content": "Hey, C.J. Thanks for the question. Good to hear from you, as always. Yeah. I think in -- you know, as we talked about in consumer, we're seeing some stabilization there as far as demand. PC OEM, we've been talking about now for three-plus quarters and I think we see them mainly shipping to true demand. I mean, nobody is building inventory right now, but we think the inventory correction there is mostly behind us."}, {"role": "assistant", "content": "Our channel business performed really well this past quarter, I think, above what our expectation was. The inventory issue is still very much in data center, and it's very lumpy like we have some -- some big cloud customers that are consuming. We have others that are really in a full inventory digestion and aren't taking anything. So that that market is still where we see a lot of -- a lot of inventory digestion going on, and I expect that to be lumpy for the next couple of quarters. We are seeing some signs of stabilization in China. We talked about that. I think it's setting up for a recovery in the second half of the year, a lot more activity around RFPs and discussions about what demand is going to look like in the second half. So that's a bit of an overview of where we see the market. I think on your numbers, you're probably down a little more than we are on HDD. I think that's probably more single-digit kind of number on a sequential basis."}, {"role": "user", "content": "Great. Very helpful. And as a quick follow-up, can you kind of walk us through what you're thinking today in terms of underutilization charges beyond the June quarter."}, {"role": "assistant", "content": "Yeah, flows, let's talk about it for each business. I mean, I think in HDD and I'm sure Wissam will have a little bit to add here as well. HDD, which is the smaller part of the number, but still significant, we're going to see a drop in volume next quarter. So we'll see some underutilization there. On the Flash side, we continue to underutilize the fab. We're managing it in a very -- in a very dynamic way, kind of week-to-week, month-to month to make sure we fully understand demand and keep our inventory in a position where we want it, and so, but we will definitely see underutilization on both sides of the business next quarter."}, {"role": "assistant", "content": "Yeah, and just to add. C.J., sorry, just to add a bit more color. I think we in our guide, we're estimating around $220 million to $240 million, the range of underutilization charges, and by business, this is roughly two-thirds Flash and one-thirds HDD -- one-third HDD."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, C.J."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Joe Moore from Morgan Stanley. Please go ahead."}, {"role": "user", "content": "Great. Thank you. And you mentioned that you're taking lower of cost or market charges on NAND. And can you talk about the methodology there. Is that -- do you pull that and then take a charge overall or is it any time, any individual product falls below the market price, you adjusted down?"}, {"role": "assistant", "content": "So Joe, with respect to our LCM charges, we do it at the finished good product level. It is not pulled."}, {"role": "user", "content": "Got it. Okay. Thank you. And then in terms of the underutilization charges and things like that, do you know how the covenants are going to be defined? Are you going to be able to remove those charges from the EBITDA number as defined in the covenant?"}, {"role": "assistant", "content": "Those are typically allowed to be added back per our credit agreement to the EBITDA."}, {"role": "user", "content": "Okay. Great. Thank you very much."}, {"role": "assistant", "content": "Thanks, Joe."}, {"role": "assistant", "content": "You're welcome."}]}, {"messages": [{"role": "system", "content": "The next question comes from Aaron Rakers from Wells Fargo. Please go ahead."}, {"role": "user", "content": "Yeah, thank you for taking the questions. And just to build on that last question, just to -- just to beat the thing. Your gross margin expectation in this current quarter, I'm guessing the commentary assumes that you're not expecting another inventory charge in the Flash business, and if so, why not?"}, {"role": "assistant", "content": "So, Aaron, we typically factor into our guidance on the expectations, and when we exited the Q3 just like a typical quarter, we do our reserve reviews and we take the -- we make sure that the balance sheet is property stated. And so, based on our forecast, everything is baked into the guidance. Typically, we have a small amount in the guidance, just like we did also in the past quarter."}, {"role": "user", "content": "Okay, and then, I guess, my follow-up question is on the hard disk drive business. I can appreciate you guys have seen some cloud customers kind of it sounds like purchased really no product, this last quarter. I'm guessing from a competitive perspective, how would you characterize the current environment? Have you seen increased price aggressiveness? How do you guys think about the discussion around Hammer and your roadmap going forward, et cetera."}, {"role": "assistant", "content": "Yeah, I mean, I think there's always price pressure in this market, Aaron, but we've been very disciplined about the value of our products. I think one of the things we feel very good about is we've been investing in our HDD roadmap, things like OptiNAND, ePMR, UltraSMR, these products are really now starting to ship in volume. We've talked about the 22-terabyte CMR drive was the highest volume drive at 20 terabyte and above. So we feel very good about where the portfolio is about where it's going, and we've got a number of very large customers qualifying SMR right now. That's clearly the next step in the data center where our UltraSMR product, they're in the 2016, we've talked about we'll finish up calls this quarter and start deploying next quarter. So we feel like we've got a portfolio that is aligned with what the market needs and that's showing up in kind of how that -- how we're able to monetize that portfolio and not have to compete on price."}, {"role": "assistant", "content": "So, you know, future technologies like Hammer will be there. We're still a ways away before that product is going to be a volume type product. The volume products are the 22s going in an SMR going to be the big volume products over the next couple of years and after that we'll get to -- we will get to Hammer. Well, we feel confident about that technology. It's been in development for a long time, we're in the final stages of it as an industry and I think everybody is excited that it will be the roadmap for 30% above when we needed."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Yeah."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Sidney Ho from Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Thank you. And I want to ask about the network security breach. Can you give us an update on the recovery there, it looks like your operations are back to normal levels? But have you experienced or do you expect any more issues of -- with production or your ability to ship products?"}, {"role": "assistant", "content": "Yeah, we -- we've been very transparent about the -- that incident. We -- when we noticed it, we let folks know. We had -- we took our -- we basically disconnected ourselves from the public Internet to protect ourselves and then restore the environment. We still have capabilities inside the companies and the factories were operational throughout that clearly a tremendous amount of work by the team, but we feel like we're nearly all the way back now, as far as operation. We got -- we got to bring the store online in here in another week or so, but it was really, really good to see our business continuity plans. You don't want to rely on them too often, but when -- when we had to they were there and they -- they kept the company moving forward."}, {"role": "user", "content": "Okay, great. Thanks for that update. Go ahead."}, {"role": "assistant", "content": "Sorry, Sidney. I just wanted to add that for fiscal Q3, we don't have any impact in the numbers there to the network security."}, {"role": "user", "content": "Okay. That's great. Maybe a follow-up question is, Samsung in early April, we talked about they are cutting production. I'm curious if your compensation with your customers have changed since that announcement? And related to that, do you expect the June quarter to be the bottom of -- for your bargains for your Flash business? Thank you."}, {"role": "assistant", "content": "I would say we have, I mean, obviously, we have very robust conversations with our customers all the time. I wouldn't pin the tone of those conversations on to how any one particular player in the market is acting or what they're doing. We stay very focused on our business, and as far as whereas the bottom, I mean, we expect the market to come into balance as we go through the second half of the year. I think, actually, we're clearly taking a lot of actions in our own business to closely manage it supply and demand, keep the utilization of the fab close to where our demand is, so we manage our inventory. And clearly, we're going through one of the -- one of the most severe downturns in a while, but we think as we move through the second half of the year, the market will get in -- will come into balance."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Mehdi Hosseini from SIG. Please go ahead."}, {"role": "user", "content": "Yes, sir. Thanks for taking my question. One near term and most of the inventory -- your inventories are on a absolute dollar value, it keeps going higher, and I want to understand how the mix is changing between wafers finished good and other material. Is there any way you can give us a color how incremental changes are happening for different categories within inventory and I have a follow up?"}, {"role": "assistant", "content": "Yeah. We -- we typically don't break that out as much on the call. This is a bit too much detail, Mehdi, for me to discuss here. The one comment, I would make though when -- when we think of inventory, our operations team is really focused on minimizing -- minimizing where we can. So, we basically try to stage it in the places that makes the most sense from a -- from a demand perspective."}, {"role": "user", "content": "Let me rephrase the question, how do you -- how should we think about the risk of inventory write-down?"}, {"role": "assistant", "content": "The -- I mean, the inventory write-down typically is -- is really based -- the ones that was, for instance, I called out is based on basically the inventory value relative to where the market prices, and so if -- when prices decline by a lot then we do have -- we do have to take a look -- closer look and see if there's any impact, but that's, yeah, that's what I would say about that."}, {"role": "user", "content": "So would -- are you assuming that the rate of price decline is moderating? So maybe that would minimize the downside risk?"}, {"role": "assistant", "content": "What I'm saying is, we -- what I'm saying is, at the end of every quarter our balance sheet is property stated because we do look at where the inventory value is versus where the demand is and the prices are most particularly at the finished good level, and so where do we see differences we have to adjust our inventory value. Otherwise, it is property stated, and I guess, your question is more around trying to predict where the -- where the price is going, and we typically -- we typically don't necessarily do that."}, {"role": "user", "content": "Okay, thank you. And then, a question for David. Looking at longer term, more than just one quarter, I think there is some confusion or unknown factor how new type of AI would impact demand for HDD versus SSD? Do you have any view how this incremental demand created? These are expensive worker stations. How is it going to impact SSD versus HDD?"}, {"role": "assistant", "content": "We're doing analysis on that. Mehdi, I would say is, to me, I'll even go a little longer term bigger-picture. This just reinforces the value of stored data. I think that it just seems like there's this constant ways for people can figure out how to use all the data they've stored to do very productive things with it, and I think the latest is training these AI engines. And so we just think it's another element of the long-term value of data storage, and it's just a big secular tailwind for the HDD business and the Enterprise SSD business. I mean, again, you know that they're both. They both have big TAMs in the data center and they're both growing. And we think this is another reason why people will store more data is because they can monetize it in different ways in the future."}, {"role": "user", "content": "But I guess, I was hoping you would shed some light as to how HDD CAGR would change? I don't think this is going to lift the HDD -- the TAM for each different types of storage at the same rate. Is there any thoughts that you can share with us?"}, {"role": "assistant", "content": "I think it will, you know, HDD is the -- the lion's share of storage in the cloud. So you would expect that's where the bigger lift would be across those two technologies."}, {"role": "user", "content": "Okay. Thank you."}, {"role": "assistant", "content": "Thanks, Mehdi. It's good to talk to you, as always."}]}, {"messages": [{"role": "system", "content": "The next question comes from Shannon Cross from Credit Suisse. Please go ahead."}, {"role": "user", "content": "Thank you very much for taking my questions. My first is, as you look at what you're doing on opex in terms of holding and cost, how do you think about the -- how you're -- where you're investing and how you're making those decisions? And how should we think about potential impact to the future projects at this point? And then I have a follow-up. Thank you."}, {"role": "assistant", "content": "Yeah, we've been very -- obviously, we've been -- one of the things we've been building into the business over the last several years as we've restructured the business is more agility and the ability to proactively respond to the market we're in. I think that's kind of the hallmark of the organization we're trying to build is agile and dynamic, but clearly, on top of that, Shannon, we -- we went to a business unit structure for a reason is because we have two very, very focused organization with very sophisticated leaders in them that is constantly doing the ROI analysis of where we put our opex and we get the most out of it. And quite frankly, that's led to the portfolio we have today. I think we have the best portfolio we've ever had and that's an effort that goes on constantly continuously."}, {"role": "assistant", "content": "And so as we continue to drive down opex to resize the business to the realities of what the market are -- market is, we've built the capability over the last couple of years to do that in a way where we can make sure we're going to get. First of all the -- the opex we spend, we get the best ROI out of it, the best return and that we make sure that we're making, we're taking actions to the business that don't harm the long-term value of it and we make -- we make the right decision on a -- on a day-by-day, week-by-week, month-by-month basis. So I think this is really a capability we've built in the last three years and I think it's serving us well right now to make sure that we are -- we're not - we're not cutting in ways that are going to impact the long-term health of the business."}, {"role": "user", "content": "Thank you. That was helpful. I'm trying to -- maybe I'm trying to make lemonade out of lemons, but I'm just wondering as you've cut capacity on the HDD side, you know, you've had these underutilization charges. Are there things that you've learned in terms of maybe how you manufacture in the pathways to drive incremental productivity. You're seeing it as kind of a it's certainly a unique time to maybe take a step back and look how things are doing -- how things have been done and what you could do in the future? Thanks."}, {"role": "assistant", "content": "I'll make a few comments and I suspect Wissam will have a too few comments as well. I mean this is -- there's been a lot of focus on this in the last year of how do we become more efficient, how do we automate more, we've -- several of our factories have won World Economic Forum Lighthouse Awards for automation. How do we reskill our employees? And how do we just -- we've been very focused on driving a level of automation, driving productivity and just lowering our fixed cost asset base in the HDD business. And I think our fixed -- I don't think, I know our fixed costs in that business are now the lowest they've been and well over a decade. So I think that's paying off in the way we're able to generate margin in the business at lower volume levels and then, as the volume starts to pick back up, we -- we've got capacity to meet what the market needs, and I think we'll do that at a -- at a much lower-cost basis."}, {"role": "assistant", "content": "Yeah. And I mean, the one thing I would add also in addition to what David said, some of the activities that we drive in terms of the manufacturing side are -- are taken back into the development organizations to think about things back common platforms and the ability to improve on the way our products are designed for manufacturing efficiency even increasing manufacturing efficiency going forward and of course, with that comes embedded cost structure."}, {"role": "user", "content": "Great. Thank you very much."}, {"role": "assistant", "content": "Thanks, Shannon. Appreciate it."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Krish Sankar from TD Cowen. Please go ahead."}, {"role": "user", "content": "Yeah. Hi. Thanks for taking my question. David or Wissam, first question is on, your NAND ASP declined in March quarter, seems to be better than what your competitors had. So I'm just kind of curious any puts and takes if you talk about your expected pricing versus competition in March? How to think about it in June? And along the same path, you mentioned supply-demand balance later this year and bit shipments for Flash growing. Are you baking in some kind of a mobile recovery that's going to help you drive that? And then I have a follow-up."}, {"role": "assistant", "content": "Yeah. I think, on pricing, it's -- it's kind of the same story all the time, right, whether it's a down market, upmarket and mid-cycle market, which is really have a diverse portfolio. We've talked about this a lot from retail to the channel business, PC OEMs, enterprise SSD. Gaming has become a very nice part of the portfolio and growing part of the portfolio, and it's just that mobile, obviously, is a big part of our portfolio. And it's just been mixing across that where we get the best return, right, putting the -- putting our supply and our bits in the places where we can get the best -- best return. And I do think that that is a -- that go-to-market -- that breadth of go-to-market is in markets that we can reach, literally, from every single consumer to the largest technology companies in the world and kind of everything in between and just the ability to mix across that with a -- with a strong portfolio and a strong set of brands as well, SanDisk, SanDisk Professional, WD Black, puts us in a good position to get the best -- best return on our supply."}, {"role": "assistant", "content": "Next quarter, I mean, we don't really want to comment on future pricing. It's all -- it's all into the guide. We've talked about the individual markets. What I would say is we're -- we're pricing in and we're putting in what we think is going to do on an individual market-by-market basis and then how we'll mixed that next quarter."}, {"role": "user", "content": "Got it. Thanks for that David. And then as a follow up on the HDD side, it's kind of nice to see the 22-terabyte CMR is now bigger than 20 terabyte in terms of volumes. How should we expect that to grow and what is its impact on gross margin?"}, {"role": "assistant", "content": "I think that's our -- that's our focus -- on a CMR drive, that's our focus capacity point and that -- it's significantly ahead of other CMR drives above 20 terabyte, so or above the 20-terabyte drive and we expect that to be our premier drive for the next until we have a different CMR product in that part of the business. So we expect that to be a very good growth engine, and we've talked a lot about that drive of -- it provides a lot of value, it provides a lot of TCO value for our customers, and we -- it contributes an appropriate amount of margin from that perspective as well."}, {"role": "user", "content": "Got it. Thanks, David."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Wamsi Mohan from Bank of America. Please go ahead."}, {"role": "user", "content": "Hi, thanks for taking my questions. It's [Technical Issues] tuning in for Wamsi today. Hey, David. I think maybe another pricing question for you. I think you talked about price elasticity. Could you just elaborate a little bit on what exactly you're seeing, either in Flash or in HDD? And a related question to that is, there is some worry that maybe a lot of memory inventory might be built again this quarter from the likes of some OEMs like Apple because they want to maximize their favorable component pricing. So do you think this could lead to a further elongation in the recovery of the market, even though in the near term it might get a little bit tighter? So just your thoughts on that and what exactly are you seeing in price elasticity."}, {"role": "assistant", "content": "I think, the elasticity in NAND is mainly what I was talking about. I mean, we're seeing PC OEM up mid-20s year-over-year on capacity. I think a really interesting number to me is the elasticity across our consumer franchise, which is, you know, tens -- no, hundreds of millions of devices we sell a year in that channel up -- up a third year-over-year on capacity per unit, gaming, up more than that and mobile up even more than that. So I think we're seeing the market work. Even in the midst of a great downturn, you expect well -- especially in the midst of a great downturn, you expect to see elasticity start to kick in and we are starting to see that across the port -- across the portfolio."}, {"role": "assistant", "content": "What's the second -- second part of the question, again?"}, {"role": "user", "content": "And then --"}, {"role": "assistant", "content": "It was about a customer -- Oh, prebuying, yeah. I think you do see -- I think we are seeing instances of that. I wouldn't say it's pervasive, but it's we see instances of it and I think it -- I think maybe it's a sign of where the customers think we are in the cycle as well."}, {"role": "user", "content": "Got it. And for my follow-up, if I can ask a quick one to Wissam? How are you thinking about free cash flow going forward? I mean, is it -- what needs to happen to get to positive free cash flow? And is that possible in this calendar year. So just your thoughts on that? I mean, how are you looking at working capital and thinking about free cash flow? Thank you."}, {"role": "assistant", "content": "Yeah, [Indecipherable]. So we are totally focused on free cash flow. As you've seen us since the beginning of the year, we've been very proactive on opex and using that quite a bit on capex, as well as taking underutilization to manage and preserve our cash and not that inventory and so this is very important to us. In fact, we continued to -- to make improvements. I mean, if you look at our capex trend, it's -- it's gone down quite a bit this year. We'll probably be spending approximately, if not even more than 35% below last year. With respect to the next few quarters, we typically do not guide for free cash flow, but what I can say is that this is, as I said, the top priority for us and this is a big focus as you would imagine -- as we navigate the Dynamic environment."}, {"role": "user", "content": "Thanks for all the details. Appreciate it."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Tom O'Malley from Barclays. Please go ahead."}, {"role": "user", "content": "Hey. Good afternoon, guys, and thanks for taking my question. My first one is related to the HDD side of the business. Your competitor recently talked about a recovery that initially was expected to be in June and is now pushed out to the December quarter. Could you just frame the way that you're thinking about the recovery? Is it kind of in line with that? You're obviously guiding the HDD business down, but any color you could give on the back half of the calendar year about when you expect that business to recover?"}, {"role": "assistant", "content": "Yeah. I think, Tom. It's -- I would say as we go through the second half of the year, it will get better. The issue is that these revenue levels and these unit levels, which is very lumpy. You have very large customers that if they buy or not buy can impact the TAM and the available market in a very significant way. So and that's what we're experiencing next quarter. I mean, this quarter we saw things were a little better than we thought."}, {"role": "assistant", "content": "On capacity enterprise shipments, we'll see a sequential decline in that, and then we're expecting to go back up as we go into the second half of the year, but I expect it to be lumpy as we go through this inventory digestion because a lot like we saw in the PC OEM space, our customers are just completely focused on inventory digestion, which is basically new purchases, just go to zero, and customers at this scale, with this kind of business that -- that has an impact. So I expect to see that lumpiness over the next several quarters. I do have a level of optimism about China in the second half of the year, we're seeing better activity there. And so we -- we expect to see that improve in the second half of the year as well, which should -- which should also help the business."}, {"role": "user", "content": "Helpful. And then, just a follow up is on the -- the Flash side. You guys talked about a mix of customer behavior, right, where some are still consuming inventory and then others are more aggressively purchasing to various degrees. I don't want you to speak on specific customers, but we've heard this across the ecosystem, particularly, through this earnings period here where there is a discrepancy in terms of spend. Could you help maybe just frame where you're seeing that spend? Is there a certain type of customer that's spending more than others or is it really just random where guys came in with certain inventory levels and are working through that? Just any color there would be really helpful as we've heard that data point from multiple companies here."}, {"role": "assistant", "content": "I guess, I would say that customers that are different segments of the market that are through their inventory digestion are now more or less shipping to end demand being lean-on inventory. There are instances of people doing strategic buys in -- in that -- in some of those cases where they've -- they've got their inventory to where they want it. But now they -- they're making their own, they have their own view of the cycle. That's a very small number I would say and then the other ones is just inventory, where they're at in their -- the data center customers especially are just in -- there is a variability of the level of inventory at each customer and they're so big that it can impact the entire market. So and like I said, ones that have had the inventory are basically working that down in an aggressive way, and so I think it's going to be -- like I said, I think it will be lumpy for a couple of quarters, until, we get -- we get through that."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, Tom."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Toshiya Hari from Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Hi, good afternoon. Thank you so much for taking the question. David, three months ago, you mentioned that you were cutting production in your NAND business by 30%. I'm curious if the magnitude of the cuts today are kind of in that zip code, if anything has changed materially? And going forward, what would you need to see to start taking up your utilization rates in the Flash business?"}, {"role": "assistant", "content": "Yeah, we're kind of at the point where we're. I think it's -- I think probably the same zip code is probably a fair way to say it, depending on where you live zip codes can be pretty big, if you're in the country, I guess, but it's really about managing to where we see the demand and keeping our inventory relatively in check. We know it's going up somewhat, but we want to -- we want to make sure it doesn't get away from us. So we'll use the fab in that. I mean, we're just -- we're going to have to see, demand signals for our customers is just as simple as that. We have very, very close relationship with a lot of them. We're in the -- obviously in the market every single day. A lot of these consumer and channel markets are more transactional where we can see the business across a wide swath. And then, of course, we're talking to the biggest customers, biggest technology companies in the world. So we'll -- we'll get a -- we have a pretty good idea of where -- where their demand is and we'll set the fab appropriately to make sure that we -- we keep the right inventory position and we have the product when they're ready."}, {"role": "user", "content": "Got it. That's helpful. Thank you. And then one follow up for Wissam on the balance sheet side of things and I know you don't guide free cash flow on a quarterly basis or annual basis, but just curious how we should be thinking about inventory, whether it be dollars or days going into the June quarter and working capital overall, is that going to be a consumer of cash in the June quarter, or do you think you can generate some cash from -- from working capital? Thank you."}, {"role": "assistant", "content": "Sure, Toshiya. The -- with respect to inventory, we -- the current projection is I would say flattish in terms of dollar, but in terms of days, I anticipate we should see a downtick from here and while we continue to, as David said, manage it on a very, very regular basis very closely. And so that's the -- that's probably the biggest in terms of the working capital, that's the number that would be moving -- moving the most. We're -- again, we don't guide the free cash flow. So I wouldn't want to make many more comments around working capital, but I think the answer on the Inventory would be a good indicator to what working capital will do."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Harlan Sur from JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi, good afternoon, and thanks for taking my question. The market share numbers are out for last year. You guys drove a strong Number two position in client SSD, strong double digit sort of percentage share position, right. But in enterprise, you guys drove sort of a low-single digit enterprise SSD market share last year and it's sort of hovered in this 4% to 7% range for a while now. Like what is the team doing to try and drive its share in this fast-growing market to more of what I would call appropriate sort of double-digit percentage share profile?"}, {"role": "assistant", "content": "Yeah, thanks for the question, Harlan. Always good to hear from you. It's -- we've talked about this quite a bit over the last year. It's about qualifying the products at the big players have qualified in the channel. We just qualified this last quarter on BiCS6 enterprise SSD with some of the biggest customers. So the roadmap is moving forward as we expected. It's just a very dynamic market right now. So it's difficult to judge share. Obviously, our goal is what we put out there is to drive that higher, and I have every confidence we'll do that as the market stabilizes and -- and some of these big customers get back to their normal rates of purchasing."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Srini Pajjuri from Raymond James. Please go ahead."}, {"role": "user", "content": "Yeah, thank you. I have a question on the costs side, Wissam. So it's little tricky to figure out, given all the, I guess, a onetime charges. I'm just wondering you previously talked about NAND cost declines in the mid-teens. I believe, just wondering if you're tracking to that? And then, as we go to BiCS8, how should we think about the cost declines, especially, I guess, historically, we've had in 30% to 40% bit demand growth? And going forward, if that dynamic changes if it's lower than 30%, do you think we can still kind of get to that mid-teens cost declines and do you need that 30% to get to that level?"}, {"role": "assistant", "content": "Sure, so thanks for the question. In terms of Q3, we have to think of it basically with -- with and without underutilization. When you factor in the underutilization charges, we wouldn't be -- we wouldn't have reduced cost or cost income down by mid-teens. However, if we exclude that then we're close to mid-teens in Q3. Now to your question on BiCS8, I mean, this is with -- with the way our roadmap works and the timing of when BiCS8 starts ramping, it is pretty much designed in a way to allow us to continue that mid-teens reduction, cost reduction over-time. I wouldn't want to comment about the exact sort of percentage and so on in terms of the crossover because I think it's a little bit premature to talk about this, but conceptually that's what we're aiming with ramping BiCS8 slightly earlier than previously anticipated."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Karl Ackerman from BNP Paribas. Please go ahead."}, {"role": "user", "content": "Yeah, thank you. And I was hoping you could discuss the trajectory of exabyte demand of your cloud customers in the next couple of quarters? And whether there is a divergence in a recovery across on-prem and public-cloud? And I guess, as you address that question, how do you assess whether you might be shipping below normalized replacement demand? Thanks."}, {"role": "assistant", "content": "You know it -- I think we see the enterprise and the cloud market, they're both soft right now. And so we don't see a huge difference between the two. Again, the difference is, Karl, that you got this idiosyncratic behavior at really big customers. So customer that usually buys a significant amount of hard drives in a quarter, hundreds of millions of dollars goes to zero, you can pretty much assume they're buying under replacement demand. So that's kind of the -- where we're at. We just, again, other customers are going along more according to plan, so that the inventory levels, but a bit distributed across big customers. So we look at this quite a bit to understand like where do we think the exabyte growth is and where are we setting the, our long-term production capabilities, and all of that, but right now, it's -- it's just a little difficult to draw long-term conclusions in some of the -- a little bit behind some of your question, given just the way the market is -- the lumpiness of the market."}]}, {"messages": [{"role": "system", "content": "The next question comes from Vijay Rakesh from Mizuho. Please go ahead."}, {"role": "user", "content": "Yeah, hi. Just a quick question. I don't know if you talked about Elliott strategies, and I think they had filed some -- they had some filings, but just wondering how that process is progressing. I don't know if you can talk to it?"}, {"role": "assistant", "content": "It's progressing very active. Everybody -- and it is under NDA. So I can't say anything about it and we look forward to talking about it when we reach a conclusion."}]}, {"messages": [{"role": "system", "content": "Our last question comes from Ananda Baruah from Loop Capital. Please go ahead."}, {"role": "user", "content": "Hey. Thanks, guys. Appreciate it. And maybe for Wissam, and I might have missed it, but just wondering if there's any context you can provide on how you're thinking about the debt due in February of 2024? How to -- how are you going to handle that going back on that? Thanks."}, {"role": "assistant", "content": "Yeah, Ananda. The -- with respect to the $1.1 billion of convert due in February 2024, the plan is to address it over the next couple of quarters."}, {"role": "user", "content": "Okay, Jason. Is that the last one?"}]}, {"messages": [{"role": "system", "content": "Yeah, that was the last question."}, {"role": "user", "content": "Okay."}, {"role": "assistant", "content": "All right, everyone. Thanks for joining us today. We look forward to seeing you through the quarter. Take care."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And the first question will come from Durgesh Chopra with Evercore ISI."}, {"role": "user", "content": "Good morning. Thanks for taking my question. A lot of investor discussion, Vince, around just the legislation in Kentucky. Can you just share some initial feedback if you have any from your filings. A lot of investors are looking at this legislation, thinking about what the -- what it may mean for you and whether the state is actually going to accept your application to retire these coal plants. Just any additional color that you can share that would be appreciated. Thanks."}, {"role": "assistant", "content": "Sure. So look, in general, these are open proceedings. So we're going through the formal processes with the commission. So not a lot to share directly in terms of feedback from the commission. But as we think strategically, Durgesh, the CPCN that we filed with the commission is, again, our view as the least cost option to serve our customers. Again, as I mentioned in my remarks, we quantify the NPV savings to our customers at about $600 million versus continuing to operate the coal plants that we're proposing to retire. Our plan also ensures reliability."}, {"role": "assistant", "content": "It checks all of the issues that SB4 has in it in terms of cost and reliability, etc.. So we think we meet the requirements that have come out in the new law. So from our perspective, we still feel very confident that we can get our plans approved through the commission, engaging with our customers and the various interveners and stakeholders in the process. So overall, nothing changing from our perspective in terms of the CPCN strategy."}, {"role": "user", "content": "Got it. That's helpful, Vince. Is there a middle road here perhaps? And I know this is early innings, but like not your plant in entirety, but a portion of your plant might get accepted and you have alternatives for the balance of the plant. I'm just thinking about the risk because it's a significant portion of your capex, which is included in your plan as you go into the CPCN filings and where there's a sort of a collaborative approach here to get some of it, if not all of it approved?"}, {"role": "assistant", "content": "Yes. Look, I think that's a fair question, Durgesh. We'll ultimately have to see when we go through the process with our intervenors if there's a settlement scenario or a case that we ultimately can agree to, to your point. Of course, we're always open to those types of discussions. I think it's important to comment that if we do need to continue to operate the aging, uneconomic coal plants that we're proposing to retire that would require us to invest potentially significant amounts of capital to comply with existing EPA regulations, which, again, we don't think would be in the best interest of our customers."}, {"role": "assistant", "content": "But if we're required to do that, we would have to make those capital investments. If you look at all of the plants that we're talking about retiring, again, we'd have to evaluate the final EPA regs once they come out in final form and then analyze all that. But sitting here today, that could be between $0.5 billion and $1.5 billion of environmental investments alone, not to mention the maintenance capital that we would have to incur to keep those plants operating. So quite a significant amount potentially of investment that would be required there. And as I discussed, again, in my remarks that would recover -- be recovered through the ECR mechanism, which basically provides real-time recovery for our share owners should we need to make those investments."}, {"role": "assistant", "content": "We have other -- if we're not going to spend $2.1 billion on gen replacement, I mean, from an affordability perspective, we have other investments we can make in Kentucky primarily in the T&D businesses. Again, we're seeing increased severity and frequency of storms in the state. We saw that just this quarter, so continuing to strengthen the grid in Kentucky. We certainly have the opportunity to do that as well. And then from a capital plan perspective, we really don't have a lot of the IIJA project funding in our plans. So specific to Kentucky, we have about $300 million worth of projects that we submitted with the DOE, $150 million would be funded by us and $150 million would be funded by the DOE. So at the end of the day, we're feeling really good about the overall capital plan, Durgesh. And obviously feeding the earnings targets that we've laid out."}, {"role": "user", "content": "That's really helpful. Thanks very much."}]}, {"messages": [{"role": "system", "content": "The next question will come from David Arcaro with Morgan Stanley."}, {"role": "user", "content": "Good morning everyone. Let's see -- wondering if you could just maybe give an update on your confidence level in achieving your previously planned cost cuts for this year. What you're seeing for inflationary pressures? And I guess, how hard of a stretch is it to dig deeper and also offset the weather headwinds that you're facing?"}, {"role": "assistant", "content": "Yes, sure. So I'll ask Joe maybe to comment on that."}, {"role": "user", "content": "Yes, sure. Dave. Well, first of all, for the O&M targets that we've set for this year, we are on track to achieve those, and we feel really good about our ability to do so. As far as offsets for this year and the weather impact that we saw in the first quarter, I had a number of them during my prepared remarks, but those include the benefits from the strong execution of the convert that we issued earlier this year. And that's about $0.01 to $0.02 better than our expectations. We're also anticipating that this mechanism in Pennsylvania provides additional earnings."}, {"role": "user", "content": "It could be -- by about another $0.01 to $0.02 there. And then any potential outperformance on the integration of Rhode Island Energy. We're very focused on that integration process there and always try to do better than our plan. And that could be another $0.01, maybe $0.02. And then so if you're looking beyond that, we always have the ability to flex our O&M spending, which we could do on top of that."}, {"role": "assistant", "content": "Number of levers we have at our disposal, David."}, {"role": "user", "content": "Yes. Great. Yes, you anticipated my other question, which was to get a little more clarity on those other levers. So that's really helpful. And then -- just wondering if you could touch on Rhode Island and just following the ISR decision. Maybe one, do you think there's still interest in pursuing those projects by the commission that didn't get approval? And then -- just wondering maybe more holistically, are there other opportunities that you would look for additional capex upside in Rhode Island more broadly?"}, {"role": "assistant", "content": "Yes, sure. So first of all, I'd say, I think the process in Rhode Island was very constructive. And as I talked about in my prepared remarks, the projects that did not get approved were really associated with other proceedings that are currently in front of the commission. In particular, the grid modernization on the electric side and the leak-prone pipe on the gas side. So because we have other proceedings in front of the Commission on those areas, it wasn't a total surprise to me that they decided to temper some of the increase in those areas pending getting a little further down the road on those proceedings. We will have the opportunity, to your question, to request those projects in future proceedings."}, {"role": "assistant", "content": "Again, those could be future ISR proceedings, they could be future base rate cases depending on the timing of when we file our next base rate case. We also have reopener provisions in the current rate case for both grid mod and the AMF filing. So we could also potentially use that avenue as well. But I think it's important to point out that the $290 million, almost $300 million of investments that we did get approval for, right? Those are vital in strengthening the safety, reliability and resiliency of our networks. And so I think it highlights the importance of the ISR mechanism for our customers, but it also demonstrates the constructive regulatory framework for our investors."}, {"role": "assistant", "content": "In terms of additional capital opportunities, I think probably the biggest one would be, again, in the IIJA buckets. We have about $480 million worth of projects that we've applied for with the DOE, $330 million of that would be PPL funded, $150 million of that would be DOE funded. Obviously, that helps the economics on those projects. So we could, again, funnel those through the ISR or other mechanisms to get approval. We would need regulatory approval for those projects. But again, with the DOE kicking in, about 30% funding on those, it really helps the cost benefit analysis on those projects. So hopefully, we would get a lot of support in the state to do those types of projects."}, {"role": "user", "content": "Alright. Got it. Thanks."}]}, {"messages": [{"role": "system", "content": "The next question will come from Paul Zimbardo with Bank of America."}, {"role": "user", "content": "Good morning. Thank you for the color on Kentucky, in particular. And just if I add up the pieces that you mentioned, is it fair to say that in a worst-case scenario, you could offset the majority of that 2.1 generation plan with other spending if you needed to?"}, {"role": "assistant", "content": "Yes, Paul, we're very confident in being able to meet our earnings targets and trajectory. I think how we get there under different scenarios of a CPCN approval process, we have to look at that depending on what exactly gets approved. So like I was saying, if some of that capital ends up being environmental spend, on coal plants where we earn cash recovery on that spend pretty much as we're spending it where as we know, our base plan is assuming under -- the $2.1 billion we'll be spending under the CPCN, $1.6 billion in our time period that requires a base rate case for cash funding."}, {"role": "assistant", "content": "So we'll get -- we would get some potential upside on the earnings profile by recovering quicker. Again, we have to see how much the impact on the overall capital plan is, if any, coming out of the CPCN. But really, really, we feel confident in our ability to hit our targets under various scenarios coming out of the CPCN filing. So it's a little tough to just say this capital bucket for that capital bucket because you also have the positive effect of the ECR mechanism in there."}, {"role": "user", "content": "Okay. No, I think that's good context as well. I appreciate it. And then switching topics. Joe mentioned that the outperformance of the Rhode Island integration could be $0.01 or $0.02 favorable for 2023. Should we think of that as more of a timing element? Or if you're successful there, would that accrue to 2024 plus?"}, {"role": "assistant", "content": "Yes, Joe, do you want...?"}, {"role": "user", "content": "Yes. No, I think it's more on just our overall performance against our expectations there and being able to integrate at a lower cost than we expect -- the TSA period goes through 2024. So my comments were really focused on 2023 and our ability to offset the negative weather start to the year."}, {"role": "user", "content": "Thanks for taking my question."}]}, {"messages": [{"role": "system", "content": "The next question will come from Angie Storozynski with Seaport."}, {"role": "user", "content": "Hi, good morning. So first maybe something completely different. So we're probably halfway through the earnings season. And we haven't yet heard from any utility about some additional O&M efficiencies associated with reduced office space. Is that even something that you guys are considering? I mean it seems like this hybrid work model has persisted even in your industry. And I just wonder if that -- it's a lever that you might pull in the future from an O&M perspective or it's not something that you're currently considering?"}, {"role": "assistant", "content": "Yes, Angie, I think that's a great question, great point. So I think generally, why you haven't probably heard a lot about it is either utilities own their buildings, their office buildings that they're operating out of or they have leases that they're -- fixed leases that they're currently paying under. And so maybe not an immediate source of operating efficiency or O&M savings."}, {"role": "assistant", "content": "But clearly, in the post-pandemic world and as we think about hybrid or remote working versus in the office working, I think it's an area that you will see most of corporate America focusing on over the years to come. So I think specifically to answer your question -- or not necessarily seeing it right away or even in the next year or so, but certainly, I think that could be an opportunity longer term as we rightsize our real estate needs for sure."}, {"role": "user", "content": "Okay. And then just taking it one step further. Are you seeing any sort of slowdown on the -- among commercial customers, again, somehow linked to office buildings and downsizing or any other signs of economic slowdown like any leading indicators that you see among your customers, not only on the commercial side, but also industrial."}, {"role": "assistant", "content": "Yes, Joe, do you want to talk about, maybe just load in general?"}, {"role": "user", "content": "Yes, sure. Angie, it's Joe. We are -- we continue to see a number of positive economic factors in both of our jurisdictions in Pennsylvania and Kentucky, including continued low unemployment rates and strong GDP growth. And in Kentucky, as we've talked about a number of times, we saw back-to-back record years of economic development with over $10 billion of announced investments in each of 2021 and 2022. That includes the 40V battery plant initiative that we've talked about a number of times that's recently broken ground and well under construction. And we continue to see strong industrial growth, primarily in the manufacturing and agriculture sector. So we have not seen that in our territories. And Rhode Island is decoupled and less reliant on those things."}, {"role": "assistant", "content": "Yes. I think just in general, you're seeing people catch up from the lull in COVID, right? Whether that was supply chain driven or just the lull in the economy during COVID and kind of the bow wave to not only catch up to pre-COVID levels, but then the growth, we're seeing some of our major industrials, not only getting back to pre-COVID, but talking also about expansion, expanding their footprints and their production facilities. So in our jurisdictions, generally, I think we're feeling really good about our local economies and where the growth that we're seeing in our areas."}, {"role": "user", "content": "Okay. And then just one last follow-up on Kentucky. And again, I should know that. So I mean the purpose of the bill was to basically continue the usage of the coal that is mined in Kentucky? Or is it continued operations of the coal plants? I mean, it might be a subtle difference. But how about just running these coal plants on gas and that's checking that box of continued operations of these plants while sourcing energy from those new gas plants, which given the gas price environment just became even more beneficial to the end user?"}, {"role": "assistant", "content": "Well, look, I don't want to comment on the purpose of the bill. I think we'd have to probably hear that from the folks that wrote the bill. But in general, I would say, coming out of the winter storm Elliott, there was a general concern on just ensuring that reliability is kind of at the forefront of generation decisions in the state. There was concern that the clean energy transition is happening too quickly and making sure that reliability again is front and center. I will say that, that has always been an area that we and our commission have focused incredibly on as we put together our generation planning, our CPCN filings, what the form of generation replacement looks like, etc.. It's why we have two combined cycle units in our CPCN and it's not 100% renewables."}, {"role": "assistant", "content": "We were absolutely as focused on reliability as I think the legislature is in the state to ensure that we can deliver that power 24 hours a day, seven days a week. And so I think we were already operating under the reliability issues that were addressed in the bill. In terms of driving either coal mining or running coal plants, I can't necessarily speak to that per se. However, I would say we will continue to put forth plans that ensure reliability, but do that in the least cost manner for our customers, which the bill also has in it as well. And again, we think our CPCN plan absolutely balances all of those in the most productive way for our customers."}, {"role": "user", "content": "Thanks very much."}]}, {"messages": [{"role": "system", "content": "The next question will come from Paul Patterson with Glen Rock Associates."}, {"role": "user", "content": "Hi, good morning everyone. With respect to the -- back to the Rhode Island gas modernization program, I guess what sort of comes to mind when looking at that case is, again, sort of dating myself. Is there any -- how do you think about the potential for stranded investment with electrification efforts in places like Rhode Island and what have you. I know it's different in different jurisdictions, but I'm just sort of wondering sort of broad picture when you're thinking about this, does the -- how does the idea of electrification or these sort of really aggressive carbon -- greenhouse gas reduction efforts, how do you think about that with essentially your gas capex plans and what have you?"}, {"role": "assistant", "content": "Yes. I think there's a number of factors that go into that, Paul. One is the cost of electrification. The second is the reliability of supplying electricity if the bulk of the economy is -- or the vast majority of the economy becomes electrified and then ultimately, the benefits of fuel diversity by having natural gas in addition to electricity. Obviously, the state has targets to be economy-wide net zero by 2050; on the electricity side, net -- basically 100% renewable driven by 2033. Our investment plans on the T&D networks are geared towards that 2033, 100% renewable date. We are actively engaged with numerous stakeholders in Rhode Island, including the PUC on the future of gas docket."}, {"role": "assistant", "content": "And so we're actively engaged with doing analysis on various scenarios on how we could see the future of the Rhode Island energy sector, feeding the economy there and how the natural gas system will ultimately be used or not. We would expect to have our initial view of that and issue a report to the PUC late fall of this year. In the spring of next year, the PUC would then target issuing its report to the government agency that's in charge of implementing the act on climate rules within the state. And then we would expect that organization, EC4, to issue their report in 2025. So great question."}, {"role": "assistant", "content": "There's a lot of work and actually a formal docket within the commission to exactly answer that question. And I think you could see various possibilities there, right? Whether or not we're blending different molecules through the pipes, maybe it's not all natural gas, we're using more renewable natural gas. We're using hydrogen, a combination of those things. So really, we're right in the middle of it right now, Paul. And more to come as I think we make progress on that analysis and ultimately, those reports coming out of those various agencies."}, {"role": "user", "content": "Okay, awesome. And then you obviously have a reliability initiative in Kentucky and what have you. And obviously, things are a little bit more limited in places like Pennsylvania and Rhode Island just given the structure there. But as you know, there's some alarm bells ringing off or have been ringing off for some time in PJM regarding reliability. We're seeing some stuff in New Hampshire with respect to long-term PPAs potentially and what have you. And I'm just wondering, is there any potential on the electric side that you guys are thinking about here, either in terms of longer-term PPAs, maybe in terms of on the reliability side, batteries, virtual power plants."}, {"role": "user", "content": "I don't know, or just own generation or what have you, in terms of addressing these issues as opposed to maybe the way the construct has been, which is sort of like relying on PJM, the RPM model or capacity markets or what have you. That maybe it's time to sort of pivot at least a little bit and look at terms of maybe other structures than yet another sort of capacity market remake if you follow what I'm saying? Or I don't know. I'm just thinking about -- we're just hearing a lot about [Indecipherable] hearing with FERC. I'm just sort of -- I'm just wondering what your thoughts are on that."}, {"role": "assistant", "content": "I would say yes to all of that. This is an area that I spend a lot of time thinking about and we're starting to formulate our strategy along the lines of many of the things that you just mentioned. So to your point, PJM themselves, I think, are very concerned about 40 to 45 gigawatts of thermal generation amounts to be retired between now and 2030. That's an incredible amount of a very reliable, dispatchable generation that is scheduled to come out of the ISO, out of the gen stack. The vast majority, almost all of the replacement generation are intermittent renewables."}, {"role": "assistant", "content": "And developers are having a hard time getting the siting and permitting, getting any of it built. So even if it does get built, which there's a lot of, I think, concern in terms of the timing of when this replacement generation gets built, you're replacing very reliable, dispatchable energy with intermittent energy. And so I do think PJM is concerned as they're looking at their generation stack and thinking about the ISO itself, which of course then makes me focus on how do we ensure we have electrons flowing through our wires in Pennsylvania and Rhode Island."}, {"role": "assistant", "content": "And so yes, we are absolutely focused on this -- laser-focused on this, I would say. And some of the things that you had mentioned, I would say all of those, I think, are areas that we think we can take a look at to try to shore up the gen supply in our own jurisdictions. Great question."}, {"role": "user", "content": "Just a quick follow-up on that. do you think the people and the legislature or whatever the -- whatever, the officials in those states are open to those ideas as well because I would assume it might have to take changes on the part of the regimes in those states, you follow what I'm saying? I mean are they open to this? Do you think or do they recognize it or...?"}, {"role": "assistant", "content": "I think it's new -- this is a new topic for them. We will be engaging with not only our legislators, but our regulators just to make sure that we're all on the same page as we look at security of energy going forward. But we have flexibility within the current rules to do a lot of what you suggested. So not all of this requires legislative change. And so we'll certainly use as much of the levers within current legislation and regulation to shore up gen supply. But to your point, if we need to go beyond that, that might require legislative change. I can't handicap today the likelihood of that happening or not."}, {"role": "user", "content": "Okay. Great. Thanks for the color. Appreciate it."}]}, {"messages": [{"role": "system", "content": "Your next question will come from Ross Fowler with UBS.."}, {"role": "user", "content": "Hi. Most of my questions have been asked and answered. But maybe let me ask this one, and apologies if I drag out the past here. But can you sort of give us the context or at least the contention in this fraudulent conveyance claim against PPL Hydro that's out there with Talen and sort of if there's any process here or time line around actually resolving that."}, {"role": "assistant", "content": "Sure. So the case itself relates to or -- when we still owned PPL Montana, when PPL still owned PPL Montana, we had sold the hydro assets to Northwestern and the proceeds of those assets, $700 million about we distributed those proceeds back to PPL following the sale. That was known and negotiated when we created Talen Energy as part of spinning out energy supply and merging that with Riverstone's assets. And so -- all of that was well understood, well documented. The contention is that we somehow by doing that we made PPL Montana insolvent. And so that is the fraudulent conveyance charge."}, {"role": "assistant", "content": "We feel extremely confident in our position in defense that PPL Montana was not only in compliance with all applicable laws at the time the distributions were made, but that it was also solvent at all relevant times as it relates to the law and those distributions. So we -- just in terms of an update on the situation with the case, we did go into mediation between the parties recently. We could not come to agreement in that mediation. And so we have discontinued that. And so we're basically back in the bankruptcy court."}, {"role": "assistant", "content": "We would expect to resolve this with the court proceeding hopefully by the end of the year, Ross. So Talen has indicated certain time frames on coming out of bankruptcy within the next couple of months. This issue will not and does not necessarily need to be resolved before they can do that but we do expect it will be resolved by the end of the year."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Vince Sorgi for any closing remarks. Please go ahead, sir."}, {"role": "assistant", "content": "Well, thanks again for joining us this morning. We look forward to speaking with investors at our Annual Shareowners Meeting in a couple of weeks or perhaps we'll see you on the road here soon. So thanks again for joining us, and we'll close out."}]}, {"messages": [{"role": "system", "content": "Thank you [Operator Instructions] Our first question comes from Rich Repetto from Piper Sandler. Rich, please go ahead."}, {"role": "user", "content": "Hi, good morning, Jeff and Ben and Warren, congrats on the second best revenue and EPS quarter in the company's history. So I'd like to go back to the origin. And being energy, I know, Ben, you spent a lot of time on it, but still the quarter-over-quarter -- or excuse me, the comparisons compared to the second quarter of last year improved dramatically for you. They're down 20% last second quarter versus the first quarter."}, {"role": "user", "content": "So I guess the question is, Ben -- and you just put in a price increase, is what could derail the strong -- looking more out at the just energy market overall, we know what you're doing with options and the open interest. But what's the outlook for volumes? And what could derail this positive setup you get for the remainder of the year here, but it looks like a positive setup."}, {"role": "assistant", "content": "Thanks, Rich, and this is Ben. Thanks for the questions and the commentary there. Simply said, the setup couldn't be better for the balance of this year. When we look at the health of our overall markets, I mean, we've -- as you alluded to in your comments, we've built this business with a long lens and a view towards what customers' risk management needs are across the entire energy spectrum, including helping to help our clients navigate to a cleaner energy world and through our environmental markets that we've invested heavily in."}, {"role": "assistant", "content": "And the setup just couldn't be better. I mean, if you look at -- right now, we're at or near an average daily volume market share high against any of our peers in crude and in oil. We're at or near, open interest market share highs in North American gas and global gas. We're at or near, revenue share highs in energy. We had record energy options volume in Q1, posted an all-time high for Brent versus WTI options share versus our peers. We had record active market participation in our environmental markets and our TTF gas, as well as we are at or near, records and data subscribers in several markets."}, {"role": "assistant", "content": "And this positioning also is underpinning our ability, as Warren said in his prepared remarks, around the growth in our desktop business and energy and environmentals. Yes, we have this flywheel effect where we're also seeing some nice growth in our Fixed Income and Data Services business in this area. So why are we seeing all this? Last year, you had the war in Ukraine. This unfortunate war that created all these supply shocks across European Energy markets, create a very difficult trading environment. We continue to look at the health of the market by active market participation and market data subscribers, and we didn't see that shrink."}, {"role": "assistant", "content": "In fact, we saw it grow. And look at where we are today with U.S. for example, U.S. oil and LNG backfilling a lot of the supplies that have been cut off from Russia, we're starting to see the market normalize. And that has driven, since the end of the year, TTF open interest growth, up 40% since year-end. Gas oil has come roaring back now that gas -- it's clear that Russian oil is not going to be in gas oil deliveries as of the beginning of this year. That's up over 30% since year-end. Energy options are up close to 20%. Our Brent benchmark is doing very well, up 18% since the end of this year. And now you have WTI Midland grade oil coming into Brent this summer, mostly priced by our Midland WTI American Gulf Coast contract. We're well positioned there."}, {"role": "assistant", "content": "And then the other market that we saw that had some headwinds last year was our EUA markets, our European Union Allowance markets. Because there was so much time, attention and capital being put towards energy, we saw that come back strong, with average daily volume up 18% Q1 versus Q4, and there's, long-term secular growth drivers for that EUA business, where there's roughly 4 gigatons of carbon emissions that are emitted in Europe. Today, about 1.5 gigatons of those carbon emissions are priced by compliance markets based on policies that are in place."}, {"role": "assistant", "content": "And over the next few years, as a new program called Fit for 55 comes into place, another 1.5 gigatons will be priced as roads, buildings and maritime sectors of the economy start to get pulled into this, which is all a long-term secular growth driver for that. So we feel very, very well set up for the balance of the year and beyond."}, {"role": "user", "content": "Okay. Thank you very much Ben and the team."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Kyle Voight from KBW. Kyle, please go ahead."}, {"role": "user", "content": "Hi. Good morning. You noted the top five global bank win replaced their in-house solutions with Encompass. I guess, is there any way to frame the revenue upside or the potential revenue upside from that contract? And then in terms of kind of Tier 1-sized banks, do you think getting this signing could kind of open the door to other opportunities of this size? And if you comment on the pipeline from kind of that client segment of the larger banks. Thank you."}, {"role": "assistant", "content": "Thanks, Kyle. This is Ben. So if you remember last quarter, I had highlighted that the fourth quarter of 2022 was the strongest sales in terms of new sales to new Encompass customers of all of 2022. And then we followed it up with Q1 of this year being the strongest new sales of Encompass to new customers of all time. So we feel great about really the hypothesis that we had when we, a few years ago, bought the Ellie Mae business, that you had a lot of banks that had aging in-house infrastructure that they were trying to support."}, {"role": "assistant", "content": "And we felt that, that replacement cycle was going to be coming up, as that's the main competitor that we have in the Encompass marketplaces is in-house legacy infrastructure. And as we've seen that funnel develop, I alluded to it on the first -- on our last call that we saw a strong funnel of these types of banks that we're talking to and engaged with and talking about the benefits that Encompass can provide them. And lo and behold, we brought on board one of the biggest global banks onto the platform here in the first quarter."}, {"role": "assistant", "content": "So we -- these customers, I need to point out, are large. They're complex businesses. It's going to take time to implement them. So in terms of timing and when we'll see revenue contribution, it's more likely going to start to come in, in 2024. But again, we believe that based on the hypothesis that we had, that clients are going to be replacing this in-house infrastructure as well as the relationships that ICE has established, the long-term relationships that we've established since our founding, being a trusted technology and infrastructure provider for financial institutions like this that we're very well positioned to win this business as other banks look at making the same decisions."}, {"role": "user", "content": "Thanks, Ben"}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Alex Kramm from UBS. Alex, please go ahead."}, {"role": "user", "content": "Yes. Hi, guys. Good morning. Just going back to energy for a second and being more specific here. You mentioned the pricing increase. Maybe I missed it. Obviously, we can look at your disclosures in terms of the fee schedule, but there's a lot of mix here. So maybe on a like-for-like basis, maybe look at 1Q volume mix, like how much would the pricing changes actually impact the RPC or revenue?"}, {"role": "user", "content": "Alex, this is Warren. So good question. So I'd expect a few pennies of impact to all is equal. What we did there was we touched a handful of products within energy. And so when I say a few pennies, I'm talking about the energy RPC overall, of course. And so we touched a handful of contracts within the broader energy complex. This is something we haven't done, in some cases, decades; in other cases, ever."}, {"role": "user", "content": "As you know, our philosophy is really to take the approach of where we created value for our customers and then over time, go capture some of that value. And so we felt like this was a good opportunity given the backdrop to do that in some of these contracts, and that's what you're seeing there. And so, look, we've done that in the past. We're always looking to do that, and we'll continue to look for those opportunities, not only within futures, but really across the business and taking that same philosophy as we go forward here. So hopefully, that's helpful in terms of thinking about the impact."}, {"role": "user", "content": "You can't put it in percentage terms, can you? Or could you?"}, {"role": "user", "content": "Well, I would just say, look, you know the energy RPC was about $1.60 in the quarter. I'd say a few pennies on top of that, that should help you in terms of thinking about the impact."}, {"role": "user", "content": "So looking for exact math, but good enough. Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Dan Fannon from Jeffries. Dan, please go ahead."}, {"role": "user", "content": "Thanks. Good morning. So I guess another question for you, Warren. You talked about strategic investments, and that's part of the pickup sequentially and was hoping you could just frame where those investments are going in this year, kind of projects in products? And then if the environment isn't as constructive as we think about the back half of the year, is there some flex to maybe remove or reduce spend across the expense base?"}, {"role": "user", "content": "Yeah, it's a good question. So in terms of some of the investments, we're making those across technology. We're also making some select hires in certain areas, particularly areas within some of our data products, new data sets, ESG indices. We're expanding some of the opportunities we have within the connectivity business. So it's fairly broad-based in terms of those investments we're making. That's all part of the plan, if you will, or the budget when we entered the year. We talked a little bit or I talked a little bit earlier about in my prepared remarks about how so we did have some expenses push into the second quarter. So we're -- as I'm noting now, we're going to continue to make those investments, and we're on plan to do that."}, {"role": "user", "content": "Look, over time, of course, and the goal every year is to grow, both in the near and the long term. And to do that, we've got to make investments in the business, particularly if we're going to grow into the future. And that's what we're doing here, and that's what you should expect us to continue to do. And that's -- frankly, that's the benefit of -- that we have with a diversified model we had not only across asset classes, but also the mix of subscription that tends to be a little more resilient and then as well as on the diversified transaction front."}, {"role": "user", "content": "So that's what we'll do. And I think, look, as we're thinking about how things trend to the balance of the year -- look, we're a company that's run pretty efficiently. We had operating margins of 61% in the quarter. That's been a philosophy that we've had to operate that way and look to run the business efficiently, both in good times and bad times or tough times. And so I don't think you should expect us to really be changing how going to make those investments."}, {"role": "user", "content": "And to the extent we needed to pull back, we will think about that. But I think it would have to be more of a structural change in some of the asset classes that we're in than anything cyclical because, again, we want to drive long-term growth. And there's no reason for us sitting here today to do that because we're not seeing that at the moment."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Andrew Bond from Rosenblatt Securities. Andrew, please go ahead."}, {"role": "user", "content": "Hey, good morning. I just wanted to ask if there's been any change to your thoughts and ICE's strategy in the digital asset space in recent months as other traditional exchanges become more active? And given the impact of the current bank crisis in other countries where ICE has already worked with regulators stepping up their efforts to really become crypto hub while the US sales are all behind. And additionally, do you think the US government and regulators are making a mistake by not being more proactive in providing thoughtful regulatory clarity on space? Thanks."}, {"role": "user", "content": "This is Jeff. So we sort of have our foot in two places with respect to digital assets. First of all, we created back and then spun it out as its own public company. And while I can't speak for back management, the philosophy that we put into the company at the time of the spin was to be highly regulated, in other words, to get 50 state money transmitter licenses and set up a custodial banking practice under the New York banking regulations. And so from the onset, I would say to you, we had the philosophy that anything we did around digital assets should be -- should comport to existing regulation."}, {"role": "user", "content": "We own and operate the world's largest Exchange, the New York Stock Exchange, 350 billion transactions a day. And we have the infrastructure to list digital assets. It is different than a lot of the entrepreneurs in the digital space, in that a requirement of a US Securities Exchange is that its members have to be licensed broker dealers. So there is no such thing as NYSE direct. It's not that we couldn't build NYSC direct. It's not that we don't have relationships with end users, but the losses that end users need to come through broker-dealers who provide KYC and AML oversight to the market. And so, so far, that model hasn't been one that the market has been interested in."}, {"role": "user", "content": "But our ability to list the digital asset is actually quite easy. It's obviously a token and registering on a public blockchain is actually relatively simple, given the complexity of the infrastructure that we are used to operating. So we'll see how this unfolds. It does appear that the SEC and other regulators would prefer to use that traditional infrastructure for tokens in the United States. And a lot of their compliance activities seem to be focused on moving the existing market towards our model and the historical model. And to the extent that there's an appetite for us, it would be easy for us to list digital assets, and we obviously have the domain knowledge here having built back on how to operate in a public blockchain environment."}, {"role": "user", "content": "Great. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Michael Cyprys from Morgan Stanley. Michael, please go ahead."}, {"role": "user", "content": "Thank you. Good morning. So just a question on mortgage. I was hoping you could talk a little bit about where you guys are along the journey of digitizing the mortgage process. From e-closings to e-note to Teams, it seems you have a lot of capabilities already in place maybe it's just about driving engagement from here. So maybe you could talk about what's left? What are some of the hurdles that you're facing? What are some of steps that you're taking to overcome those hurdles and to accelerate the push to digitize the marketplace? Thank you."}, {"role": "assistant", "content": "Thanks, Michael. It's Ben. And the short answer to the question is, we have done a really good job of integrating the businesses that we've acquired over the last few years from MERS, to the simple file business, to then the Ellie Mae business really bringing together from the start of the origination process, all the way through to the electronic closing of the loan. We have integrated those into a cohesive platform for our clients. And as you alluded to, we've stood up an electronic closing room for our clients to digitize the close. We have eNotes now as part of the Encompass document set natives into the -- into our loan origination system. So we're really set up well to be able to cross-sell the solution set into all of our clients."}, {"role": "assistant", "content": "And that's the thing that I think is most important for people to really -- when they're thinking about the mortgage headwinds and the current conditions in the marketplace is -- and Warren mentioned this in his comments -- in his prepared remarks, that we're not losing clients. And of the 6,000 lenders that are out there, we're providing some services to just about every one of them. 3,000 of those lenders are on our Encompass platform. So we're very, very well-positioned to now cross-sell these solutions to our clients."}, {"role": "assistant", "content": "So right now, what we've been really focused on is, now that we've completed that, that integration is executing on the sales success that we've had. We've talked about the strong funnel that we've had and bringing new clients into the Encompass ecosystem. I think the other thing to point out is, as you see some of the noise in our results, is for people to fully appreciate that when we have renewals that are coming through our process, just like we did last quarter, more than 60% of the clients that renewed, renewed at higher subscription fees than where they started at the beginning of that quarter. What we're trading off for that is a per closed loan fee."}, {"role": "assistant", "content": "We're lowering that to some degree, which is transaction revenue. So of the clients that did not renew at higher subscription, it perhaps went down in subscription. There the trade-off is consistently that we're raising the per closed loan fee on those clients, which means that as the market rebounds and returns, we have an opportunity to participate in the upside there. So it's important that people see that, one, we're not losing customers; two, we're very well-positioned to cross-sell the entire digital solution suite that you alluded to in the way that you asked the question. And we're set up very well with that balance between transaction and subscription revenue, where if clients are in tough times and they need to reduce their subscriptions, we can participate in the upside in transaction revenue."}, {"role": "user", "content": "I don't -- this is Jeff. I'd also tell you that one of the things we're seeing is much like it came out of the dot-com boom where there were thousands of tech companies, and that then really reduced down to a core group of companies that emerged as the largest companies in the United States today. And the reason is similar to the environment we're in today is that in tougher periods, like we're in right now with mortgage with -- in a higher interest rate environment, clients are more apt to talk and listen to our pitch about changing their behavior, that they're looking for cost efficiencies."}, {"role": "user", "content": "A couple of years ago, when the market was at its peak in terms of transaction volume and everybody is busy in making money, it's actually hard in that environment to convince people to change their behavior. But our team has been really seeing a lot more success now in this environment with people focused on the new model that we're bringing, as Ben mentioned, a subscription SaaS-based model that has deep connectivity across the mortgage ecosystem that will allow them to save money and ultimately pass those lower costs on to consumers. And so it's actually a pretty good environment for us to try to advance a different model across the industry."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Craig Siegenthaler from Bank of America. Craig, please go ahead."}, {"role": "user", "content": "Good morning, Jeff, Warren, hope everyone is doing well. My question is on disposition potential. ICE has always been pretty opportunistic in terms of buying businesses that make strategic sense and sometimes selling ones, too. But are you looking at any businesses today that may not make strategic sense or a subscale or maybe would be even more valuable to another party? And I'm partly thinking about your Fixed Income execution business, which you may view as subscale, but it's within a great fixed income franchise that's benefiting from both bond ETF adoption and the migration to e-trading."}, {"role": "user", "content": "That's a really good question, actually. I don't want to focus on specifically our Fixed Income business, but let me speak broadly. And the answer is yes. I feel like as a management team, we promise that we're going to deliver growth. And sometimes, we can do that by building new technologies, as we just talked about in mortgage, sometimes we do it by acquisition. And sometimes, it's better to do dispositions and reallocate the capital. And I think through the history of this management team, we've not been afraid to spin businesses out. We've obviously acquired a lot of businesses, and we're good at integrating businesses. It's actually a pretty strong domain capability of this company."}, {"role": "user", "content": "But we also are good at organizing businesses and spinning them out. Ben oversaw, along with some Black Knight people, the ability to put together their loan origination platform and take it to market. So we're not afraid to move businesses around if there's value there. The other thing I would say to you is that if the market doesn't appreciate the overall footprint of ICE, if you, as an investor and investor advocate, think that the sum of the parts would be better organized differently than as a management team, we should be open to that. We like actually running smaller, flatter businesses that have entrepreneurial bent to them. And so the complexity of being a large organization actually can sometimes frustrate that."}, {"role": "user", "content": "And so maybe unlike many management teams, we like being small and nimble. So a long-winded answer is saying, yes, we look at everything, and we do meet routinely all the people on this call. We meet routinely to go through all of our business units and what our competitors are doing, what the landscape is and think about whether there are opportunities to organize differently."}, {"role": "assistant", "content": "Thank you, Jeff."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our next question comes from Alex Kramm from UBS. Alex, please go ahead."}, {"role": "user", "content": "Yes, hey, back so soon. Just a quick one on the Fixed Income and Data business. On the fixed income data, recurring revenues, in particular, I know there's a couple of moving pieces here for the flat growth year-over-year. But now if you think thematically and you step back, right, fixed income markets are in a position of strength for the first time in, I don't know, 15 years or so? And people are getting excited about all these changes and flows into CDs. And whatever is happening out there that we haven't seen this along, systematically, I don't understand like why this is not helping the business more? Or do you think there's still some things on to come, because it just seems like there's been a period of underinvestment. And as fixed income managers now have more strength, I would assume that, they're looking to modernize some of their solutions."}, {"role": "user", "content": "Hey, Alex, this is Warren. I think you made some really good points, and I would echo those. I think right now, though, in terms of our business and the customers that we're facing, they are still licking their wounds a little bit from what was a pretty tough 2022. But as you're alluding to, there are some green shoots, if you will. I mean, you've had some good fixed income flows that to now first couple of months of the year. I don't want to predict anything, but it kind of feels like at least relatively speaking, you've got some stabilization in interest rates."}, {"role": "user", "content": "And then -- and as you said earlier, I mean, this all of a sudden becomes a pretty attractive asset class broadly speaking. And so, look, I think there are customers right now, and we've seen this. When I talk about sales cycle, things like net new fund growth and things like that, that's part of the slower sales cycle. That's a component of our growth. But as we just said and you said, too, like it seems like things are getting -- are stabilizing a little bit, and you've got a potentially very attractive asset class. So we're encouraged by that. And I think as we look to the second half, we do have some easier compares to -- that we're facing. And I think I'll -- if you pull that all together, it's all pretty encouraging."}, {"role": "user", "content": "But also I think don't lose sight of what's going on in the rest of the data business that we talked about, too. I mean, other data and network services -- we had some really strong growth in our desktop business, up double digits. Our strong growth in our analytics business within that, in part driven by some of the commodity customers, that's also helping our Exchange data business. And so we've had some pretty good results, and that's the benefit of having some diversity across different types of solutions in different asset classes and helping to drive what overall for the segment was another good quarter of double-digit growth and margin expansion and again, sort of a testament to the -- not only the all-weather nature of that particular segment, but really the business overall."}, {"role": "user", "content": "Okay. Fair enough. And then since we're in over time, I'm going to squeeze one quick one in there for Ben. Ben, you mentioned the data and analytics in mortgage as a sign of area of strength. But sequentially, that business was actually down a decent chunk. So I don't know if there's seasonality, but just making sure that people are not also trading down there or getting rid of some services that they've purchased in the past."}, {"role": "assistant", "content": "Thanks, Alex. So while you did allude -- you alluded to the slowdown in the business, you got to look at it as well, though, it is up 10% against the market that's sequentially down 20% and year-over-year, down 60%. So the backdrop is still tough. Historically, when you go back to when we bought the Ellie Mae business, this business was heavily transaction-oriented. So that's why if you look over time, each quarter, this -- the results in this business has been a little bit volatile. Because we've been -- just like on the origination side, we have made a concerted move to moving more and more customers towards subscription. In the fourth quarter and then again, in the first quarter, we moved some pretty substantial customers that were on heavily transaction-oriented deals more towards subscription and gave up some transaction revenue to do so. So that's some of the noise that you saw in there."}, {"role": "assistant", "content": "But some of the tailwinds we have in this business, as well as in the spring of last year, we mentioned we won a major global bank in JPMorgan Chase coming on to our AIQ platform. And we have now implemented them, they're live, and we're going to start seeing revenue contribution from that, so there is -- a nice tailwind there. We also, based on the interesting datasets that we have and the unique datasets that we have on our loan origination system. We've recently been engaged by the CFPB and they have engaged us to help improve our average prime lending rates. So the lending rates that they put out to consumers that's the average to give them a benchmark of my getting a fair deal when we're underwriting alone. They've engaged us to help provide them our data to help improve that index."}, {"role": "assistant", "content": "So we think that's just one of many examples of data offerings that we'll have in the future. And the other thing I'd point to is that we're feeding a lot of our datasets into other parts of our business, like our ICE Data Services business, to improve our mortgage-backed securities pricing. And then we also launched those rate lock features. Last year that we believe is a very interesting risk management tool to help with some of the basis risk that you have in the mortgage space when producing a mortgage, whether it's a long-term mortgage lock that you have or you have jumbo loans in your portfolio, you have pretty significant basis risk versus treasuries and the TBA market when doing that. And in April, we saw 11, 000 contracts executed on those rate-lock features. So there's a lot of green shoots there within data, and I think you'll see that feed multiple different line items in the future as those develop."}, {"role": "user", "content": "Right. Great. Thanks for the follow-ups."}]}, {"messages": [{"role": "system", "content": "Thank you. That is now the end of the Q&A session. We will now hand back over to Jeff Sprecher, Chair and CEO, for closing remarks."}, {"role": "user", "content": "Well, let me thank you, Lauren, for being today's operator, and thank you all for joining us this morning. I want to also send out a special thank you to Rich Repetto of Piper Sandler. As many of you know, he dialed in very early this morning in order to open today's questioning, as he's done every quarter since our initial public offering in 2005. And we understand that Rich plans to move on to new opportunities this summer. So I represent everyone in the room when I say that we will miss hearing his thoughtful questions going forward. And Rich, I just want to say thank you for your commitment to following our company and our progress. And in your absence, please know that we're going to continue to strive to innovate for our customers and build an all-weather business model that will continue to grow. With that, have a great day, everyone. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]."}]}, {"messages": [{"role": "system", "content": "Our first question comes from Carlo Santarelli with Deutsche Bank. You may go ahead, sir."}, {"role": "user", "content": "Hey, everyone. Thanks for taking my question. Craig, as you -- you talked about some of the work you guys are doing on the Peninsula at that asset. How much of the, I guess, trailings of that asset relative to Cotai is related to the work versus how much of the overall recovery that you've experienced or the market has experienced in Cotai, how much does the peninsula lag that? And what do you think -- or what do you think it takes to narrow that gap in the resumption of attempting to attain 2019 levels in both geographies?"}, {"role": "assistant", "content": "Sure. No problem. Carlo, thanks for the question. So first, it's important to note, we don't normalize for mass hold. And so, when we talk about normalized numbers, they don't include any unusually low hold in that. And we did hold low in mass at Wynn Macau in the quarter. But, certainly, and I called it out for a reason, Wynn Palace is leading the charge amongst our two properties as the market comes back."}, {"role": "assistant", "content": "There's really a few factors at play. I think everybody who follows Macau closely knows that GGR and visitation were somewhat disconnected in the initial waves, in that you had a lot of dedicated players come back. A lot of those players -- most of those players are rated players. And they weren't coming with tour groups. They were coming as individual visitors and they disproportionately, at least within our business, ended up at Wynn Palace on Cotai. Wynn Macau historically has been more exposed to tour group business, general unrated business, et cetera, et cetera. So I'm not surprised from that perspective that Wynn Palace led Wynn Macau. That's the first point."}, {"role": "assistant", "content": "The second point is that there are a number of changes that we're making to Wynn Macau. The property needs to be refreshed, and we're making those changes now. We did start those in Q1, including some pretty significant refreshment of the east casino there, which disrupted significant numbers of pits concurrently. They were effectively closed during the quarter. So that also had an impact."}, {"role": "assistant", "content": "So I think as the market continues to recover, as more unrated play comes back to the market, as more tour groups come back to the market, then we'll get the natural benefit downtown. And then, of course, we're trying to make the property the best that it can be to take as much market share as we possibly can. But in the interim, as I said, I would expect Palace to lead Wynn Macau."}, {"role": "user", "content": "Thank you. That's helpful. And then as a follow-up, obviously, there's plenty of development activity. There's obviously some spend on Cotai and your contributions down the road for the UAE development. What was the primary thought process and driving factors and the decision to reinstitute the dividend?"}, {"role": "assistant", "content": "Thanks, Carlo. Yes, the dividend, as we always talk about with our investors, the dividend is the cornerstone of our capital return strategy. And the US business is getting plenty of cash flow, Macau is coming back quickly and so now we are doing exactly what you just alluded to. We're balancing these high-ROI development projects in Boston and the UAE. We're preserving a bit of capital related to New York City to the extent that that advances. And on the other side, our desire to re-implement that dividend and return capital. So we felt like this initial dividend was a great place to start. And from there, stay tuned. We'll see how we grow it over time."}, {"role": "user", "content": "Great. Thank you, Craig."}, {"role": "assistant", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Joe Greff with J.P. Morgan."}, {"role": "user", "content": "Good afternoon, everybody."}, {"role": "assistant", "content": "Hi, Joe."}, {"role": "user", "content": "Craig, it looks like EBITDA margins on net revenues in Macau in March were about 30%. I just want to make sure my math is right on that. And then when I just look at overall opex growth versus net or gross revenue growth, it looks like opex growth is approximately half of revenue growth. Do you think that can continue or do you think opex growth is lagging because of labor constraints and maybe other nuanced things in the Macau marketplace?"}, {"role": "assistant", "content": "Thanks, Joe. The market is structurally different than it was in 2019 and before for a few reasons. I think the change in the junket environment and the shift to mass is well understood. On the opex side, the concessionaires were encouraged to, and generally did, maintain labor throughout the course of the shutdown. There are components of the labor pool where I think all of us were able to -- particularly with respect to some foreign labor, where we were able to trim. And so, I think I've heard comments from some of our competitors that they were bringing labor back on, particularly on the housekeeping side, et cetera, et cetera."}, {"role": "assistant", "content": "I think that's generally true for us. We have been operating at full capacity since the day the market reopened. We're probably light in a couple of labor categories, not high-dollar labor categories. So I don't think we're in a situation where certainly our fixed costs are going to meaningfully accelerate as the market accelerates. And I would expect some pretty healthy operating leverage coming out of the business over the course of the next couple of years."}, {"role": "assistant", "content": "If you look at where Palace printed this quarter, you can look at that relative to 2019 and you can see that there was distinct margin improvement. Our service levels certainly haven't degraded versus 2019. So I'm pretty bullish."}, {"role": "user", "content": "Great. And I was hoping you can maybe put a little bit more meat on the bones with respect to your comments about April and Macau in terms of an EBITDA run rate. I don't know if you want to look at it as a percentage growth rate in relation to March or for the full quarter, but any additional details would be appreciated."}, {"role": "assistant", "content": "Well, I would just say our average EBITDA per day in April was up over our average EBITDA per day in Q1. You saw what the market did. The market grew quite healthy from both February to March and then March to April. And we had 14% share in the first quarter. So I think you can probably do the math from there."}, {"role": "user", "content": "Great. Thanks so much guys."}, {"role": "assistant", "content": "Sure."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is Shaun Kelley with Bank of America. You may go ahead."}, {"role": "user", "content": "Hi. Good afternoon, everyone. Thank you for taking my question. Just was hoping we could get a little bit more color on the recovery you're seeing maybe in the VIP segment. So, obviously, I think you called out direct being, I think, double over the Golden Week holiday. But maybe just in general, how you're serving that higher-end customer, where you see them playing on the floor? Just kind of behaviorally, how has the market kind of adapted and adjusted to that and how your direct program has evolved as well?"}, {"role": "assistant", "content": "Sure. I think, it's -- Shaun, I think it's honestly a little bit too early to forecast the overall trajectory of VIP, both direct and junket. But certainly, we were pleased with turnover in both the quarter and subsequent to, including Golden Week. I think it's a testament to how much Macau in general and we, in particular, have to offer those customers, including those from broader Asia. So we're watching the situation closely. Stay tuned."}, {"role": "assistant", "content": "I don't think there's been a lot of, frankly, changes in terms of how we execute in direct. We certainly have developed some incremental relationships, player referral relationships outside of the traditional markets, and that's part of the broader mandate to improve international visitation to Macau. But the way that we underwrite credit, the way we think about extending credit, none of that has changed. So we'll see how it develops over the course of the next couple of quarters. But overall, I think we've been pleasantly surprised."}, {"role": "user", "content": "Thank you for that. And then as my follow-up, could you just -- going back to the renovations for a second on the Peninsula, your expectations for when those should conclude or if they don't conclude entirely sort of become materially less of a headwind from here, how long that program is expected to last?"}, {"role": "assistant", "content": "The material impact will subside this quarter. So we had the portions of the main floor on the east side closed at various points throughout Q1. That's complete. Now we're doing some work in some of our adjacent salons, and that will complete this quarter. There's a number of other things that will have a longer tail, but it shouldn't impact revenue the same way."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]."}]}, {"messages": [{"role": "system", "content": "Our next caller is Dan Politzer with Wells Fargo. You may go ahead, sir."}, {"role": "user", "content": "Hey, good afternoon, everyone. Thanks for taking my questions. I wanted to actually pivot to Wynn Al Marjan. Can you maybe talk about how we should think about this property evolving over time in terms of the timing of your capital commitment, maybe the financing breakdown versus the equity contributions versus debt, gaming versus non-gaming? Just any additional color. And I appreciate that the presentation was pretty thorough. But just as we think about this going forward and over the next few years, that would be helpful. Thank you."}, {"role": "assistant", "content": "Yeah, sure. Think about it as a $4 billion project for now. Think about it as 50% equity, 50% construction-related financing with the exact percentage TBD. Think about the equity going in pro rata with the construction cost, that's always a debate you have with the financing sources. So we'll see how that goes, but that's the way that I would model it for now."}, {"role": "assistant", "content": "I've talked a bit about this on prior calls. The market in Dubai from a non-gaming perspective is incredibly healthy. If you look at ADRs, if you look at spend on food and beverage, if you look at spend on luxury retail, it's tremendous. And so, we think that this -- the more time we spend there, we think that this business is much more akin to our Las Vegas business than it is, say, Macau or Boston, which are primarily gaming-centric markets. So we think that this will be a healthy balance of gaming, non-gaming and that that will allow us to provide a very full and high-quality experience and generate very healthy returns."}, {"role": "user", "content": "Got it. And then just in terms of Macau, I know there was a couple of moving pieces in the quarter. Is there any way to maybe quantify -- and I recognize that this is not something you would typically adjust for, but that mass hold in the quarter in terms of the impact to EBITDA, as well as that construction disruption and just as we kind of think about in a normalized scenario going forward, that would be helpful."}, {"role": "assistant", "content": "Yeah. So there's probably 500 basis points of low mass hold, plus or minus. You have the statistics in the press release, you have drops, so you can apply that to it. And the construction disruption, we have not quantified."}, {"role": "user", "content": "Got it. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next caller is David Katz with Jefferies. You may go ahead sir. David, your line is open. Possibly your mute is on."}]}, {"messages": [{"role": "system", "content": "We'll go to the next caller. Robin Farley -- you may go ahead -- with UBS."}, {"role": "user", "content": "Great. Thanks. I just wanted to circle back to your comments about VIP hold and the fact that it was at two times the level of 2019, your direct business for Golden Week. If we think about your direct VIP business in 2019 being maybe 15% of total VIP, is it reasonable to think you could get back to 30% of previous VIP levels or even higher since this is really just out of the box here under the new regulations?"}, {"role": "assistant", "content": "Well, thanks, Robin. I think what's unknown at this point is the denominator in your equation. So we don't know what total VIP will be yet, right? We need to really see how that develops over the course of the next couple of quarters. There's really no legal or structural impediments to us returning to our prior direct VIP business or, frankly, exceeding it. It's unaffected by -- generally unaffected by the legal changes that happened. So I think that we were--"}, {"role": "user", "content": "That's what I was suggesting. In other words, if you were at two times the level already for Golden Week that you could -- in other words, is there a reason that wouldn't be a sustainable rate of recovery of your previous what was direct, that you'd be able to recapture some of what have been junket business at that same level or even higher?"}, {"role": "assistant", "content": "No. There's no reason that we couldn't do that, other than credit underwriting. What we won't do is underwrite players that we're not comfortable with from an asset perspective. So with that caveat, no, there's nothing that could stop that."}, {"role": "user", "content": "Okay. Thank you."}, {"role": "assistant", "content": "Sure."}, {"role": "user", "content": "We will take one last question, operator."}]}, {"messages": [{"role": "system", "content": "Thank you. John DeCree with CBRE. You may go ahead."}, {"role": "user", "content": "Hi. Good afternoon, everyone. Thank you taking my question. Maybe bring the conversation back home for one in Las Vegas, obviously, a fantastic quarter for you guys in the market as a whole. And two kind of customer segments that we're paying attention to is the international customer and convention recovery. Presumably, we've seen both of those kind of accelerate in 1Q. So curious to get your thoughts on where the recovery of those two segments are for Wynn specifically and how much room you see in front for those kind of two customer segments relative to 2019?"}, {"role": "assistant", "content": "Sure. I'll cover international and then I'll ask Brian to talk about the group and convention pacing. On the international side, you're right, the market has not gotten back to its full pre-COVID levels. It's really been a geography-by-geography question. LatAm started to return early. Europe has started to come back. And so, there are certainly opportunities in international. I do want to -- I would specifically call out China and Mainland Chinese guests where we don't know yet because it's very, very early there. And so, we'll see how that plays out. But international is starting to trickle back. And I think that that will be a tailwind as we move through 2023 with the caveat that I mentioned with respect to seeing how China plays out."}, {"role": "assistant", "content": "Brian, do you want to comment on our group and convention pace?"}, {"role": "user", "content": "Sure. Thanks, Craig. John, yeah, I would say that group is back beyond 2019 levels at this point. When you look to Q1 and what we did, the team did an amazing job. We had one of our best -- well, we had the best convention group revenue we've ever had. We had all the stars line up, CES, Homebuilders, CONEXPO. It was just a phenomenal quarter, which then helped drive the record quarter."}, {"role": "user", "content": "If you look forward, I think the group business is solid. Our team has done a great job. We're pacing towards record group room nights for this year with very strong ADRs. We built a solid base that will allow us to yield manage our rooms in the other segments as we move forward. And right now, 2024, knock on wood, 2024 is actually pacing ahead of what we believe will be a record 2023. So, yes, we're back to beyond 2019 levels, and we see this right now continuing. We're looking for the signs. Don't see any signs of softening yet, but we're going to be cautious and react if we have to. But right now, it looks pretty good."}, {"role": "assistant", "content": "And we have -- again, as Brian said, it's proven to be interesting. I think everybody, at least that we talk to on the sell side and the buy side, keeps waiting for a shoe to drop in Vegas. And it hasn't to date. Now, we have a 2023 playbook, 2024 playbook for every possible scenario because we learned how to operate our business incredibly efficiently as we went through all the various iterations of COVID. So we feel great about where we are. We're ready for anything, and we'll see how we go."}, {"role": "user", "content": "Thanks. That's really helpful. Maybe as a follow-up, one more on Macau. Craig, could you kind of give us your insights on the competitive landscape, I guess, particularly on the direct VIP and premium mass? It seems like there's been plenty to go around so far in early recovery, but curious to get your updated thoughts on player reinvestment and how competitive or promotional the market has been, if at all."}, {"role": "assistant", "content": "Sure. It's early, right? And a wise person once told me that half of great strategic thinking is ignoring noise, and there is a tremendous amount of noise in the market in Q1. We had competitors with rooms out of commission. We had hold volatility because, in the early portion of the quarter when you have lower volumes, you inherently have hold volatility. You have a lot of things. You have the market compounding month-over-month and growing month-over-month and creates a lot of noise."}, {"role": "assistant", "content": "But in general, I would say that the market is coming back much more quickly than anybody would have thought of certainly six, nine months ago. It's incredibly good to see. The margin profile of the businesses across Macao looks pretty strong, which would indicate to me that reinvestment rates are relatively disciplined, which is good. And I think that, overall, the behavior in the market is quite rational. So, I think the next couple of months, the next quarter, quarter and a half, I think will be telling to see what the pace and size of the recovery is. If you -- who can imagine that we're run rating $22 billion of GGR right now."}, {"role": "assistant", "content": "For us, if you kind of roll the business forward and do your modeling, what you'll find is that at around $26.5 billion of GGR, our combined properties start to produce the EBITDA -- something close to the EBITDA that they produced in 2019, which is pretty unbelievable. And so, I think as you see the market continue to gain momentum, and we've all -- all of us in that market have been around the back many, many times, we've been through ups, downs and everything else, I think you'll see the concessionaires behave relatively rationally. And I think it's good for the market. It's good for us. It's good for them."}, {"role": "user", "content": "Yes. That sounds very encouraging, Craig. Thanks so much. And thanks, everyone. Congratulations on a great quarter."}, {"role": "assistant", "content": "Thank you. Appreciate it."}, {"role": "user", "content": "Thank you. Well, with that, we'll close the call. Thank you for your interest in Wynn Resorts and we look forward to sharing more information with you next quarter."}]}, {"messages": [{"role": "system", "content": "Thank you, ladies and gentlemen. [Operator Instructions] And our first question is from the line of Tom Gallagher with Evercore ISI. Please go ahead."}, {"role": "user", "content": "Good morning, couple of investment question. So, John, the 19% of office CMLs that mature in '23. You guys said 36% of them have been resolved so far through the end of April. Can you just elaborate a bit on what's actually happening there? What does resolved mean? I think you mentioned either pay down or extended. As you're going through that process, are you - -are most of them actually paying-off of maturity? I assume there's not a lot of liquidity out there so you probably extending more than you're seeing payment of principal at the end here. And then also, what kind of yields are you getting assuming you are extending a lot of these or restructuring? Are you getting yields commensurate with the higher risk in the market for that asset class right now or are you having to subsidize them at all? Sorry for the rapid-fire questions, but wanted to just get a better sense for what's happening."}, {"role": "user", "content": "Good morning, Tom. It's Steve and thanks for those questions. And talking about kind of what's happening, how we're managing the portfolio today and John did give some high-level numbers and when you look at how we're actually managing the portfolio and there of course are a number of ways to resolve, most of what we're doing right now is on extending, but those are all extension options that are part of the original contract, where it's the borrowers option to extend or not and when they do, they still have to meet all of various restrictions and requirements of the contract, including financial status, terms and conditions and the like, and there is usually a fee paid with it too. And they're generally all that market. So that's where we do see a lot of the activity in resolving the portfolio. We have conversations with virtually every borrower, who has a maturity coming up this year and basically I think most of the borrowers who have that extension option probably will exercise them. We actually are seeing payoffs though across the portfolio as well. So I think that that's that's a strong result too. I think when we look at sort of numbers of loans, probably on the order of a quarter of the loans are actually paying-off to. So we're actively managing the portfolio as we always do with obviously a heightened sense of attention today. But very confident and John gave numbers. We think that there'll be a very, very small number of foreclosures likely when we're through through this year."}, {"role": "user", "content": "I know your second question well, I could expand, I sort of answered your second question. You're saying the extensions are at-market, but also what I'd say is, yeah, this is a market where we're very picky and I'm looking at all of the office, well, frankly, across all of the commercial loan space. We're getting kind of a minimum of 200 basis points over likely indices on floating-rate loans or on treasury indices and if we were to do an opposite, we'd probably be at least 100 basis point premium over that too. So it's a market where again you have to be very cautious, but there are opportunities as we've seen through other cycles in the past."}, {"role": "user", "content": "That's really helpful and just a quick follow-up. Last year at the end of '22, I think you had a big increase in CM3 rated loans that had an adverse impact on RBC. Can you talk about what you expect from migration, positive or negative for '23."}, {"role": "user", "content": "Yeah, and. I think first we probably want to just address what happened with those numbers for the 2022 migration because it's a fairly unique circumstance. I mean, we do a reasonable amount of floating rate loans, about 30% of our portfolio are in floating rate loans, and just the way the mechanics of those LTV calculations work, there are lags involved. Net operating income is a three-year average. So when you think about something like caps, those basically you kind of get delayed in how they work into the actual calculations. And so we do see that migration. But again, over time, that cap income and will also get incorporated in, obviously depending on the overall interest rate environment. So when we look at it, we're not really concerned that that's a credit issue, it's really just more the mechanics of the formulation and the timing. So that's what really is driving it. We wouldn't expect significant negative deterioration across the portfolio, other than just the mechanics."}, {"role": "user", "content": "Okay. Thanks."}]}, {"messages": [{"role": "system", "content": "And next we move on to a question from Erik Bass with Autonomous Research. Please go ahead."}, {"role": "user", "content": "Hi, thank you. Maybe, Steve, sticking with you for one and maybe just stepping back. I was hoping you could provide sort of an estimate as you think of kind of a more severe stress scenario for commercial real estate and office in particular. How do you think about what the potential capital impacts are in total if you add up impairments and ratings migration?"}, {"role": "user", "content": "Thanks, Eric. That's certainly something that we spend a lot of time looking at and we regularly stress test the portfolio. We've just gone through another round of that testing. No surprises, just given what's happening in the market. And what I'd say, summary is, we are very comfortable with the portfolio. The implications of a severe stress test are really very modest. And what we did in our most recent stress test scenario is we assumed that all valuations across the entire commercial mortgage loan portfolio declined by 30% to 35% from where they are today. So if you think about that, that's pretty severe. And then you worked that through in terms of impact on net operating income, loan migrations, foreclosures, REO impacts, the net impact to us from a capital perspective we estimate would really only be about 10 RBC points to 15 RBC points over three years. So when you really put that in context of what it means to capital, it's very, very modest impact and I think that is a very severe stress case as well. So, I think it just points to the overall strength of the portfolio and the overall strength of our capital."}, {"role": "user", "content": "Thank you. Very helpful perspective. And I guess maybe turning to the business for Latin-America, you continue to see strong growth and it looks like you're running well ahead of what your guidance would imply for 2023 earnings even with some of the headwinds from VII and [Indecipherable] this quarter. So I guess is there anything unusually strong in the underwriting results in 1Q or is $200 million-plus of run rate earnings kind of a reasonable expectation?"}, {"role": "user", "content": "Yes, hi, Eric, this is Eric. So let me shed a little bit more color around around LatAm first and then answer your question. So we have, as you know, a significant footprint in the three largest markets in the region. We are market leaders with a very strong brand in Mexico and Chile, and a very fast-growing presence in Brazil. Our strategy around the region is really centered around three pillars, one is protecting the core, the other one is growth through diversification and all that underpins through a transformation to meet our customers and our partners evolving need. So I can't give you a couple of examples of the execution of the strategy around the region."}, {"role": "user", "content": "So in Mexico, which is our third largest market globally, we have a very unique worksite government franchise that continues to grow very nicely. But in parallel, we've been very successful in diversifying and expanding that distribution reach into the private sector, both in retail and group. In Chile, where we have a very strong face-to-face agency franchise, we are growing very fast, our bancassurance and third-party distribution. The distribution."}, {"role": "user", "content": "And then in Brazil, which now represents roughly 20% of the region sales, we're also growing very, very fast with 60% year-over-year this quarter alone and there, the focus is really on bancassurance and third-party distribution. So that continued momentum across the region really reflects the strength and diversity of our distribution channels and product offerings combined with the technology investments that allow us to continue to differentiate for our customers and our distribution channels. So overall, we believe we're really well-positioned in the region to capture the growth opportunities that these markets that are still under penetrated and under served have to offer."}, {"role": "user", "content": "Now, going back to this quarter's results and your question particularly. This was another strong quarter on the heels of a record year, but as mentioned by John, this quarter's strong results included that roughly $20 million of favorable underwriting, really driven by seasonality and overall favorable claims experience. But that being said, we believe that the guidance we provided is still a reasonable run rate for the remaining of the year for the region, so. I hope this helps to give you a little bit more context around around LatAm."}, {"role": "user", "content": "Yes, thank you."}]}, {"messages": [{"role": "system", "content": "Next we go to the line of Tracy Benguigui with Barclays. Please go ahead."}, {"role": "user", "content": "Good morning. Just want to touch upon VII. In today's environment, do you still feel like $500 million of quarterly alternative asset returns is still an appropriate run rate and if you could also touch upon what you're seeing into a quarter."}, {"role": "user", "content": "Hi, Tracy. It's Steve. I guess I'd go back to how we talk about VII fairly consistently. And recall, we're not trying to predict quarterly, monthly interim returns. I mean we really set our projection based on our long-term performance track record in the classes and that's how we've come to the 12% number, 3% a quarter. So that's always our standard projection. Certainly, as we go through the year, we do look and given the lag, we can look and. try and make some connections to what's happening in the markets. And I think that kind of relates to a little bit what John talked about our performance, although venture capital certainly was something that everyone was focused on for a while, so I think we did see those negative returns come through in the last quarter. So again, looking ahead, I'd still look at what the overall market has done in the previous quarter just given the lag. That will serve as some directional indicator for where we are and I think our view is always that our portfolio should be less volatile and probably less extreme on returns than the overall market. So again I think compared to last quarter, venture capital took a big hit across the rest of the portfolio. We actually saw pretty decent returns and looking at the [Indecipherable] portfolio and some of our our specialty sector like power, infrastructure, energy and those sorts of portfolio. So there is performance. And I guess, I just look at the overall market as an indicator."}, {"role": "user", "content": "Yeah, and I just maybe add, Tracy. I mean I think obviously Q1 is year end marks. We're moving into now Q2 being off of Q1 results. So, I think directionally we would be kind of optimistic that it would improve from Q1. Maybe we don't revert back to plan, but I think we're on the kind of an upward trend."}, {"role": "user", "content": "Got it. The first-quarter was an active FABN quarter, you raised $3.7 billion and some of these coupons not surprisingly were much higher than what we've seen historically. So my question is, do you feel like this product is attractive in today's environment or you could still earn like a $200 million, $300 million spread by reinvesting or is the first quarter activity more function of refinancing maturing issues?"}, {"role": "user", "content": "I'd say both. It was elevated activity wise just because of maturities that we wanted to refinance, but we managed the program very actively and it still meets all of our target thresholds for returns and income on the portfolio. So we're very happy with the returns."}, {"role": "user", "content": "So what kind of assets are you reinvesting in today's environment to make that return."}, {"role": "user", "content": "Yeah, and again, you have to go and look at the maturity because again, it's still overall a matched portfolio. But what we're looking at are really mostly fixed maturities, structured finance, some private assets. Not much in the way of real estate these days."}, {"role": "user", "content": "Got it, thank you."}]}, {"messages": [{"role": "system", "content": "Our next question is from Jimmy Buehler with JPMorgan. Please go ahead. Mr. Buehler, do you have your phone muted. We don't hear you. We will attempt to come back to him. One moment please. Next, we'll move on to the line of Ryan Krueger with KBW. Please go ahead."}, {"role": "user", "content": "Hi, thanks. Good morning. You addressed most of this but I just have one more question on CM rating. When you do extend commercial mortgage loans, does that trigger resetting LTV and all the metrics that go into the CM ratings or just did kind of maintain the prior metrics that already existed?"}, {"role": "user", "content": "Ryan. Really related more to just our overall valuation process. When loans get refinanced or extended there is a evaluation that's right in line with our normal valuation process, so. And like I said, most of the extensions we're doing our extensions are our borrowers options who've met all the financial criteria required for the loan. So we wouldn't expect to see migration as a result of that."}, {"role": "user", "content": "Okay, got it. And then just one on retirement spreads that came in quite high on a base level excluding VII. Is that a level that you think in the current rate environment can be maintained near term?"}, {"role": "user", "content": "Good morning, Ryan. It's John. So like you said RIS spreads. I think overall $117 million, but ex-VII we're very strong in the first quarter at $137 million and just recall our overall all-in range was $135 million to $160 million. So if you kind of add back a normal contribution to VII, that would have been certainly high end of the range. And look, I think we highlighted this on the outlook call. We did think that the first half of 2003 certainly based on the forward curve would have, I'll say, the higher end of spreads, just given our in-the-money caps. We probably think Q2 has some kind of similarity to Q1 at this point for ex-VII spreads. And then, we'll need to see how the forward curve and how rates progress through the rest of the year."}, {"role": "user", "content": "Okay, great, thank you."}]}, {"messages": [{"role": "system", "content": "And next we move to a question from John Barnidge with Piper Sandler. Please go ahead."}, {"role": "user", "content": "Good morning, and thank you very much for the opportunity. Can you maybe talk about persistency of renewals in the group business. We've heard other participants talk about letting business walk that didn't match pricing objectives with this renewal season after a couple of years of elevated experience. So curious, your thoughts there. Thank you."}, {"role": "user", "content": "Thank you, John. So it's Ramy here. Maybe let me just give you the punch line in terms of the results we're seeing. Our persistency in terms of the Q1 renewals was extremely strong and it was higher than prior year across all of our major markets. So we're seeing very strong persistency alongside our renewal actions that were very much in line with our expectations. So we're very pleased about the outcome as we go into the year. Maybe just to give you a bit of flavor on that. We've always talked about the group business as a business where price is important, but it's also a business where you can differentiate on many factors beyond price, right. And you certainly see that in our national accounts franchise, our average customer has been with us for more than two decades. You see that in the very wide breadth of our products, which allow us to be much more consultative with our customers and meet their needs and you also see that because of our scale. Our scale has continued to afford us the ability to invest in our capabilities across the business and therefore drive greater persistency and stickiness with our customers. So all-in-all, a very strong persistency as well as the rate action story for us in the first quarter."}, {"role": "user", "content": "Great, thank you. And as a follow-up question on raising capital. I see you obviously and that's another buyback authorization. But can you talk about market volatility and opportunities that may create to do other acquisition either in products or geographic interest specifically? Thank you."}, {"role": "user", "content": "Yeah, hi John. It's Michel. The first thing I would point to is really the consistency in terms of our capital deployment and you can see that over, I would say a number of years and it was again evident in the first quarter. So if you just look at the first quarter. One, we saw sales growth across most of our key markets and businesses. So we're deploying capital to support responsible growth. We were active from an M&A perspective, we announced the acquisition of Raven Capital Management, which adds an attractive adjacency to our main business, which we think we can scale over time. We deployed $389 million in dividends and we announced a 4% increase in our dividend. Again, if you look at the increase since 2011, 9% annual compound rate increase."}, {"role": "user", "content": "And then we bought $780 million in our shares in Q1, another $223 million in April. And we have a new $3 billion authorization from our Board, above our liquidity buffer of $3 billion to $4 billion at the Holdco. So if you take all of these together, I think they signal sort of confidence in terms of our financial strength and the free cash flow generation capabilities of our businesses. So again, we're confident in terms of how we're positioned and we continue to sort of explore M&A opportunities, provided those fit strategically, are accretive over time, and meet our minimum risk-adjusted hurdle rates and the like, and would it remain also disciplined on that front as we as we always have been. So hopefully that gives you some color."}, {"role": "user", "content": "It does thank you very much."}]}, {"messages": [{"role": "system", "content": "Next we go to Suneet Kamath with Jefferies. Please go ahead."}, {"role": "user", "content": "Thanks, good morning. Ramy, I was hoping you could unpack that group disability results a little bit in terms of what you saw in the quarter. We did have one company yesterday talk about sort of a a pretty significant improvement in loss ratios and that actually persisting for the balance of the year. Just wondering how your business is doing and if there's any expectation for ongoing improvement as we move through '23?"}, {"role": "user", "content": "Hi, good morning and thank you for the question. So, inside our non-medical health ratio, disability business is a contributor to that and we've certainly seen a favorability in our disability results this quarter and that feasibility came in through both lower incident rates as well as stronger recoveries. And when we think about that favorability, there are some external factors in the environment and there are some internal drivers as well. So externally, you could look at the low unemployment levels, as well as the fact that we are now clearly out of the pandemic environment, which kind of decreased the pressure on the STD lines, so a favorable environment in Q1."}, {"role": "user", "content": "Internally, when you look at disability. This is a product where our customers have complex needs. And here again, I would point to scale and investment you need to make here to really differentiate yourself in the marketplace and in particularly to differentiate yourself in terms of outcomes. So in our case, that's come from investments in our human capital. We've build a world class team of clinicians, who diligently work on returning people to health. We deployed data and analytics in our pricing, underwriting and our claims process. We have world class capabilities in terms of leave and absence, which again when packaged with LTD drive greater customer value and persistency in our books. So certainly a favorable disability ratio."}, {"role": "user", "content": "As we think about the rest of the year, from a pricing perspective, we continue to [Indecipherable] for softness in the environment. I mean it's so from a pricing and renewal perspective, we continue to look at that and continue to [Indecipherable] pricing loan to make sure that our margins are resilient should we see softness from the claims side."}, {"role": "user", "content": "Okay, got it. And then maybe just pivoting to Steve on the CML portfolio. I know that Class B is a pretty small percentage of the office book, but as we think about those scheduled maturities for '23 and '24, any sense of like what's the piece of it related to Class B, have you resolved any of the Class B loans? Just some color on that would be helpful."}, {"role": "user", "content": "Hey, Suneet. We haven't broken out the maturities. Again, I think if you look at the overall resolution and the path we're down, it's very strong for the overall portfolio. Extension options where they're provided at market with fees and a good number of payoffs too. I'm sorry, I don't have the specific breakout, but I'm very pleased with the overall structure of our resolution right now."}, {"role": "user", "content": "Okay, thanks."}]}, {"messages": [{"role": "system", "content": "Next we go to a question from Elyse Greenspan with Wells Fargo. Please go ahead."}, {"role": "user", "content": "Hi, thanks, good morning. My first question. I believe in your prepared remarks, you guys mentioned that you might want to rightsize the VII portfolio over time. Was that an overall comment on the portfolio or was that just related to the corporate segment?"}, {"role": "user", "content": "Hey, Elyse. It's John. Yeah, I made the comment, more because as you've seen, we probably have a little bit of outsized sensitivity in CNO for VII. It was a function of a number of things. Remember last year, a year ago, we were able to monetize about $1 billion of our private equity portfolio. We also just with some asset liability management moved a bit more into corporate and other. I would call that a holding pattern for now and that's really the comment I am making and so it does, I think on the margin causes to probably we're not stopping our investment, but relatively speaking, the new commitments are bit a bit slower, but we're still doing that. We want to always invest through the cycle, but that was the gist of the comment."}, {"role": "user", "content": "And then your direct expense ratio of 12% was pretty stable year-over-year and outside of Group, it doesn't look like expenses moved much. How much active expense management is going on and how much underlying pressure are you guys seeing from wage inflation or other drivers?"}, {"role": "user", "content": "It's John again, Elyse. As you said, it was a good result for the quarter. Look, how much a lot of active management, a lot and inflation has been challenging and I think we've seen that throughout the insurance industry on both sides and it's a challenging environment. And as a result, it takes active management and. I think the culture here has been really strong around efficiency mindset. We continue to use that mentality to build capacity, so that we can continue to invest and through these cycles, and not let things like inflation slow us down, and it gives us optionality should we see more stressful environment. So, I think the team has done a really great job, but everyday it's active management."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our next question will come from Alex Scott with Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Hi, good morning. First one I had is for in Asia. Can you talk about your organic growth there and particularly how U.S. rates and I guess GGB rates are impacting your annuities business there and in particular your ability to sell new product and have attractive product in the market?"}, {"role": "user", "content": "Hi Alex, it's Lyndon. Yes, look, we really are benefiting from the U.S. rate movement. It's really giving us an advantage as we compare to the Japanese rates. We've seen demand for the foreign currency products go up consistently over the year. If we look at fourth quarter sales, annuities were very strong and that continues as we go into the first quarter. So as far as rates go, it really puts us at an advantage as we are selling this product, but if you look at the fluctuation in the foreign currency, that is really kind of makes the market tentative going into the product. So overall, I think rates have really benefited us in this environment."}, {"role": "user", "content": "And then, along the same lines. In LatAm, I just wanted to kind of peel back the organic growth a little bit and see if you could tell us a little bit about what you're doing, whether it's in distribution or actions that you're taking that are allowing for such strong organic growth and seemingly market share taking?"}, {"role": "user", "content": "Yes, hi, This is Eric. So yeah, as I mentioned earlier, really it's a combination of diversifying our distribution combined with the introduction of new digital tools and active distribution growth through different channels and again our breadth and depth of our franchises in the key largest markets across the region."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And ladies and gentlemen, we have no more time for questions. I will turn the call back to John Hall, Global Head of Investor Relations."}, {"role": "user", "content": "Thank you for joining us today and we appreciate your patience with the technical difficulties at the beginning of our call. We look forward to seeing you over the course of the quarter and have a nice day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] The first question is from the line of Brandon Couillard with Jefferies. Your line is now open."}, {"role": "user", "content": "Hey guys, thanks for taking the question. I'll just start with the '23 guidance which is on the top line. Can you help us bridge the components and the puts and takes between Russia weakness, early-stage biopharma, lower process media demand? And secondarily, what gives you confidence in terms of the second half acceleration on top line?"}, {"role": "assistant", "content": "Brandon, it's Andy, actually. So maybe I'll just walk through the answer to that. And you did capture the big levers in once out of Russia which has had a meaningful impact. Biopharma softness which did have some impact, particularly in the -- kind of -- let's call it emerging biopharma companies and financial access to capitals in Q1 which flowed through to broad demand -- broader kind of slowdown in demand for our Life Science products. The process chrom story is not so much an emerging biopharma story as much as I think we've finally now just seen some of the effect of the overall inventory rebalancing that has been going on in the industry and we had not been seeing that previously. I'd say the last points to highlight on revenue bridge would be the slower pace of backorder reductions which -- I don't think we're seeing -- we're able to capture everything that we initially estimated. And related to our gene expression business, just generally, a softer demand that is being experienced this year against very significant installed base that we had previously put out there over last 2 or 3 years."}, {"role": "user", "content": "Okay. Maybe in terms of the '25 targets, I mean, just generally, conceptually, why update those now, especially given what seems to be all the operational challenges you faced in the quarter and macro variables that you discussed on the call? Number two; can you share what the implied targets would be in terms of revenue dollars in '25? And if my math is right, would that be just 8% organic CAGR in next 3 years, to get there?"}, {"role": "assistant", "content": "Yes, Brandon, thanks for the question. So first of all, we are updating the 2025 based on our latest view and in light of the changing environment that we are experiencing. Obviously, as Andy mentioned just now, the entire kind of biotechnology sector and the funding and that was one of the growth drivers that we called out during Investor Day and see headwinds there. The overall inflationary kind of cost that we today believe is here to stay. I mean I'm not sure that it is transitory and that was not taken into account when we presented during Investor Day; so we are layering on what that means for next 2 to 3 years. And this, we do believe that it merits an update to the 2025 target model in order to set the expectation. With that said, it doesn't change our thinking in terms of the overall transformation that we are working and everything that we still plan to achieve, and all kinds of new instruments that are in pipeline and the development. And so that doesn't change our thinking; it's more kind of -- I would argue macro-driven, and we have to kind of communicate accordingly. In terms of the growth, yes, I mean -- so your math is correct, it's about -- on core basis, it's about 8%; and that's the update. If you think about the currency neutral basis, it's about $3.4 billion for 2025 on a currency neutral basis."}, {"role": "user", "content": "Got it. Last one for Simon, maybe [Phonetic]. Your closest competitor in digital PCR earlier today talked about a market CAGR the next 3 years in the 30% to 40% range. I just want to see if that's consistent with your view in terms of how you would assess the market and if you view the opportunity and growth outlook any differently for your business?"}, {"role": "user", "content": "There's definitely emerging competition in digital PCR without doubt; and we observe that very closely and we take it very seriously. And as we said before, I think it really is also helping to significantly expand the market opportunity in ddPCR. And when we hear the commentary and the disclosures from competitors and we overlay that with growth trajectory that we see in our own business, we think it's pretty consistent overall and we think it's playing out the way that we thought it would. And then, when we think about our overall position today, we talked about how demand for the QX600 platform and customer acceptance is really fantastic. So we're feeling good about that. And in the biopharma segment, notwithstanding some of our market softness that we are seeing at present time, we've got very strong position there. We think the market's ultimately got very long legs, and I think we've got quite nice moat around the business. We've got a formidable portfolio of high-performance assays. And we know in this segment that performance really, really matters; and our QX One platform is really best-in-class in terms of throughput and automation. And then as was mentioned earlier, we already got QX Continuum platform that's in development, and I can tell you that program is running quite nicely. So, when we think about the overall dynamics here, I don't think anything has fundamentally changed since we discussed this at Investor Day."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Patrick Donnelly with Citi."}, {"role": "user", "content": "Maybe a similar remaining questions. On the process chrom side, it sounds like you saw a pretty good slowdown in the quarter. Andy, I think you called out timing as an impact but obviously, the guidance coming down pretty significantly for the year. How much do you think timing versus change in demands? What are you seeing in market and what's the ability to execute in backdrop? Again, if the demand is holding up; is it just an execution issue? Maybe just kind of give us a little more color there."}, {"role": "assistant", "content": "Yes. I mean, timing is always a challenge for that business and I'm sure you guys -- you know that well. But -- and in Q1, in particular, is a tough compare to prior year for us. So we -- that really wasn't a great surprise from that point of view. Looking forward, I think we just starting to experience some kind of -- we're calling it inventory rebalancing and just more prudent or conservative approach from end-market as we go forward. And we feel it's prudent to reflect that in the way we're thinking about our guidance this year. Underlying all of that, though, is a still extremely solid and consistent demand for the process chrom business. The new products we've introduced have been exceedingly well received and we are starting to see uptake and traction on those; so our go-forward thesis on process [Phonetic]. We're finally seeing some of the effects that I think others have been calling out for a while. We're finally seeing little bit of that flow through our business now."}, {"role": "user", "content": "Okay, that's helpful. And Ilan, maybe on margin side; I think you called out some -- maybe more aggressive expense management. As you think about first half to second half ramp in margins, can you just talk about what levers you guys are pulling, the visibility into hitting those numbers, again a pretty good step-up from the first half to second?"}, {"role": "assistant", "content": "Yes. Thank you, Patrick. I appreciate the question. So we have several initiatives that are in flight and it's part of our plans already. We anticipate that we will be able to realize it in the second half and it will roll over also into next year. And these are obviously multiple initiatives that we are pretty confident that we will be able to achieve as part of the guidance. Obviously, it's baked in. And obviously, the goal there is to mitigate softness that we guided for the top line, as well as some aspect of the gross margin. And I think that we have a very good plan to achieve it and it's mainly focused on the second half of the year."}, {"role": "user", "content": "Okay. And then maybe on long-term guide, Life Sciences came down by -- I think 150 bps. When you think about changes to the growth build in terms of algorithm, you guys have behind the scenes there, what -- I guess, what segments were the biggest step down? I mean, did digital PCR changed at all? Was it process chrom? If you can just help us think about what softened in that algorithm is I think when you guys gave the guide, we didn't get tons of building blocks. So, just trying to figure out what areas. Maybe it was all of them but just if you could help us out there, it would be helpful."}, {"role": "assistant", "content": "Yes, Patrick, let me take a shot at this question. I think what we determined is that the biopharma softness is contributing to life science growth at a slower pace, is kind of the simplest way to think about it. And with the kind of shake up that's gone on a little bit in the emerging smaller biotech companies, where we've had meaningful business and very strong growth. And just it's that effect flowing through over the next couple of years. And I wouldn't think of it as anything more than that at this point in time. Just to reiterate the fundamental pillars in Life Science business on the process chromatography and Droplet Digital PCR and other related products are very solid. So we're -- I think, prudently putting forward that we see slower growth as a result."}, {"role": "user", "content": "I think as well, Russia wasn't part of the initial calculus and now it is. It's not a massive impact but it does make a dent and that flows through to our projections as well."}, {"role": "user", "content": "Understood, thank you guys."}, {"role": "user", "content": "Thank you, Patrick."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Dan Leonard with Credit Suisse. Your line is now open."}, {"role": "user", "content": "Thank you. I think Brandon asked this question but I'm not sure I caught the answer. The revised guidance still assumes a meaningful sales acceleration in 2H. The fourth quarter comp is tough, macro is not getting better. So what are you looking at to support that second half ramp?"}, {"role": "assistant", "content": "Yes. So we do see a slightly lower growth projection from the Life Science business which I think we just reflected in the commentary which is some -- partially offset by an improved performance in the clinical business in second half. We're actually seeing fairly robust demand for our clinical systems that we expect to continue. So you've got little bit of a mix shift playing out there across the 2 business groups which will further support the second half performance but has small mixed impact on margins which we're also reflecting because of the differential between the 2 business groups."}, {"role": "assistant", "content": "Yes. And Dan, I will add to that also from there, obviously, it flows throughout P&L. On the gross margin, we expect it to improve as the year progresses. As well as we have a list of initiatives that are in flight and some are scheduled to start that will benefit the second half."}, {"role": "assistant", "content": "We've got 1 final factor which is a burndown of backlog in the second half. And so we have much better line of sight to the phasing of that in the second half and that will also contribute to the second half growth. And QX600 on the Life Science side is, it's a very robust pipeline."}, {"role": "assistant", "content": "Yes. So on QX600, yes, exactly. Andy, I mean -- it's about the manufacturing kind of volume that we plan to add much higher volumes in the second half than the first half. And that's obviously a nice contribution, not only about the top line but its above average margin that flows through."}, {"role": "user", "content": "Okay. And then my follow-up question. Andy, you commented on softer demand for gene expression against a significant installed base. Why isn't that a multiyear problem?"}, {"role": "assistant", "content": "Well, I think as we move forward, it is an element. I think it's a good point you're making there and it's an element that is factored into Life Science forward-looking view on '25 trajectory, right? And it is a factor that is hard to really quantify in the market after you've placed all these instruments over the last two years plus three years. So it's a good callout and a fair point -- but is considered in our '25 reguide for Life Sciences."}, {"role": "user", "content": "Okay, thank you."}, {"role": "assistant", "content": "Thank you, Dan. Thank you for your question."}]}, {"messages": [{"role": "system", "content": "The next question is from the line of Jack Meehan with Nephron Research. Your line is now open."}, {"role": "user", "content": "Thank you. Good afternoon. First question is on the Russian sanctions. Can you just quantify for us the impact that's now embedded in your forecast? And when did it start? And when -- just, I guess when will it annualize?"}, {"role": "assistant", "content": "Yes. Thank you, Jack. I appreciate the question. Historically, we called out that Russia was between 1% and 2% of revenue on an annual basis. Obviously, the sanctions kept accumulating. And when we started the year, we still had a nice pipeline. And I would say that about 1/3 of our projection -- more than 1/3 of the projection for this year was impacted by incremental sanctions that we had to revise this quarter. These are not prior sanctions; these are incremental sanctions that prevent us from shipping more than 1/3 of our projected or prior projections for this year."}, {"role": "user", "content": "Got it. And then in the Diagnostics business, it sounded like regionally, you did well in Asia. I was just curious if you could comment on what you're seeing here in the U.S. and in Europe. I think I heard largely flat. We've been hearing about better volumes from lot of our services providers. So, just how is that playing through your U.S. and Europe business?"}, {"role": "assistant", "content": "Yes. I believe we have Dara, she dialed in remotely. So Dara, I'm not sure, were you able to hear the question?"}, {"role": "user", "content": "Yes, this is Dara here. Ilan, can you hear me okay?"}, {"role": "assistant", "content": "Yes. Thank you."}, {"role": "user", "content": "Great. So demand is strong in all regions, elevated a bit in Asia Pacific as a consequence of China opening backup with the COVID restrictions lifted in Q1. The actual sales were sort of biased towards Asia Pacific in Q1, so revenue was biased but demand and backlog is similarly sort of higher than historically in EMEA and Americas. So bodes well as we burn down that backlog, replacing [Phonetic] instruments globally which increases our installed base."}, {"role": "user", "content": "Great. Then one final one for Norman. We're in this macro environment which is evolving a little bit. Your business should be -- I think, more defensive when it's all said and done. Just was curious how evolving landscapes might change your philosophy, if at all, when it comes to M&A and what you're seeing in the funnel?"}, {"role": "user", "content": "Yes. So the funnel remains about the same. Obviously, when you think about kind of valuations coming in, it's a little stickier on the way down. So that's a dynamic that I think we're aware of. But again, we've got couple of things in hopper and we continue to see it as a viable option for cash deployments as we go forward to add to the business."}]}, {"messages": [{"role": "system", "content": "The next question is a follow-up from Brandon Couillard. Your line is open."}, {"role": "user", "content": "Hey, thanks. Just to push back on your answer to Patrick's question, I think -- I mean the biopharma exposure you have is only 15%. You're talking about a sliver of that overall market. First I want to make sure I understand that right. And then what's embedded in your outlook for that earlier stage biotech customer base? Could you quantify it in terms of sizing but also what you're expecting in terms of growth from that market?"}, {"role": "assistant", "content": "Yes, Brandon, I mean, I don't think we've quantified or segmented our sales within the biopharma segment overall. We've done particularly well in emerging biotech, especially because of cell and gene therapy-based therapeutic development there, in those companies but the -- so that's more of broader life science product impacts. The process chrom [Phonetic] is obviously for the much more mid-and-large sized biopharma companies. And there, I think we're just literally subject to the macros that have been going on across the industry which had not seen before and it's started to show up bit for us this year. So we've moderated our growth expectations this year; although they're still good, healthy double-digit growth for bioprocessing side of the business."}, {"role": "user", "content": "I'll just maybe add that about 1/3 of our Life Science revenue is contributed from biopharma but we're pretty overweight in the smaller and emerging biotech companies, whether you're talking about process chromatography and we've talked about this previously, how our resins really play in these emerging biologic therapeutics. And also in our Life Science portfolio, generally, we see the halo effects in the emerging biotechs, more so than big pharma which tend to be locked up in really large contracts."}, {"role": "user", "content": "Okay. Last 1 for Ilan, just to make sure the definitions we understand correctly. Your 25% EBITDA margin target, that includes the Sartorius dividend, I just want to make sure and how much is that dividend contemplated? Is it the $34 million this year or the one from the size of the dividend last year at Analyst Day which was much different?"}, {"role": "assistant", "content": "Yes. So we try to compare it kind of apples to apples. And back in the Investor Day, we said that it included about $19 million of dividend. And that's what we assume now, to be consistent."}, {"role": "user", "content": "Got it, thank you."}, {"role": "assistant", "content": "Sure. Thank you, Brendan. Thank you for your question."}]}, {"messages": [{"role": "system", "content": "There are no additional questions waiting at this time. So, I'll pass the conference back to management team for any closing remarks."}, {"role": "assistant", "content": "Thank you for joining today's call. We will be at the RBC Capital Markets Global Healthcare Conference in New York later this month. And also in New York, the Jefferies Healthcare Conference in June. As always, we appreciate your interest and look forward to connecting soon. Thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] We'll go to the line of Robert Fishman with MoffettNathanson."}, {"role": "user", "content": "Good morning, everyone. I have a couple of related questions, if I can. Lachlan, after the Dominion settlement, is there anything that you can share to better understand the future settlement risk? And then related, can you discuss whether the departure of Tucker Carlson will lead to changes in the prime-time programming strategy and then potential opportunities for more national advertising?"}, {"role": "user", "content": "And then for John and Steve, just if you can expand on the early confidence you have from recent MVPD renewals? And after seeing the acceleration in retrains growth this quarter, any more insight on whether you can get better pricing to outpace the elevated levels of cord-cutting or just more economics from your affiliate partners? Thanks very much."}, {"role": "assistant", "content": "Thanks, Robert. I don't know where to start. I'll talk about the seven questions. So -- but thank you very much, and good to hear from you. On -- so let me start and hand over, I suppose, to Steve, for that -- the final questions. So I'm obviously limited about what I can say about any ongoing litigation, but I can make the following comments in regards to Dominion. And I referred to some of this in my prepared remarks."}, {"role": "assistant", "content": "Look, as we've stated many times, we always acted as a news organization reporting on the newsworthy events of the day. We certainly included allegations being made by the sitting President of the United States and his lawyers in the aftermath of a hotly-contested presidential election."}, {"role": "assistant", "content": "Now we have been and remain confident in the merits of our position that the first amendment protects a news organization's reporting and allegations being made by a sitting President of the United States."}, {"role": "assistant", "content": "However, the Delaware court severely limited our defenses and trial through pre-trial rulings, one example of being not being able to point to the newsworthy nature of the allegations. So we determined that the best course of action for the company and its shareholders was to settle instead of proceeding with a 6-week trial and potentially two or even three years of appeals."}, {"role": "assistant", "content": "As you know, we have a pending case with Smartmatic, which is a fundamentally different case than Dominion and that all of our full complement of First Amendment defenses remain, and we'll be ready to defend this case surrounding extremely newsworthy events when it goes to trial, likely not until the calendar year 2025."}, {"role": "assistant", "content": "As regards to our programming strategy in prime time, there's no change to our programming strategy at FOX News. It's obviously a successful strategy. And as always, we are adjusting our programming and our lineup, and that's what we continue to do. We are pleased with the strength of the advertising demand throughout our schedule, but particularly prime time."}, {"role": "assistant", "content": "Steve, do you want to talk to the MVPD?"}, {"role": "user", "content": "Yes, sure, on the affiliate. So Robert, yes, listen, we're pleased with the way our affiliate negotiations are going. You know that this year, we had roughly 34% the total affiliate book up for renewal. We've been successful in generating and establishing new pricing benchmarks for the network in FOX Sports or retrains and Fox Sports in those negotiations. And so with another sort of one-third of our book due for renewal in fiscal '24 and a touch under 30% during fiscal '25, we feel pretty confident that we can continue to deliver pricing gains in subscribers. If the subscriber rate of attrition stays at the same level, we expect to post ongoing affiliate revenue growth for the company."}, {"role": "user", "content": "Operator, we can take the next question."}]}, {"messages": [{"role": "system", "content": "And that will come from the line of Ben Swinburne with Morgan Stanley."}, {"role": "user", "content": "Thanks. Good morning. I just want to ask about advertising. As you guys look into the rest of the year and head into the upfront, does Tubi give you guys an advantage as you go into what is, at least, I would describe it as a soft demand environment for advertising and trying to drive pricing kind of across your properties, particularly with the new Tubi Media Group, just wondering if you think that's going to matter enough this year for us to maybe notice as we head into the fall."}, {"role": "user", "content": "And then just on the direct response weakness at FOX News, do you guys have any visibility on sort of whether that's improving here in Q4 or what the drivers of that are? Any relationship to sort of some of the broader volatility around FOX News? Just wanted to get your updated thoughts on that. Thanks very much."}, {"role": "assistant", "content": "Thanks, Ben. I'm glad Robert left your question. But on advertising, look, we -- I think you've alluded to a softness in the market. We're really not seeing that across our major platforms. I'll give you a bit of the detail. The national market, the sports market for us is very strong, very robust. Obviously, as we enter the summer, it's a slower acquired, a quieter -- always is a quiet period for us until the fall when our key marquee sports programming is on air, but we are seeing pretty robust demand for time and availability in the sports market. So we're very confident with sports."}, {"role": "assistant", "content": "In news, the direct response issues, which is a market issue, it's not a FOX News issue, has stabilized. So we're not seeing any more deterioration in direct response pricing. So we feel pretty confident in the stabilization of that piece of revenue. Again, that's really a product or a result of oversupply in -- with our competitors with direct response. It's not so much a FOX News issue, but it's something that certainly has affected our ability to achieve the premium pricing that we've been used to. But again, that issue has stabilized, and we think it offers us a pretty good platform going forward."}, {"role": "assistant", "content": "Another thing to mention on news, which is just a small data point, we're seeing political revenue earlier than we've ever seen before. It's still small, but it's sort of unheard of to have it this early in the political cycle. So again, we think that bodes well for the fall and as we enter the more significant part of the political cycle."}, {"role": "assistant", "content": "And then coming on to Tubi, the revenue is accelerating there. It's -- revenue is -- while it's accelerating pretty strongly -- Gabby doesn't want me to give the number. It would break most of your models. But it's not keeping pace with TBT. TBT continues to grow even faster, which is a great metric. So we have the avails. We're looking forward to Tubi being a central part of our upfront negotiations. It's clearly not only a strategic driver for us but have been an important driver going forward."}, {"role": "assistant", "content": "Then when you get down to local base markets, that's where we're seeing more mixed results in the different kind of verticals of revenue. We're very pleased to see auto, again, continuing its rebound with strong growth in the auto category. The entertainment category, we're also seeing growth in and the restaurant category, where we're seeing growth in. But this is offset by weakness across other categories such as retail, telecom, and sports wagering and betting. So the local market does feel -- overall. But again, we're looking forward for our businesses. Particularly in sports and news, we're looking forward to a strong -- a decent summer and a strong fall season. I think that's all the questions. Thanks, Ben."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "We'll go to the line of Phil Cusick with JPMorgan."}, {"role": "user", "content": "Phil Cusick"}, {"role": "user", "content": "Hi, thanks. A couple of questions and then a quick one. On tub, it sounds like your TBT is still outgrowing revenue, but are you starting to unleash the revenue and profit there a little bit. And then on the legal side, any direction on legal expenses from here? And then one stand-alone, any thoughts on appropriate leverage and capital return from here? We appreciate the $1 billion, but how should we think about this? Are you still going to sit on the cash until we get to the next sort of legal view? Or should something happen between now and then?"}, {"role": "assistant", "content": "Lachlan Murdoch"}, {"role": "assistant", "content": "Thanks very much, Phil. On -- let me start with Tubi and apologies, Steve, for the capital management element of the question. So on Tubi, we're going to continue to invest in Tubi. It's at the same levels. We've been investing over the last year or so. We just think it's a tremendous opportunity for us. As I mentioned in my comments, the fact that we're now -- Nielsen's Gauge now has us over 1% of the U.S. television viewing is a tremendous sort of benchmark to have hit, and I see continued growth there. So from a consumer aspect and from a marketer's aspect, Tubi is becoming more and more a central part of usage and sort of an opportunity. And this is really because the focus Tubi's had or not -- we think of it over the last three years with our involvement, but obviously, the team there has done a tremendous job not only over the last three years but before that in really sort of driving sort of the best-in-class personalized AVOD experience, building an incredible library with nearly 55,000 titles in the U.S. alone. And again, to put that in context, that's 5 times the size of the Netflix library and now really being able to monetize that viewing in a more efficient, better way. So we're incredibly optimistic. And I would say the results are -- and we're incredibly pleased with the performance of tb going forward, and we think it's an appropriate area for us to continue to invest in. On the -- I'll turn it over to Steve on the -- on sort of capital management. But just on it, I'll just start by saying, look, we have a $7 billion buyback authorization. I think we spent about $4.4 billion of that. So we've -- my math's incorrect this time of the morning, a $2.6 billion remaining of the authorization. We fully expect to deploy all of that capital back to shareholders through our buyback. And any litigation has no impact on that at all. Yes, Steve."}, {"role": "user", "content": "Steven Tomsic"}, {"role": "user", "content": "Thanks, Lachlan. So Phil, just to go back on legal costs, legal costs over the last two orthree3 quarters have been elevated. Obviously, we've been deep in the depositions and pretrial preparation for Dominion. So I'd expect that to subside over the next couple of quarters. And then to just pick up on Lachlan's point, listen, we -- the leverage is the debt we have, $7.2 billion, we've got a maturity in January, which we'll make a call on as to whether to repay or refinance. But the leverage feels about right where we are at the moment and our cash position is strong. And so we would anticipate whatever happens with future litigation, we can continue to continue to go with our buyback pacing as it has been over the last couple of years now or a few years now as well as leaving us flexibility to invest in the business or take advantage of any inorganic opportunities, but we'll be balanced about it as we've been saying since the formation of the company."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "And that will come from the line of John Hodulik with UBS."}, {"role": "user", "content": "John Hodulik"}, {"role": "user", "content": "Great, thanks guys. Maybe getting back to the sports theme, where viewership remains strong, I'd say, across the board. I mean First of all, how would you gauge the success of the USFL? Second, anything you could tell us about your appetite for additional sports rights, especially to fill in the summer months? And then how does the sort of relative weighting on sports versus entertainment programming position you guys given what could be a protracted writer strike?"}, {"role": "assistant", "content": "Lachlan Murdoch"}, {"role": "assistant", "content": "Thanks, John. Look, USFL, it's still -- it's just the start of the second season. We're very pleased with it. We're pleased with both its ratings, the quality of the games, its performance on television and ratings. And also, frankly, it's a performance on the ground with ticket sales and engagement with football fans. So early days, but we couldn't be more happy with it -- with how it's tracking today. In terms of additional sports rights, we look across our portfolio of sports rights. We're constantly managing them. We look at sports rights as they come up. And we also look at them as they get renewed just to make sure that they are efficient for us and that we're paying a responsible and appropriate amount for those rights. So we're constantly adjusting, but we do it with, I think, a real commitment to discipline in terms of what rights we would acquire or dispose of. So it's a moving -- it's always a moving feast, but I wouldn't expect anything dramatic at all in that area."}, {"role": "assistant", "content": "What was the last question? The writer strike. So thank you. On the writer strike, look, I think for us, we are well positioned for the writer strike. We think that with our strategic priorities and sort of strengths in sports but also in news, these are 2 areas that are not affected by the writer strike. And the audience will pivot on a -- when they're watching television to those categories. In entertainment, you have to remember as well, we only program 2 hours of entertainment at night. That's a mixture of both scripted and unscripted content. So we feel very well positioned there with that not to be affected by the writer strike really at all. There'll be some scheduling changes with some of this descriptive content, but it's not something that'll have a significant financial impact on us."}]}, {"messages": [{"role": "system", "content": "Operator"}]}, {"messages": [{"role": "system", "content": "Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] Our first question comes from the line of Robert Spingarn of Melius Research. Your line is now open."}, {"role": "user", "content": "Hey, good morning. Kevin, I noticed you said something that seemed a little different this time about the M&A pipeline, and that was perhaps a little bit better than it's been. And I'm wondering, is that because more properties are for sale or there's fewer competitors out there bidding against you because of the financing environment. What's going on there?"}, {"role": "assistant", "content": "Yeah, I think there's more properties available, more coming available, things that have long been rumored to have come to market or we now know are definitively coming. So that certainly sets up favorably for us."}, {"role": "user", "content": "And how about the pricing environment within that?"}, {"role": "assistant", "content": "I have not noted any difference in pricing, maybe things have come down ever so slightly, but they're still going for high multiples. People remember what they can command or what they could, and are still expecting that."}, {"role": "user", "content": "Okay, thanks so much, Kevin."}]}, {"messages": [{"role": "system", "content": "Please standby for our next question. Our next question comes from the line of Myles Walton of Wolfe Research. Your line is now open."}, {"role": "user", "content": "Thanks, good morning. I was wondering, Kevin, if you can comment on the source of the OEM upside in the guidance being raised. I can follow the aftermarket, but what's getting better on the OEM side?"}, {"role": "assistant", "content": "I'll give you my thoughts and George can chime in, but build rates are improving, deliveries are improving, and we're finally starting to see the order book build on the OEM side. So that's really the genesis of it."}, {"role": "user", "content": "Yeah, I'd echo Kevin's comments. Generally, there is some level of offset from the OE production rate increases to when the sub-tiers in our business sees that demand. So, we're cautiously optimistic that they are moving the rates up, and will continue to produce more aircraft as we go forward in the future."}, {"role": "user", "content": "Okay and then one for Mike. [Technical Issues] working capital consumption is $220 million in the quarter, and I think it was a slight source in the first-quarter, what's the expectation for the full-year at this point."}, {"role": "user", "content": "And it's hard to say exactly how it plays out over the course of the year. From peak to trough during COVID, about $400 million came out. If you look at the math around that, we were close to all of that having gone back and not quite there, but pretty close. So, it's hard to give exact guidance by quarter, but I think we're getting closer to the max amount should be back in there. So, we don't expect to see a sizable uptick of the type we saw this past quarter in future quarters."}, {"role": "user", "content": "Okay, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Please standby for our next question. Our next question comes from the line of David Strauss of Barclays. Your line is now open."}, {"role": "user", "content": "Thanks, good morning. Kevin, so it looks like if we just look on revenue that your aftermarket revenues are now back to 120 -- 20%, 25% above pre-pandemic levels. Where do you think volumes are at this point on the aftermarket side relative to pre-pandemic levels."}, {"role": "assistant", "content": "Yeah, I think you're right in what you're saying about the percentage of. But, I still think we are 10% to 15% volume light in our numbers. That's still has the potential to come in as people fly more, and that gets us back to really where we were pre-COVID."}, {"role": "user", "content": "Okay, and any comments on supply-chain. I know you've pointed out some issues in the past, you know, how would you characterize your supply-chain three months further on now."}, {"role": "user", "content": "Yeah, I think, our supply-chain has done a nice job recovering and trying to support the ramp up. I think in general terms, we've seen more stable and predictable performance out of the suppliers. Electronic components, as I mentioned, continue to be a little bit of a minor pain point, but I'd say generally that's getting better as well."}, {"role": "user", "content": "Okay, and what about your ability to hire and retain relative to maybe three, six months ago."}, {"role": "assistant", "content": "Sure, yeah. I don't think we have really run into any significant retention issues through this process. Definitely, we've seen the overall labor market improve at most of our locations in terms of the production labor, still a little bit tight on the higher technical and engineering expertise, but again a little bit signs of improvement there as well."}, {"role": "user", "content": "All right, thanks very much guys."}]}, {"messages": [{"role": "system", "content": "Thank you. Please hold for our next question. Our next question comes from the line of Robert Stallard of Vertical Research. Your line is now open."}, {"role": "user", "content": "Thanks so much, good morning. Kevin, I'll start with you, first of all, on the aftermarket, very strong growth here and in the most recent quarters, but just looking forward, how sustainable do you think this is particularly as you start to lap that price increase towards the end of the year, and also, given these very low rates of old aircraft retirement."}, {"role": "assistant", "content": "Well, I guess we'll have to see how the order book continues to evolve. Of course, as we -- it all depends on takeoffs and landings, and if the flight activity continues to increase, then we'll see continued strength. I think we're just seeing the opening innings really of China coming back, and it's good to see that in the numbers, but it's hard to put any parameters on it from here. It's up you. We do expect things to continue to improve for the year, but it will have to slow down at some point as OEMs start to ship more, but we'll have to see how that unfolds."}, {"role": "user", "content": "Okay and then a follow-up from Mike on the interest rates. On the debt market has been some, what might be, optimistic chat about the interest-rate is actually coming down going forward from here. I was wondering what your thoughts might be on that and what sort of flexibility Transdigm has to adjust interest rate if that does occur."}, {"role": "user", "content": "Yeah, we generally with regards to the capital structure and interest rates, we don't take a strong position on where they're going to go. As we've said before, we're in the business of focusing on keeping on-time delivery and quality of our parts as high as we can, rather than trying to predict where rates might go. That said, this past caller --this past quarter, we did take a bit of a different approach. And when we did the new hedges, we did colors rather than swaps, so that if rates do float down a bit, we'll get some of that benefit down to about a 2% SOFR rate, so you'll see some of that detail in the 10-Q when it's filed later this week. And then as always, I mean, we can if the overall market rates did step back by two to three percentage points, you can go in and refi, right? We can reprice our bank debt of which we've still got $6 billion or so and bring down the rate on that, and we can also if it makes sense, take out some of the fixed notes. There is a breakage cost from the ladder, but it's just math, and if the rates come down enough, you can take out those notes early or pay the prepayment penalty, so that you get the benefit of lower rates going forward."}, {"role": "user", "content": "That's great, thanks so much."}]}, {"messages": [{"role": "system", "content": "Thank you. Please standby for our next question. Our next question comes from the line of Ron Epstein with Bank of America. Your line is now open."}, {"role": "user", "content": "Hey, good morning, this is [Indecipherable] on for Ron. I just had a question on Calspan. I know you guys said that the financial profile fit the M&A targets that you guys pursue. But the company being services-based, should we view it as a departure in your strategy or shift? And also, should we expect more services to be in your pipeline."}, {"role": "assistant", "content": "I don't think we expect any change in our approach. Our approach is always to deliver private equity like returns to our shareholders. When we find businesses that are highly proprietary, highly-engineered and produce a highly-engineered product, in this case a testing report. I think it absolutely lends itself to our products. And we'll see how successful we are with this acquisition. And it certainly opens us up to other markets we might explore within aerospace and defense. But you shouldn't interpret this as any new direction for us. We find that this business should produce the same types of returns as we've come to expect from our components businesses. George, do you have any comment on that."}, {"role": "user", "content": "Yeah, I would add, as we were very excited about acquisition I first say, excited that we closed it yesterday. But as we evaluated the opportunity, we saw many of the characteristics and attributes that we've seen in other businesses that we've acquired. They do very highly engineered, proprietary testing. They are a great partner with their customer base, primarily aerospace and defense, which we like as well. And there was no fudging the numbers or changing any type of criteria as we evaluated it. We expect it to perform as other acquisitions, past acquisitions have performed and generate the typical returns that we'd expect. So, we're very excited about it."}, {"role": "user", "content": "Thank you so much."}]}, {"messages": [{"role": "system", "content": "Please standby for our next question. Our next question comes from the line of Sheila Kahyaoglu with Jefferies. Your line is now open."}, {"role": "user", "content": "Good morning, guys. This is Sheila. On the last."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Good morning. [Indecipherable] my last name but..."}, {"role": "assistant", "content": "I thought \"she\" was great though, I have to say it."}, {"role": "user", "content": "On the last call, you pointed out volumes were 85% below 2019 levels, implying price of about 25% since 2019, Kevin. So, I think in response to Strauss' question you implied price of another 10 to 15 points of plus up this quarter, is that just a rounding or is the shortage of new planes..."}, {"role": "assistant", "content": "That's not. Actually, I think what I was referring to, and I apologize if I confused. I was simply saying there's still 10% to 15% of missing volume if you look back to the pre-COVID levels. We don't comment on price to that extent. So, I'm just looking at from a volume point of view. We still -- there are still flight activity that has not returned, that we anticipate will over the coming year or so, but we don't anticipate all the volume to return in '23, some of it will fall into '24, we fully anticipate."}, {"role": "user", "content": "Okay, that's helpful, and then maybe just post '23, and as you think about '24 and '25, what is like the normalized aftermarket outlook you guys are thinking about on a volume basis and then opportunities beyond that."}, {"role": "assistant", "content": "Go ahead, Mike."}, {"role": "user", "content": "I think, Sheila, on that point, we'll give the guidance when we give it. We're just getting started with our detailed bottoms-up op unit forecast here for the next 12 months this coming month or so, and I think we don't want to get out over our skis in terms of predict and where our commercial aftermarket volumes could go from here. Things are still changing quickly, and as we've said all along that the recovery could be lumpy here."}, {"role": "user", "content": "Okay."}, {"role": "assistant", "content": "And again, Sheila, as you know, we do a bottoms-up forecasting. So, we don't give our teams expectations. We allow them to tell us, and I think that has proven to be more accurate than announcements from on high."}, {"role": "user", "content": "Yeah, sure. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you, Sheila. Please hold for our next question. Our next question comes from the line of Ken Herbert of RBC CM. Your line is now open."}, {"role": "user", "content": "Yeah, hi, good morning. Hey Kevin, when you look at the sort of the update of the increase to the full-year aftermarket guide for fiscal '23, it sounds like it's pretty broad-based in China and some other tailwinds there, but is it possible as you look at that increase to maybe rank order or prioritize for us maybe what drove the increase, or where you're seeing the greatest impact."}, {"role": "assistant", "content": "I'll let George take that one."}, {"role": "user", "content": "Yeah, I think, as you guys know, we have no visibility into the inventory or specific trends in a particular region per se. Our largest submarket, which is the passenger submarket is seeing that bounce back in that, and we're seeing it across multiple operating units. While cargo is down, we are seeing some improvement in terms of the belly cargo on some of those businesses as well. So, I would say generally all of our operating units that support the commercial aftermarket are seeing the rebound in the recovery."}, {"role": "user", "content": "Great. And within that, are you seeing anything in particular on the interior side when I think of some of the businesses there, and I think about maybe retrofit opportunities on wide-body aircraft. Is that doing better than the passenger trend or how is that looking?"}, {"role": "assistant", "content": "I would say interiors are following a similar trend. We're seeing a nice recovery there. We've probably seen that over the last few quarters generally, but obviously, as they continue to utilize the existing fleet, that's beneficial for potential down the road modifications and refurbs etc."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Please standby for our next question. Our next question comes from the line of Gautam Khanna of TD Cohen. Your line is now open."}, {"role": "user", "content": "Hey, good morning, guys. Just a follow-up on the last couple of questions on -- are you seeing any differences in aftermarket demand across kind of traditionally discretionary products versus flight critical or many submarkets, whether it'd be Hilos [Phonetic] or what have you that are weaker or stronger than others. Any sort of flavor you can give us."}, {"role": "assistant", "content": "No, I think in general the majority across operating units are participating in the recovery. There could be some puts and takes across any given quarter, but we're not seeing any significant differences in the commercial aftermarket there. I think, to add to that commercial transport is stronger than the business jet and helicopter, but business jet and helicopter aftermarket is very strong as well. And a small portion of our overall aftermarket revenue as you know."}, {"role": "user", "content": "Yeah, and maybe Kevin, could you speak to your comfort with leverage in this environment, like how much to the right deal, how much would you be willing to take up the debt-to-EBITDA ratio."}, {"role": "assistant", "content": "I think we're comfortable operating in the same range as we have historically. As Mike said, we don't get into forecasting, we run our business, we make sure we have enough available cash and for any available opportunity that we see on the horizon and that we can go after it, so I don't see any limitations. I think we are comfortable operating within the same range as we historically have. Five to seven times, we're right in that sweet spot. I think this is where we continue to operate. And as you heard, there's probably some forecast. Rates will start to go down in the not-too-distant future. This is good. We have successfully navigated this so far, and we will continue to come out the other side stronger. So, I feel like we're comfortable where we are. Mike, do you have something you want to add?"}, {"role": "user", "content": "I think that's right. As we said many times before, we feel comfortable in sort of the six times area, and then it's always dependent on not just the leverage level, right, but how far out to the right can you keep the maturities. That's as important a part of the equation as just what the overall leverage level is, and we always try to manage that."}]}, {"messages": [{"role": "system", "content": "Thank you. Please standby for our next question. Our next question comes from the line of Peter Arment of Baird. Your line is now open."}, {"role": "user", "content": "Yes, thanks, good morning, everyone. Kevin, maybe just a quick one on just price, your ability to kind of fill pass along price, any changes that you've seen as kind of volumes and overall activity has picked up. Just curious on this inflationary environment."}, {"role": "assistant", "content": "This is still an inflationary environment. I don't see any changes. Our goal is to, as always, to pass along inflation that's what we try to do. I think we've all seen reports from the airlines of ticket price increases and the like, so I would say all of the market has been successful in passing this along as we have needed to, to perform."}, {"role": "user", "content": "Okay and just a follow-up -- quick follow-up. On China, overall less than 10% or around 10% of your overall mix in terms of revenue."}, {"role": "assistant", "content": "Well, we don't give geographic splits. We don't actually know. We sell a lot of that through distribution and OEM. So, we don't actually know. I think the way to model it is to look at what is missing from the flight activity from pre-COVID to now, and that gives you an idea of what's still missing from our business. And there still a, as George alluded to in his remarks, there is still a chunk of China flying activity that hasn't materialized yet, but certainly looks like it will."}, {"role": "user", "content": "Yes, the Internet is will obviously still lagging considerably compared to the domestic, but it's moving in the right direction."}, {"role": "user", "content": "Thanks so much."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Please hold for our next question. Scott Deuschle with Credit Suisse. Your line is now open."}, {"role": "user", "content": "Hey, good morning. George, does your pricing model move at all in response to airline profitability given the value-based approach, meaning, if airlines continue to become more profitable kind of on their current course, could we see you exercise your pricing power in a manner that's perhaps greater than what you've historically done relative to inflation, but which is consistent with your value-based models since the airlines are generating more profit per takeoff and landing cycle."}, {"role": "user", "content": "Yeah, I'd say airline profitability doesn't really come into play as we've always stated, our pricing objectives is to market base the price and do better than inflation. So obviously with a higher inflationary environment, we're trying to get real price on-top of the inflationary pressures that we're seeing in some of the costs that are flowing through the business, but we don't start looking at the profitability of the customer base or anything like that."}, {"role": "user", "content": "Okay and then just following-up on Calspan, do you have a sense for which of the three value drivers will have the most impact on driving accretion there. Isn't on the price side, is there an ability to achieve price realizations at Calspan quickly, or it is that company have a lot of backlogs and you have to work through before you can start to get price. Thanks."}, {"role": "assistant", "content": "Yeah, I would say our view on value-creation is it's a three-legged stool, right. We're trying to make sure that we're getting the price to reflect the value of the products that we see. We're always trying to make sure we are managing the cost structures and pulling costs out of the business, and then we want to be able to provide innovative, profitable solutions to the customer base. And that's not going to change with Calspan, and frankly, it's not going to change across any of the portfolio of companies that we own. So obviously, we just closed on the acquisitions, but we are going to be looking to leverage all three in the process, it's a great business, it's been well managed and run, and our hope is to be able to optimize it like we've been able to do with past acquisitions."}, {"role": "user", "content": "Okay and last question, Kevin, just a clarification, you said the M&A pipeline is stronger than typical. As you defined typical here, are you referring to the past few years as your reference period or are you saying the M&A pipeline is stronger than it's typically been across the longer-term experience of Transdigm."}, {"role": "assistant", "content": "Yeah, I would take me at face value there. It's typical than what we've traditionally experienced, and more so than the last couple of years. There's a lot in the pipeline right now and the team is busy. But you cannot -- that doesn't linearly project closings of course, but we're very busy right now."}, {"role": "user", "content": "Right. Okay, thanks guys."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Please hold for our next question. Our next question comes from the line of Seth Seifman of J.P. Morgan. Your line is now open."}, {"role": "user", "content": "Hey, thanks very much. Good morning, everyone. Wanted to ask about the obviously very strong profitability in the quarter, and I believe not necessarily a guidance for any specific year, but as a framework, the company has [Technical Issues] in a normal year, it's possible to have roughly 100 basis-points of margin expansion with the same set of businesses. Is there any reason to think that, that shouldn't be the case for next year off of wherever 2023 comes out."}, {"role": "assistant", "content": "I think that when things stabilize, when we get back to normality whatever that looks like, I think 100 basis-points to 150 basis-points expansion per year on margin, apples-to-apples, is always what we have modeled and tried to achieve, and I think that's a fantastic target."}, {"role": "user", "content": "Okay, okay, great and then maybe just as a follow-up with regard to the M&A pipeline, we see some pretty solid valuations in the public markets these days. A lot of activity in the private market obviously. To what extent do you see that being driven by valuation and does that kind of inhibit things at all over. Is there still kind of plenty of value out there."}, {"role": "assistant", "content": "I think there's plenty of value out there. I don't -- given our ability to generate value, I think we don't turn away when prices go up necessarily as long as we remain convicted with the individual property products. So, the value what we have to pay doesn't factor into too much, so we're not concerned if prices stay high, go higher. When you find a business that matches the criteria that we look for highly-engineered products, you're going to have a successful run with those kinds of products over their lifetime."}, {"role": "user", "content": "Great, thanks very much."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Please standby for our next question. Our next question comes from the line of Michael Ciarmoli of Truist Securities, your line is now open."}, {"role": "user", "content": "Hey, good morning, guys, thanks for taking the questions. Good morning. Kevin, maybe just to go back to Scott's question on Calspan. I think you said the EBITDA margins were about half of what you're doing now, just given that these are more services, is there a path, you think to get these margins up to kind of transplant historical levels or is there anything with the type of services and testing that they provide that would prevent you from driving that margin."}, {"role": "assistant", "content": "I think we're in the early innings here and difficult to comment too much. I don't know if this business gets to the average of Transdigm, but I would I guess argue that it doesn't have to you as long as we continue to find pathways, the private-equity like returns. I don't know if the business has to get to Transdigm average margins, but there is no reason to believe any business in the aerospace sector that is highly-engineered producers of technical product like what we specialize in that it couldn't get there, but right now we're not modeling it, that it definitely will, but we'll have to see. There is lots of room for value generation."}, {"role": "user", "content": "Okay, perfect. And then just on the defense market, can you give any additional color there, maybe parse out OEM growth aftermarket growth. I know you might have some more of the consumable exposure there, but any noticeable or discernible trends within defense marketplace."}, {"role": "assistant", "content": "Yeah, I'll take that. As you know, we really don't separate out the defense OE from the aftermarket. I think both are performing relatively equally in terms of how they're tracking. it's a difficult environment, as the government continues to do its best to support Ukraine and figure out how they're going to spend funds. So, I think the general commentary that I provided in the opening in terms of we're seeing a slow but steady improvement in the outlays. But the fact remains the outlays are still a little bit slow in terms of solicitations closing into orders as we look at the historical timeframes."}, {"role": "user", "content": "Got it and then just last one on that topic. Are you able to get real pricing in your defense markets, or are you grappling with some of the same issues we're seeing and hearing about from fixed prices just not being able to pass-through those costs until the contracts reopen or you get new task orders."}, {"role": "assistant", "content": "Yeah, I really don't want to comment or get into specific contract terms. As you know, each of our operating units independently negotiates the contracts with the government, and I will be speaking out of turn."}, {"role": "user", "content": "Okay, fair enough. Thanks guys."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. Please standby for our next question. Our next question comes from the line of Kristine Liwag of Morgan Stanley, your line is now open."}, {"role": "user", "content": "Hey, how are you guys doing?"}, {"role": "assistant", "content": "Great. How are you?"}, {"role": "user", "content": "Wonderful to hear. Hearing from some of the MRO facilities, we're hearing that aircraft turnaround times are extending from three months to maybe even as long as six months, and part of that is still from some parts shortages. And then some from labor. Can you talk about how this environment is benefiting your pricing power, and is that something, and if are, is that something that you could sustain for longer?"}, {"role": "assistant", "content": "Yeah, I don't know that we'd have any comments specific to that environment benefiting pricing again as I've stated many times. Our pricing philosophy remains unchanged. It's based on a market-based value for the products that we deliver and design and produce. And we look to realize real pricing on-top of inflation, and I think that has been something that's been very consistent in the history of the company and that's how we continue to approach it."}, {"role": "user", "content": "Great. If I could tack on second question here. So, when you think about available parts, when you think about the order activity that you have in the market, what percent of those orders do you -- are you able to deliver on, and are there any specific shortages that you're facing in terms of providing to the market."}, {"role": "assistant", "content": "Yeah, each business in each operating unit has its own stated lead times with that they provide to the end-users and the airline customers when they come in for any particular demand, and those lead times can vary based on operating units. In general, given the recovery that we've seen in the aftermarket in the commercial transport aftermarket specifically, we've tried to invest in some inventory to be able to support the customer-base, and off-hand, I am not aware of any specific pain points in terms of supplying airlines or turning around spares activity. Again as a general comment, electronic component availability is still little bit tight, but the teams have been doing a nice job managing through that."}, {"role": "user", "content": "Great, thank you guys."}]}, {"messages": [{"role": "system", "content": "Thank you for your question. At this time, I would now like to turn it back to Jaimie Stemen for closing remarks."}, {"role": "user", "content": "Thank you all for joining us today. This concludes the call. We appreciate your time and have a good rest of your day."}]}, {"messages": [{"role": "system", "content": "Our first question comes from Brian Essex from J.P. Morgan. Your line is open."}, {"role": "user", "content": "Hi, good afternoon, and thank you for taking the question, and congrats on a nice quarter, particularly in a tough macro. Maybe, Keith, for you. Nice acceleration in services revenue this quarter. And I know Ken talked about more effectively is selling or some value-added services -- secure services into your installed base, how much was due to that better attach rate of secure services versus changes in registration policy or pricing increases in the quarter?"}, {"role": "assistant", "content": "Yes. When we -- great question, Brian. And I think when we peel the onion back there, we saw in FortiGuard, which was the security services part of the business. And you'll see this in our SEC filings next week. Growth was 35% for FortiGuards. So we started looking more deeply at that. And to Ken's point, what we saw there were areas like SaaS products and offerings that are attached to existing customers, certain cloud offerings, what we call pay as you go, if you will, were attached to it as well. And I would describe those as being a significant driver to the growth. I think the price benefits will probably take the number two slot. And then the number three slot would be some changes in the registration behavior. By that, I mean, customers did register a little bit faster in the first quarter. But that lag -- that registration policy change that we implemented in the first quarter that was a specific call out is not really having an impact in the first quarter, nor did we really expect one. So kind of in order, I think it was selling into the installed base, price increases and then some wide improvements in the registration behavior."}, {"role": "assistant", "content": "Yeah. Also with the new FortiOS 7.4, we started launching -- we started to have a more function, which can also enable much more new service going forward for both the current customer installation base and also for new customers."}, {"role": "user", "content": "Got it. That's helpful. And maybe as a follow-up, Keith, I think you commented on lower than expected cancellation rate. I know the question will be asked, impact on billings from backlog train? And what some of your assumptions are, particularly given what you see in macro? I know you talked about, you expect to be at normalized rates for backlog by the end of the year, but maybe if you can contextualize or quantify that to the extent that you're able to?"}, {"role": "assistant", "content": "Yeah. I think in the guidance, particularly as we look at the full year, it's difficult to figure out exactly what quarter some of that backlog is going to end up in or be canceled. But for the full year, I think we talked about low single-digit growth that would be coming from the backlog. I do think that the risk of cancellations increases as the year progresses. So by that, I mean, if the customer has only been in backlog for a week or a month or something like that, they're seeing somewhat less probability that they're going to cancel. But the longer it takes to deliver on that backlog, I think the cancellation risk continues to increase."}, {"role": "assistant", "content": "Also point is really, you mentioned go by normal end of the year, we see later this year, it could be middle, it could be towards the end. But in Q1, I say, the operations team did a great job to reduce the backlog, which also helping secure more customers and lower some cancellation rate."}, {"role": "user", "content": "Got it. Very helpful. Thank you both very much."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. This question comes from the line of Gabriela Borges with Goldman Sachs. Your line is open."}, {"role": "user", "content": "Good afternoon. Thank you. I have for Ken or Keith. It's a follow-up question on for costing, which is we've heard so much noise in the industry around supply chain and cover catalyst product cycles. How do you all think about true demand and potentially plan around the risk of demand going faster than expected, given you've had a very strong couple of years? Thank you."}, {"role": "assistant", "content": "I think probably, some of that more refer to the traditional network security, secure some deployment enterprise. But we do see that our solution has a much broader use case. And also expand to much bigger market opportunities in the traditional enterprise firewall and also the SD-WAN OT, it's also see strong growth continue to helping drive both the new customers and also expanding the current existing customer. Also in the SMB space, it's relatively greenfield. We also see pretty healthy, faster growth, probably even faster than the traditional enterprise, which is more replacement. I think all this actually contributing to a pretty healthy keeping saying double-digit growth in the future for the wholesale network security space."}, {"role": "user", "content": "Yes. That makes sense. Thank you. And Ken, the follow-up is for you, which is as we start to execute more on the convergence of selling into the networking budget or the convergence of networking plus security, when you look at the classic networking competitors, how do you think about the barrier of the limitation for classic networking vendors to get more into security and become more competitive in the convergence over time."}, {"role": "assistant", "content": "I have to say from the product architecture, it's very different because security needs much more complete power and to handle a lot of unstructured data, which the traditional networking company, probably more based on some structured data, handle some fixed network protocol, and much less computing power needed to process data compared to the network security. So that's where -- and also, we would have to implement function and the new function come up every year in the software first and then keeping enhancing improving performance, leverage ASIC, that's also we don't see networking company doing some of that. They probably may be slow on where to come up a new function for the security space, all kind of have a different architecture to really supporting the secure computing needed for network security. So that's -- so far, we have not seen the traditional networking company really come close. They did some acquisition, but so far, I don't see the really come up too much since to meet new demand from customers, both on the function and also on the service on the infrastructure change."}, {"role": "user", "content": "Thanks for the details. Congrats for the quarter."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. The next question comes from the line of Fatima Boolani of Citi. Your line is open."}, {"role": "user", "content": "Thank you. Good afternoon. Appreciate taking my questions. Ken, just a technology vision question for you. You are very -- and the team is very bullish on the SASE opportunity that was very apparent at the Accelerate conference as well. But I'm curious as to why you're taking the effort to build out data centers and points of presence to deliver your Universal SASE strategy versus maybe some of your peers and competitors who are maybe relying on third-party providers hyperscalers? And then I have a quick follow-up for Keith, please."}, {"role": "assistant", "content": "First of all, SASE, kind of is a little bit different than some of our competitors. We do believe it will be a universal need to be more broadly deployed and also more leverage a lot of service provider infrastructure is kind of a hybrid environment instead of a cloud-only SASE solution. And we do keep expanding some of our part because there's -- definitely, there's some user like whether depending on work from home or some other cloud -- SASE to secure some of their traffic here. But on the other side, there's a huge base of customer need to use SASE or kind of service model, evitable service provider all their current infrastructure and even on-site appliance. And so that's where a certain point, we also see our FortiSwitch and FortiAPs kind of hardware agent helping for the traffic for the FortiGate to process all these SASE traffic there. So that's where -- that's the reason we kind of put that in a single OS, both on the networking side function like SD-WAN, 5G or other past security like a CASB, DLP, all these firewall service all these things. So that's where we have a more integrated, more broadly distributed and leverage whatever the hybrid infrastructure SASE solution there. That's also the reason we continue to build some of the PoP. It's a little bit different than some other very certain cloud providers because we do see the care provider potentially also can be the service provider to offer SASE. And also from the high point of view, even have a little bit more investment from the beginning to build some PoP ourselves. But long time will be more profit model. So we have a better margin -- so it will take some time to make sure we build a healthy ecosystem, both with our partner and also its investment for long-term benefit."}, {"role": "user", "content": "I appreciate that detail, Ken. Keith, just quickly for you, kind of a tactical question on the billings outlook. You're raising the full year by less than half the beat and raise when I think about the first half. And so maybe from a bottom-up perspective, can you walk us through what sort of underpinning that conservatism. I can appreciate the macro is jittery, but if you can kind of give us some more tangible considerations or thinking about in terms of a bottom-up perspective on getting to that billings guide for the full year? Thank you."}, {"role": "assistant", "content": "Yes. I would say, one just kind of as a general thought, I think raising it to some extent, I think, probably gives you a little bit about of a message that we feel good about our strategy and the execution that level that we can bring to the market. But more specifically and more tactically, as we look through -- look to the second half of the year, there's probably a little more rigor and effort, if you will, in trying to look at what we see coming in the second half of the year. And I would give you that, probably the two headlines that we're looking at. One is we're still very, very pleased with the pipeline. And the pipeline continues to -- continues to be well above anything that we're talking about growth rates for the company for the full year. But I think the nuance that -- maybe not even a nuance, really, that's coming to play now is more about close rates. It's not just as simple of taking your pipeline, assuming you're going to have close rates that were at the same level they were in prior periods. And that's -- when we use the term close rate, not a suggestion that deals are getting lost, but this continual cycle that we seem to be in, where some of the larger enterprise deals, in particular, are taking longer, they're pushing out a lot of pushes. It's not that there's been an increase in losses, but the continual push. And so, with that in mind, I think a fair amount of attention looking at the full year guidance on what we really think our close rates may be for the second half of this year."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. Next question comes from the line of Saket Kalia of Barclays. Your line is open."}, {"role": "user", "content": "Okay. Great. Hey, good afternoon, everyone. Thanks for taking my questions here. Ken, maybe just to start with you, great to see Fortinet sell the whole breadth of the platform, particularly within the enterprise. Could you just maybe talk about anything that you can do to make it easier for customers to consolidate spending with Fortinet, whether that's an enterprise license agreement or any other thing that sort of makes it easier to combine -- consolidate those vendors, which was a theme, I think, was talked about earlier?"}, {"role": "assistant", "content": "We definitely see some healthy growth of enterprise agreement. And also, we're working closely with our channel partner, with our service provider also leverage their connection, their resource to the healthy ecosystem to grow together. But I also see the -- from enterprise level, they also see the benefit of consolidation definitely and also, not just consolidate some of the security product, but also the expanded infrastructure go beyond the traditional network security. So that also we see pretty healthy growth, like in Q1. We do see that we call enhanced -- enhanced technology side also has pretty healthy growth. Yes, the sales force, also you can see the number of $1 million deal, both on the number and also on the dollar-wise, has a pretty healthy growth, continue to accelerate and grow beyond the total building growth. So that's a pretty healthy trend we see going forward to helping customers consolidate."}, {"role": "assistant", "content": "Yes. And Saket, maybe just -- this is Keith, just to go on a little deeper on what Ken is talking about there, and I'll give you maybe four quick examples. So enterprise agreement is something that we've been doing now for probably a couple of years. We track those as -- in some ways, as a different line of business in terms of the growth rates. And particularly as we move into the enterprise, I think it's been very important to be there, and we've been very successful in it. I think another illustration of trying to make it easier for customers was the example of the large retailer we gave on the call today. And we talked about the points program, right, which is an easier way, I think, sometimes for them to get on board and consume more of the products. And I think also then, when we sell, making sure that our salespeople are well trained on the value proposition that we're offering, not just on the cost of the appliance or the throughput, the performance, but also what it means to the customers' management cost and overhead costs as well. So I think those types of things are all going into play here to support what Ken is talking about, about making it easier for customers to consume our products."}, {"role": "user", "content": "Got it. That's super helpful. Keith, maybe for my follow-up for you. Great to see that 30% growth and acceleration in services revenue. Maybe the question is, how do you think about what portion of your existing subscription base hasn't seen that cumulative impact of the price increases you've done yet, right? Like clearly, the price increases on products have been fully baked. But how much of the base or maybe how long will it take for the subscription base to fully realize that pricing as well?"}, {"role": "assistant", "content": "Yes. Great question, and I think didn't really look at the numbers closely this quarter with the last quarter. A couple of things to keep in mind. The average contract term, call it, 27 months. If all the contracts are 27 months, you can do that math, but they're not some are one and some are three-year contracts -- in terms of the renewals that are coming through. So probably one in five-year contracts. Sorry, Peter, thank you for that. So it does have a long tail. And again, I defer you back to how many quarters or a few years that we talked about seeing the uplift that came when we converted to 24x7 support from 855, that was something that continued to provide a benefit for several years. I think the tail gets smaller, obviously, as you go further out. I think the majority of what's the existing contracts more than 50% are under the new pricing."}, {"role": "user", "content": "Very helpful. Thanks guys."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. The next question comes from the line of Shaul Eyal of TD Cowen. Your line is open."}, {"role": "user", "content": "Thank you. Good afternoon, congrats on results and guidance in a tough macro. Keith, maybe starting with you. Can you comment -- can you provide us with some color about the financial vertical performance this quarter?"}, {"role": "assistant", "content": "Yes. Well, financial services have always been one of our -- I should say always, but for a long time, even the top three. And it can be a bit feature famine there with some very large deals in the quarter. But I don't think there was anything that was -- it was number two in this particular quarter. Thank you, Peter. I don't think there are any really large deals that drove that number. I think it was -- we saw growth and success, not only in the US but also internationally, particularly in Europe. And so I think it was a strong quarter for us in that area."}, {"role": "user", "content": "Got it. Got it. From a product mix perspective, so the entry level performed the best versus the high-end. Is that just a mix or a macro reflection? And also, did you have any eigth-digit wins this quarter?"}, {"role": "assistant", "content": "So we talked about -- yes, we did."}, {"role": "user", "content": "Okay."}, {"role": "assistant", "content": "I think we talked about one in the script just a moment ago. I think we commented it was an eight figure deal, if I'm not mistaken, right, without giving a specific number -- yes. And I don't recall if there was a second eight figure deal, there was a second."}, {"role": "assistant", "content": "Also our SMB had pretty healthy growth. Like I said, SMB is more greenfield for the network security. We do see more-and-more SMB than network security to protect their business, especially comes from some of the resin attacks. On enterprise because it's a kind of more replacement -- and also a lot of enterprise kind of maybe the environment in the refresh some of the hardware more dependent on the service -- so that impacts some of the high end. And also, the other benefit for some of the low and middle range is really -- most -- I'd say most SD-WAN and some of the OT deployment maybe more towards the low and middle range."}, {"role": "user", "content": "Got it. Thank you. Appreciate it. Well done."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. Next question comes from Rob Owens of Piper Sandler. Your line is open."}, {"role": "user", "content": "Thank you very much and good afternoon. Thanks for taking my question. I wanted to start around opex or the quarterly operating margin. A very strong first quarter here. I think you mentioned it was the strongest Q1 that you've had since you're public. If I go back through results since you've been public, Q1 has never really been the high watermark from an operating margin standpoint. So, walk me through your thought process as the rest of this year plays out, was there some aberration in Q1 that really helped drive that or just a lot of conservatism as we look ahead?"}, {"role": "assistant", "content": "Yes. I think that we called out three things and maybe focusing on two. One, we had a very strong gross margin in the quarter, and I'll elaborate on that in a moment. And then also FX you know, continues to provide a tailwind. More commentary about the gross margin, particularly the product gross margin, as we move through the supply chain challenges and then into inflation, etc., over the last couple of years, I think we've talked publicly that our goal is to try and keep the product gross margin around 61% or so."}, {"role": "assistant", "content": "The fourth quarter came in obviously very low. We did not anticipate that we'd be able to time our price increases and the cost increases perfectly. So, they went through the income statement in the same quarter, so to speak. And with that, I think you saw a little bit of pressure in the fourth quarter than you saw it kind of revert in the first quarter."}, {"role": "assistant", "content": "I think, longer term, we also look at product gross margin as an opportunity sometimes for us to continue to invest in growth."}, {"role": "assistant", "content": "And I think we saw the first quarter gross margin certainly well above that band that I just talked about. And with that in mind, as we start to see some of the costs moving out of the equation, and we introduced new products, I think we'll be looking at that in terms of, is there an opportunity there to make certain investments in growth, while maintaining the margin commitments that we've talked about."}, {"role": "user", "content": "Great. And then as a follow-up, I did want to touch on the OT business and the strength you're seeing there. Can you talk a little bit from a go-to-market standpoint? And some of the channel programs, because it does seem like there's some new large channel partners out there that are very excited about the opportunities. Thanks."}, {"role": "assistant", "content": "Yeah. I think OT, we do look at -- I mean, you're always trying to organize our sales force around verticals, geographies or what have you. And I think when we started to see the opportunity in OT several years ago, Patrice and Ken made a decision to start separating that out and having really a separate sales function and some people that specialize in that."}, {"role": "assistant", "content": "I do think that we probably got some first-mover advantages by doing that, particularly as we look at Europe and then quickly followed thereafter by the U.S. And, yes, there are some large names that are in that space that are providing technology, not security technology, but technologies in the OT space that have been very receptive, if you will, to conversations and opportunities to meet with us."}]}, {"messages": [{"role": "system", "content": "Thank you, very much. One moment for our next question. The next question comes from Adam Borg of Stifel. Your line is open."}, {"role": "user", "content": "Awesome. Thanks so much for taking the question. Just for Ken or Keith, obviously, it's great to see the strong collections and the record free cash flow. And you also talked about contract terms being consistent year-on-year. And I was just curious, though, just given the tougher macro, are you seeing any pushback by customers around willingness to pay upfront? And then I have a follow-up."}, {"role": "assistant", "content": "Yes. Well, first of all, I want to revel in the $600 million of free cash flow, which we been doing for several more quarters. But I'm trying to let people know that a lot of the things fell our way in the quarter. There's always the conversation and part of the sales cycle, if you will. The customer is a lot a one-year, three-year, five-year deal. And certainly, in a rising -- in an environment where interest rates have gone up, I think there's a lot more -- many more conversations that exist around payment terms and things like that."}, {"role": "assistant", "content": "I do believe that just as we just talked about in the second quarter of 2020, when COVID hit, we have a very strong balance sheet. We obviously have very strong margins. And it's appropriate for us to look to that as opportunities to leverage our balance sheet. Sometimes that may be in the form of extended payment terms or what have you. In our income statement in the form of how we want to go about discounting and supporting growth."}, {"role": "assistant", "content": "So I think that, again, the strength that we've had, we have the ability to do those things. If the question is around what are we seeing from some of the enterprise customers and Ken is seeing a lot of this as well. Do we see deals that go from five years to three years, sure. Is it more than we've seen in the past? I kind of look back at the contract term data point that we gave and say, maybe but not a lot kind of thing."}, {"role": "assistant", "content": "And on payment terms, the channel has always offered a financing function. I think they prefer to provide the financing function. And I think we provide support to the financing function to the channel by making capital available to them through payment terms."}, {"role": "user", "content": "That's really helpful. And maybe just as a quick follow-up. Head count was up a little bit over 600 people quarter-over-quarter, up over 21.5% year-on-year. Just curious how we think about headcount growth, either in 2Q or later this year, again, just given the macro? Thanks, again."}, {"role": "assistant", "content": "Yes, we are -- overall, we look at both high coin cost, probably the same pace company grow the top-line and also try to at the same time, try to improving some efficiency there. So, we're not looking for headcount growth above the top-line, even there's still some question area, we also need to do some more investment on investment. But the company so far, we feel we have a pretty healthy finance model. And this also could be the opportunity to also gaining some market share."}, {"role": "user", "content": "Great. Thanks again."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "This question comes from Ittai Kidron from Oppenheimer & Company. Your line is open."}, {"role": "user", "content": "Thanks, guys and nice results. My first question, I guess, is on the U.S. enterprise, so not U.S. in general, but just the enterprise vertical, clearly, one of the most important growth opportunities for you long-term. Can you talk about progress over their win rates displacements? And is the macro making things easier or more difficult for you specifically in the U.S.?"}, {"role": "assistant", "content": "First, we continue to invest in the U.S. enterprise. We also see a huge growth potential for us because we have a relatively small market share. And with all the strong product technology we have. On the other side, the big environment definitely slowed down some of the enterprise making certain decisions, whether a refresh or something like that. But on the other side, our solution has a better, lower total cost of ownership and also can expand beyond the traditional network security and also helping customers to consolidate. So, I think all this combined together, we do see the U.S. enterprise definitely a strong growth area for us."}, {"role": "user", "content": "Okay. Thanks. And then maybe a follow-up on the competitive side, then Ken, maybe you can talk about what have you seen out of your competitors here in the US, any kind of abnormal activity from discounting or otherwise?"}, {"role": "assistant", "content": "I think in the slowdown of some of the big environment, definitely the competitors starting to be more aggressive, whether on some discount or offer some free, some of the -- some percentage of free service. But from our angle, we see we have much better product position, much broad like infrastructure coverage and better service. And also both on the performance angle, the product definitely has performed much better for the same countries in cost at the same time."}, {"role": "assistant", "content": "Our service also has much more value and cost lower than competitors. So, for us, we have not experienced like price pressure or discount pressure. It's more about how we can increase the coverage, increase the -- the lead gen pipeline and also to meet the customer need in this big environment change."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "I would think that what Ken talked about, I think, is fantastic. I think keep in mind, we don't -- we have a very -- as we kind of talked about in prepared remarks, a very diverse customer base, if you will, between being international, between being very large, mid, small, and MSSPs, etcetera. So, I don't want to put a policy in place that covers every geography and it covers every customer size."}, {"role": "assistant", "content": "And I think what you're really talking about here is something that for us represents 15% of our business, maybe just a little bit less. And because it's at that size, it's something that we can really more, I think, target our responses to as we get deeper into the selling function as opposed to some broad announcement that we're going to give away services for two years or something like that."}, {"role": "user", "content": "Very good. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for next questions. This question comes from the line of Angie Song with Morgan Stanley. Your line is open."}, {"role": "user", "content": "Hi. Thank you so much for taking my questions. I'm on for -- Hamza Fodderwala of Morgan Stanley. So, could you just share a little bit more about your current interest around the SASE -- or current customer interest around the SASE product? And -- what are some of the responses around it so far?"}, {"role": "assistant", "content": "It's a pretty strong growth. And also, we're working with a lot of our service providers, both on the infrastructure side or security service side. And offer SASE because we do believe SASE should be ecosystem with a lot of players instead of just a vendor offer their own SASE because a lot of -- I say, probably most customers, they prefer some of their data being processed control themselves, whether some private SASE or some data solvency keeping the data within certain geo."}, {"role": "assistant", "content": "So, that's where we see the SASE approach, we call Universal SASE, the customer flexibility to offer both cloud-based or on-premise based or kind of lack the service provider, infrastructure will be more benefited the whole industry long term. And so that's where -- even sometimes we kind of take a little bit more time to develop our SASE function in the single OS, but that's make it more easy for the customer, for the service provider to deploy SASE to see their environment. So we see a very, very healthy pipeline and the strong growth, kind of a salary growth. And that's also based on a more healthy margin model instead of -- do see money all of our growth. So we want to maintain that model and also working closely with our partner to offer kind of SASE together to the customer."}, {"role": "user", "content": "Got it. Thank you. And just one more around profitability. So how are you guys thinking about -- slows down over the next few years? And where do we see that margin leverage?"}, {"role": "user", "content": "Angie, can you repeat that? You cut out at the beginning of that question."}, {"role": "user", "content": "Yes. No worries. So the question is around profitability. And I was just wondering, what you guys are thinking about upside to profitability as growth slows down. And where should we expect to see that margin leverage?"}, {"role": "assistant", "content": "We see the midterm model will be time-date and built in by 2025 with non-GAAP operating margin at least 25% for each year in the next three years."}, {"role": "user", "content": "Got it. Thank you."}, {"role": "assistant", "content": "Yes. I think the -- one thing, Angie, and I think to about this before as well. Keep in mind, two-thirds of the business roughly is service revenue, and that's producing gross margin that's in the mid-80s. So -- and that's -- those are longer-term contracts. So I think we -- the business model is such that we have time to react if there was something really dramatic that happened in the industry. But part of that is for that to happen, I think you probably have to see some sort of shift in the behavior of the bad actors, the nation states, the organized crime groups, etcetera, and we don't see that, that's on the landscape."}, {"role": "user", "content": "Thank you, so much."}]}, {"messages": [{"role": "system", "content": "Thank you. Please stand-by for next question. This question comes from the line of Tal Liani of Bank of America. Your line is open."}, {"role": "user", "content": "Hi guys. What we've seen with good companies in the last two quarters is that they make great numbers. But when you look at the composition, new customers are slowing down and sales to existing customers are going up and we've seen it through multiple companies in the space. So the question is whether you can provide us with some data on sales to existing customers versus new customers? And how is the current environment on customer acquisition on new customer acquisition? Thanks."}, {"role": "assistant", "content": "Yes. So as a reminder, it's all good to hear from you again. If you think of the business being extremely diversified, whether that's geographically or by customer segments, one-third small, one-third mid, one-third large. We specifically called out in the script that we added over 6,000 new logos in the quarter. So obviously -- and that's probably a growth rate that's easily in the double digits. New logos take a while to really produce revenue for us. It tends to be less than 10% of total revenue from the new logo. So it creates the opportunity to continue to sell into them. Kind of Ken's comment a moment ago to your question here, do we see large enterprises in the U.S. still moving forward robustly with all their various digital transformation projects. I think that the word on the Street is that slowed down a little bit. And in that environment, I do think that incumbents sometimes have an advantage, but also a cost of performance argument and debate is something that you see customers perhaps more receptive to in the current macro environment."}, {"role": "user", "content": "And in the current macro environment, is the duration of contracts going down? Or again,"}, {"role": "assistant", "content": "It was flat year-over-year, down one month quarter-over-quarter"}, {"role": "user", "content": "Got it. Okay. Thanks."}, {"role": "assistant", "content": "Which, as somebody reminds me in the room very politely, every first quarter is down one month."}, {"role": "user", "content": "Got it."}, {"role": "assistant", "content": "Good question."}, {"role": "user", "content": "Yeah."}]}, {"messages": [{"role": "system", "content": "Thank you. One moment for the next question. This question comes from the line of Andrew Nowinski of Wells Fargo. Your line is open."}, {"role": "user", "content": "Okay. Thank you and congrats on nice quarter, so I wanted to ask about your SASE offering as well. You talked at the Accelerate conference about, I think having 8 to 10 new use cases driving demand for the firewall, but I'm wondering if SASE could be one of those use cases as well, meaning is the firewall appliance a critical component of your SASE offering."}, {"role": "assistant", "content": "Yeah. SASE is definitely is one of the use case, especially the Universal SASE or sometimes they call the Private SASE for some customer or some service provider, they want to have more control of their data. So that we see is -- both SASE like the service model, customer benefit and service provider has a big value add in that one. But at the same time, given the flexibility of whether for some traffic to the cloud or to the power have a process on premise and by the appliance. So that's we see the huge benefit of our Universal SASE solution, which is very different than some other SASE players and a lot of customers and the partner are interested in this Universal-SASE approach."}, {"role": "user", "content": "Thanks Ken. And then, maybe a question for Keith, just as it relates to your capex. You talked about a component of that being used to build out more pops to support the SASE offering. But is that something -- like how should we think about capex in that investment beyond 2023, as you continue building out your network?"}, {"role": "assistant", "content": "Ken and I are smiling each other. We've had this conversation. I think I've been here for nine years of this week. One thing I've come to appreciate is Ken behave like a long-term investor. And with that in mind, owning critical real estate assets tends to have a better payback than leasing them over an extended period of time, whether that's in R&D facilities, whether that's in manufacturing or warehouse facilities, or that as we move into the SASE market as well as other cloud offerings. It's not just investments in SASE, if you will, but it's also investments in larger data centers in order to deliver various cloud-based services and solutions. And I think you've heard us talk about that in the last several earnings calls and the guys of data centers having an impact on margins for services and capex spending. So I don't think there should be a surprise there, but I think it is an indication of our looking to expand into more fully into some of these other markets."}, {"role": "user", "content": "Got it. Thank you."}]}, {"messages": [{"role": "system", "content": "And thank you. One moment for our final question. Our last question comes from the line of Shrenik Kothari from Baird. Your line is open."}, {"role": "user", "content": "Hey, thanks for taking my question. So for Ken or Pete, I think, Keith, you mentioned about the financial services up over 40%, which is surprisingly strong and contrary to what we are hearing from your peers and competitors. So can you expand a bit about -- upon the underlying drivers? I know you touched upon it but I just wanted to expand on the geographical diversity? Or is it increased kind of impetus for vendor consolidation that is benefiting you guys in that vertical? If you can just elaborate and then I have a quick follow-up."}, {"role": "assistant", "content": "Yes. I would say it's all of the above. It's happening geographically. I think it's happening with customers that we took down earlier that are expanding with us with additional firewalls and additional security or additional services as well. I think the market, if you will, financial services, if you step back and look at what's happening there, specifically the firewalls over the last several years, there's probably two legacy vendors there that when they're contracts are up for renewal, and we've talked about this a long period of time. Now they're exposed and increasing opportunity to come in for a competitive displacement. And I think that some of the other comments or questions today is it more difficult in this environment for competitive placements. I mean, sure, you've got to work a lot harder to make it happen. You got to make your value proposition more well known. But I think, again, I think it's expansion. I think it's opportunity to displace incumbents and I don't think it's specific to any 1 particular geography."}, {"role": "assistant", "content": "Also from technology and go on, we have a huge advantage on for the internal segmentation of security data center. So because the ASIC advantage we have, we can deploy in the very high-speed environment, which a lot of us finance service provider, they do need to secure their kind of internal segmentation there. The other part, really, some of finance services are also starting to supporting work from home, working from remotely, which we also have a super solution with our ASIC based like small appliance and supporting this kind of a very broad infrastructure approach combined with like SD-WAN or the other 5G, 4G network and security together. So that's give us huge advantage from the product."}, {"role": "user", "content": "Got it. Got it. Thanks a lot Ken, Keith. Just a quick follow-up. And you guys, of course, started upon the expansion opportunity in the form factors. Of course, your peers and parties have spoken about unit expansion pressure and how the product unit growth is kind of normalizing. But just wondering, given that give examples of this eight-figure expansion and upsell opportunity replacing kind of firewall with a holistic solution. Can you talk about like expansion drivers broadly like -- are you seeing mostly upsell and expansion in form factors versus the units? Just imparted to get some clarification there."}, {"role": "assistant", "content": "Probably both. Yes, we do see the expanding of both the unit and also upsell cross-sell of the entire for the Security Fabric, which has 53 product. So that's where both our internal sales force also partners setting after across for the whole fabric. At the same time, because we combine networking security and more function together multiply case, which also the unit shipment also starting keeping grow quite nicely."}, {"role": "user", "content": "Got it. Thanks a lot. Ken, appreciate it."}, {"role": "assistant", "content": "Yeah. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. That concludes the Q&A segment. I'll now turn it back over to Peter Salkowski for closing remarks."}, {"role": "user", "content": "Thank you, Chris. Apologies to the seven people who were left in the queue. I'd like to thank everyone for joining today's call. Fortinet will be attending investor conferences hosted by JPMorgan and Bank of America during the second quarter. Fireside chat webcast link will be posted on the Events and Presentations section of the Fortinet Investor Relations website. If you have any questions, please feel free to contact me. Have a great rest of your day. Thank you."}]}, {"messages": [{"role": "system", "content": "Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question today comes from Peter Grom from UBS. Please go ahead with your question."}, {"role": "user", "content": "Thanks, operator, and good evening everyone. Maybe just two quick margin questions if I may. So one. I know you don't want to get into guidance, but you continue to comment on the sequential margin performance or improvement. So, pricing coming in and costs moderating, should we expect to see sequential improvement in gross margin from here as we move through the year?"}, {"role": "user", "content": "And then just somewhat related. As we look at selling expense as a percentage of sales today versus 2019, it's down quite a bit. So as we look ahead, is this high-single-digit rate that we've seen over the past couple of years sustainable or would you be looking to take that higher overtime, particularly as gross margin begins to improve. Thanks."}, {"role": "assistant", "content": "So, addressing your first question on gross margin, as you know we don't give guidance. But what we can say and what we have said in previous quarters, and we've spoken about the price increases. We have rolling price increases in EMEA. During the whole year. So that will escalate as the year goes through."}, {"role": "assistant", "content": "In the U.S., we had a price increase, as you know, late last year and we had a price increase April 1 in our larger sizes, The 19.2. 18.4 and the 24-ounce can. So that's something that will be reflected continuously as the year goes through. In addition, we took up some pricing later on in the year in LatAm, and that's -- and some in LatAm in 2023 as well. In Asia-Pacific, we largely took up pricing in Q1 of this year. So there will be a benefit I believe from pricing as we go through 2023."}, {"role": "assistant", "content": "With regard to costs, that's something that we continue to evaluate. We know that, for example, aluminum has kind of stabilized which is positive I think for us, and we've also had a situation where we've seen freight rates reducing and we balanced freight in two sections in our P&L, freight-in for materials and for finished goods as they move to distribution centers or regarded as part of cost-of-sales and trade-out is obviously regarded as an operating expense."}, {"role": "assistant", "content": "So we are seeing some improvements. We mentioned, I think on previous calls and in the script today that there are some challenges in our cost-of-sales, including what we're seeing in certain ingredients and co-packing fees. So overall, I think. I could see a situation where we have the price -- have the price benefits. They seem as if the, they have been sensibly executed and that we haven't had major resistance from from customers. So. I think that gives you the background, probably to make your own assessment."}, {"role": "assistant", "content": "And then on your second question on selling expenses. We work towards a budget on selling expenses, which we believe are necessary to execute our play. And what those budgets are, and where they end up with is a factor that we very seriously consider in dealing with the needs of our consumer, and the needs of the market. So we don't really compare it, it's a percentage of sales. And at the end of the quarter, everybody else does. But we look at the needs of the marketing programs and what we need to do to keep our brands exciting and in the eyes of consumers."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Filippo Falorni from Citi. Please go ahead with your question."}, {"role": "user", "content": "Hey, good afternoon, guys. You talked about energy drink category remaining solid. Can you talk about what you're expecting in the balance of the year for the category? Do you see any signs of potential weakness at the low end of the consumer base, or you're seeing trends held up in the U.S. particularly? Thank you."}, {"role": "user", "content": "So. We don't give guidance. Rodney, you're going to respond to that?"}, {"role": "assistant", "content": "It's fine. Go ahead."}, {"role": "user", "content": "No, please, you go ahead. That's fine."}, {"role": "assistant", "content": "As Rodney said, we don't give guidance and the category has in-line with other consumer products, seen a little bit of a slowing. I think there's been a lot of price increases across not only the energy category, but all beverage and consumer products. And so there has been a little bit of slowing. I think there has been a little bit of trimming of benefits under, the snap and programs that were increased during COVID and those are sort of being pulled back a little bit generally now. So. I think you would see a little bit of sort of of rationalization by buyers as they have slightly less disposable income. But again. I think that will settle down."}, {"role": "assistant", "content": "We are overall though, if you look at the numbers we gave you the Nielsen numbers, there is still healthy growth in the energy drink category. As a category it's continuing to grow and expand. But other than the direction you're seeing from Nielsen, we really can't and won't give any further direction. But obviously, we think that certainly in dollar terms the category will continue to grow in actual volumes they may be a little bit of a slowing, but I think that we don't think that will be more than made up by dollar increases in pricing."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Bonnie Herzog from Goldman Sachs. Please go ahead with your question."}, {"role": "user", "content": "All right. Thank you. Hi, I guess I wanted to ask a little bit about some of the innovation. Just maybe on the more color on Zero Sugar, The Beast, Reign Storm, how they're performing and whether they are meeting your expectations in terms of buying from retailers and shelf-space allocation? I guess I'm securing that you got a fair amount of incremental space, so just wanted to verify that with you."}, {"role": "user", "content": "And then, wanted to understand on Zero Sugar in to take a shift most of that during Q1, are you still expecting to kind of roll that out in certain market in Q2? Thank you."}, {"role": "user", "content": "Okay, so if you look at Zero Sugar. We launched Zero Sugar, we rolled it out in Q1. So, most markets by far the majority rolled out Zero Sugar in Q1. As regards Zero Sugar, we have actually been very piece with the results. We had good expectations for the product and our expectations seem to have been realized. We're not seeing a big dip in green. So a lot of people have asked questions about cannibalization. But we're not seeing a big dip in green at all. I mean Green seems very much to be holding its own."}, {"role": "user", "content": "So I think that. As we look at shelf space, obviously, we've negotiated very actively this year for additional shelf space. And we have achieved really commendable increases in shelf space, not only in convenience -- not only in the convenience independents but across the various channels."}, {"role": "assistant", "content": "The only thing I would add is, Bonnie, is internationally, we do have plans to also roll rolled out the Zero Sugar into a number of international markets, but that it's not going to go everywhere at the same time. We have other things on the agenda that need to roll out. So there will be an orderly rollout of other innovation internationally. But in many markets, including in EMEA, we will be rolling out Zero Sugar as well."}, {"role": "user", "content": "Yeah. And we just launched it in Canada as well. So really exciting times, I think, for that particular product."}, {"role": "assistant", "content": "With regard to the expectations, Bonnie, Reign Storm really was launched right at the end of the of the first quarter. So it's just too early to tell, but obviously, we are optimistic about it."}, {"role": "assistant", "content": "Again, and with regard to The Beast, we rolled it out slowly, and we're trying to do that in a cautious way. And so far, the results sales, some of the repeat sales have also been encouraging. But again, it's early on. We have a lot of additional innovation in alcohol that we are looking at and planning. So we're quite excited. It takes time, and we are rolling it out through this whole new distribution system, which we are continuing to build. Distributed by distributors. So it's taking time to get there, but as we said on the call, we hope to be national by the end of the year. We hope to have additional products. So the whole system, I think, is working, moving forward according to plan."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Chris Carey from Wells Fargo Securities. Please go ahead with your question."}, {"role": "user", "content": "Hi, everyone. Just one clarification or maybe if you could help, the 18.6 and the 24-ounce, how meaningful are those as a percentage of your overall portfolio? Or is it just any way framed the size of that price increase as contribution to total business? And then just a bigger picture one, not a left field a little bit, but I get questions pretty often just about succession planning and long-term succession planning on Monster and how strong is the bench. And how much of that bench building is going on behind closed doors and just -- it comes up and off that I thought maybe this would be an interesting place to just maybe offer some perspective on just how you think about developing talent and developing talent for the long term. So thanks for the -- maybe a little bit of help on the scope of the pricing and just on talent development. Thanks."}, {"role": "user", "content": "Yeah, Chris, I would refer you to the Nielsen numbers. And you'll see that those larger sizes are less than 10%, probably in the 6% to 8% range. But if you look at Nielsen, you'll be able to get a good assessment of that percentage."}, {"role": "user", "content": "Secondly, on succession, obviously, the Monster Board is -- and Rodney and myself are really concerned about succession. And it's something that we are addressing and we continue to address on an ongoing basis. We have a very -- in our view, a deep strength in the bench of the team below us that are being developed and are growing, and we are helping them develop. So I think from that perspective, it's something that ourselves, the Board are very well aware of, and we are continuing to address that issue. However, I don't think Rodney is going anywhere in the foreseeable future, and frankly, neither am I. So we're here and we'll help develop and segue when the time is right, a new management team."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Andrea Teixeira from JPMorgan. Please go ahead with your question."}, {"role": "user", "content": "Thanks, operator. And hi, Rodney, HIlton and the team. I just have a clarification. So going back to Bonnie's question on how accretive Monster Zero has been against Ultra, in absolute terms in numbers in the U.S., it seems that has been a great launch based on the Nielsen data. But obviously, as you look at Ultra, it also has been coming at some deceleration, which obviously one would expect. Can you comment on who your -- first of all, how is it tracking against plan? And in terms shelf productivity that you pointed out that you're gaining distribution and trying to make it obviously accretive, how is it, number one, tracking against plan, and number two, how you're seeing that going above and beyond Ultra?"}, {"role": "user", "content": "Okay. So remember that we had a product called Absolutely Zero and Zero Sugar is really the new variant of Absolutely Zero. So it's a product that was in the market that has been replaced by Zero Sugar. So when you compare the numbers for Zero Sugar, you could see that on an ACV basis, we've moved from 42% from Absolutely Zero to 72% for Zero Sugar. So the distribution of Zero Sugar is increasing and it's climbing."}, {"role": "user", "content": "It's not that it's a new product. We had, as I said, a product called Absolutely Zero. And so when we look at Zero Sugar, we look at our plans and we look at our plans for Ultra, we have been very satisfied so far with the launch of Zero Sugar. You look at the ACV growth and the sales per point, and it's something that we really -- and I said this earlier, we really are very excited with Zero Sugar."}, {"role": "assistant", "content": "Just maybe I would just add on the Ultra side. We have had a really successful launch of Ultra Strawberry Dreams. I think that some of the ASV, if you look at your Nielsen, you'll see some of the -- have some of the additional flavors ultra of Ultra have, in fact, decreased. I think that's something we just need to look at and attend. I think as you go through this change and introducing of new flavors, sometimes some of these additional SKUs that are not the top three or four or five sometimes get a little bit lost in the wash. So that's where we see a little bit of a drop off in some of those additional flavors. But I think there's -- we think that they're solid and sound products. And I think we just need to just make sure we focus on just reestablishing some of the distribution levels on those, and we think those sales will continue to increase. Sales of Ultra as a brand or sub-brand have gone up in the United States and internationally. But I think that we've had, as I said, some of those flanker sort of flavors are we need to just put some focus behind which we are doing."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Mark Astrachan from Stifel. Please go ahead with your question."}, {"role": "user", "content": "Hey, guys. Good afternoon. Two housekeeping questions. One, cash balance, it keeps growing. Any thoughts on how you'd like to implement spending some of it, share repurchase? It was nice to see there was some interest income this quarter. I assume we should all be thinking to that, that continues to grow."}, {"role": "user", "content": "And then on the alcohol brand's gross margin, the implied number this quarter was a little better sequentially than 4Q. Anything there kind of beneath the surface that we should consider in trying to model that business? Because it's clearly a lot harder to see what's going on there than sort of the legacy business. Thanks."}, {"role": "assistant", "content": "Okay, here we go."}, {"role": "user", "content": "Go ahead, that's fine."}, {"role": "assistant", "content": "On the alcohol side, I think that what we did was we had quite a drop-off in the Seltzer business which is part of the brands that we acquired. And that affected in an operating business where they're running their own production, that affected their overhead costs because you've got some fixed costs. So as you noted in the earlier last quarter of last year, we reported on the margins were really very thin on what we call the legacy business. Those margins are improving. We're busy sort of refitting the one line out to be able to increase the capacity for doing the Beast products. And as we go forward, we will start seeing an improvement in the margin in the legacy business. The margins on the Beast side are healthier, quite a lot better than on the legacy craft business side. And as again, as those are probably smaller, lower now than they'll be as we start getting some scale, we are doing some co-packing, we will be using our own facility, and we'll obviously be maximizing that. And as we go forward, we will start working on using additional co-packers where we will actually lower our costs. So we do think there will be additional additional margin going forward. But it is a thinner margin product than we obviously are traditionally used to seeing on the Monster side."}, {"role": "assistant", "content": "And maybe Hilton, you want to take the question on the cash side?"}, {"role": "user", "content": "Yes, Mark, we continually are examining options to deal with our cash balances and something that again, is a Board issue that is receiving attention. So I really don't want to comment more than we have, that our intention is to hopefully buy back shares, continue that program. But we are looking at some opportunities for further investments. And that's too premature to talk about them. But there are a number of possibilities that we're looking at. And in addition, it is our plan to continue buying back our shares."}]}, {"messages": [{"role": "system", "content": "And at this time, we'll be concluding today's question-and-answer session. I'd like to turn the floor back over to Mr. Rodney Sacks for any closing remarks."}, {"role": "assistant", "content": "Thank you. On behalf of the company, I'd like to thank everyone for their continued interest. We continue to believe in the company and our growth strategy, and we remain committed to continuing to innovate, to develop and differentiate our brands, and to expand the company both at home and abroad and in particular, capitalizing on our relationship with the Coca-Cola bottler system. We believe that we are well positioned in the beverage industry and continue to be optimistic about the future of our company."}, {"role": "assistant", "content": "We hope that you remain safe and healthy. And thank you for your attendance."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] Our first question comes from the line of Nigel Coe with Wolfe Research. Your line is now open."}, {"role": "user", "content": "Thanks. Good morning, everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Good morning, and Pat, look forward to meeting you soon, and Don, congratulations on hiring Chris Nelson. He's someone we know really well, so good guy."}, {"role": "assistant", "content": "Thank you."}, {"role": "user", "content": "So my question is really just -- maybe just more detail on the Tools & Storage sales in North America. You talked about footprint of sales being above 2019 levels, but just wondering how that looked year-over-year, maybe the fact the Pro and DIY."}, {"role": "user", "content": "And then the pricing of 2%. To what extent was that a lot of promotional activity around maybe outdoor? And how do you see pricing trending through the year? Thanks."}, {"role": "assistant", "content": "Yes, I'll give a little color on POS, and then ask Pat to give a little color on the pricing part of the question. So I, the POS trends are obviously, when you look at them year-over-year, for some of our customers, they're down in the mid-single digits to high-single digits. Other customers are only down in the low-single digits to flat. So you got a mixed bag of different things happening there, but overall, we are seeing, POS down year-over-year in Q1, and that trend will likely continue in Q2 at a lesser magnitude because as the comp gets easier from Q1 to Q2, that trend will continue."}, {"role": "assistant", "content": "The trend around PRO continues to be very healthy. We're not seeing any major shifts in that dynamic. The consumer side continues to be relatively flat sequentially to what we've been experiencing for the last, two or three quarters since the second quarter of last year. No major shifts there, but certainly not any strengthening on the consumer side as people continue to shift their dollars to different areas across the United States."}, {"role": "assistant", "content": "But overall, I would say POS is kind of trending the way we would expect. Outdoor is a little choppy in the last six to eight weeks, as we saw a pretty rough March due to the weather. Things got better first half to the later stages of April as the weather got better, and then obviously we've seen a little bit of bumpiness in the last week or so as the weather hasn't been great in the Midwest and New England and Northeast in that time frame. And not to be a weather forecaster, but the weather is looking much better as we go into next week, so hopefully that trend shifts back to a positive. But it's a little bit of choppiness."}, {"role": "assistant", "content": "I think, all of us, the retailers, our customers, ourselves, are all looking at probably the next month or so as to what the trends will be in POS, and that will really ultimately define the success of the season. But I do think we've factored our guidance in a way that allows us to navigate that effectively. And, Pat, maybe a little color on price now."}, {"role": "user", "content": "Pricing environment has been stable. The price increase dynamic for us that you referenced in the first quarter was largely a carry-in price increase. Broadly in the channels and across competitors, the pricing environment remains stable. It appears to us that most in the market are focused on margin enhancement and, therefore, preserving pricing. We don't expect additional price in our outlook through the balance of the year, so stable pricing. We will be, given the supply chain improvements we've been making, we will be engaging in traditional seasonal promotions throughout the year, so that dynamic will be returning, but that's less of a new pricing dynamic and more of a return to traditional seasonal promotions."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Julian Mitchell with Barclays. Your line is now open."}, {"role": "user", "content": "Thanks very much. Maybe just my question would be around, when you think about that uplift of margins from sort of low single digits amid the high single digits in the second half, maybe try to parse out how much of that is sort of sales uplift versus less destock versus less underproduction, and how we think about the phasing of third quarter versus fourth quarter earnings, anything major to call out there?"}, {"role": "assistant", "content": "Yes. Most of that margin uplift from the first half to the second half is driven by gross profit margin uplift as opposed to some particularly strong volume or SG&A component, and most of it is, as we get into the back half of the year, you'll have more of the progress and the transformation going through the income statement and less of the inventory destock and production curtailment providing headwinds in that. And the order of magnitude is in the 300 to 500 basis points of gross margin improvement first half to back half."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Tim Wojs with Baird. Your line is now open."}, {"role": "user", "content": "Hey. Good morning, everybody, and welcome Pat. Maybe just on the channels, I guess, what do you -- it sounds like you've got kind of varying levels of kind of POS activity between your customers. I mean, how does that kind of translate into channel inventory and kind of what they're holding and kind of what their comfort of, you know, current channel inventory is looking like?"}, {"role": "assistant", "content": "Yes. Thanks for asking that question, Tim, because I didn't really get into that when I was talking about POS. But, yes, I would say the inventory levels in the channels and our major customers in North America and Europe are still high when you kind of look at traditional historical levels of inventory, but they are starting to come down. And so we're starting to see improvement in that. And I think for us in particular, the good news has always been that we weren't starting with a high level of inventory compared to maybe other folks within the industry and other competitors. So when you look at Home Depot as an example, we're not far away from where you would traditionally see. We're within a week or so of what we would typically want it to be and what they would want it to be. Lowe's is a little bit higher than that, but Lowe's tends to run at a much higher level of inventory, as we all know, versus Home Depot, so we feel pretty good about it. I think you'll see a continued little bit of working down of our inventory and our customers in Q2 and maybe a little bit of that in the Q3 as we work through the year, depending on where demand goes. So I don't think we're done with the destocking, but I think it's something that's very manageable for us versus maybe what some of our competitors are dealing with right now."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Josh Pokrzywinski with Morgan Stanley. Your line is now open."}, {"role": "user", "content": "Hi, good morning, guys."}, {"role": "assistant", "content": "Morning."}, {"role": "user", "content": "So, Don, I just want to maybe follow up on the SKU reduction. So for what you guys have contemplated and maybe what you've done so far, what has been the drag on organic growth? I guess how much of that drops through to, you know, just kind of, you know, shelf space loss, etcetera, versus something you can backfill with similar products?"}, {"role": "assistant", "content": "Yes, that's a good question for me to clarify. Thank you for asking that. So we're being very thoughtful on how we do this. And so those 60,000 SKUs is a lot of SKUs. When you hear about that, you start to wonder if that's going to have an impact on revenue. But the ones that we've eliminated in the first phase really had, very little revenue tied to them and very little inventory in the system. So, it was really just eliminating something that hasn't really been selling over the last several years. What you're left with now are the ones that, which is about 45,000 SKUs, that we stopped manufacturing, there's revenue tied to that, and there's inventory in our system tied to it as well."}, {"role": "assistant", "content": "And so, you need to go through a thoughtful process with all of our customers of conversion from those products to other products that exist in Stanley Black & Decker that are very similar in nature. Now, whether that's an upgraded version that has been upgraded through innovation and the customer is still selling the older version, it could be an example of that. It could be an example of a brand being sold under a certain product and that we want to switch that brand over in that particular customer to a similar product but a different brand. And that takes probably 12 to 18 months to navigate through. And so, it's going to be a very slow methodical process with the overall objective being to not have an impact on revenue and to really minimize any potential write-outs that might exist in the world of inventory. And so far, the team has been very successful in doing that, but there's still a lot of work ahead of us. And we have dedicated resources that are focused on this within our tools and outdoor business. And they have a very good grasp of the commercial aspects of this as well as supply chain. And I think they're doing an effective job so far navigating through it. Thank you. Our next question comes from the line of Michael Rehaut with JPMorgan. Your line is now open."}, {"role": "user", "content": "Thanks. Good morning, everyone. And Pat, welcome and nice to see you again, so to speak. First, well, I guess my only question; I wanted to get a sense of maybe if I can kind of break it into two parts, actually. One is just a clarification on the first quarter results. What drove the upside on the operating margins? I believe you're looking for something more flattish to 4Q. But then secondly, on the guidance, you talked about PRO remaining healthy. I was just curious in terms of how you're thinking about PRO, particularly in the back half. And when you think about tools and storage with the guidance in the base case, if that is looking for a positive inflection or just being more flat, and how PRO figures in that?"}, {"role": "user", "content": "Yes, Mike, thanks for the question. In terms of the first quarter favorability, we are executing well on the transformation. And so the transformation is running ahead of plan. And we're feeling good, not just about 2023, but about the road beyond 2023 and delivering on that transformation. So I would say just, when you get to the phasing of it throughout the year, that's more just it's difficult to predict perfectly how inventory rolls off your balance sheet and what level of inventory rolls off your balance sheet. So I would say having guidance that's highly consistent with the original guidance of low 20% gross profit margins in the first half and high 20% gross profit margins in the back half is the way you should think of the business. You should have confidence in the transformation delivering that. And the way it flows quarter to quarter is always going to depend a little bit on mix and what type of inventory is coming off the balance sheet. So I wouldn't subscribe anything other than that to the first half gross profit margin. Solid transformation performance and just an update on where the inventory is falling off the balance sheet. In terms of the outlook of the end market dynamics in Tools & Outdoor for the balance of the year, we would expect what we've seen in the first quarter to persist throughout the balance of the year, which is continued strength in the pro-environment and a softer consumer environment and that dynamic to be relatively consistent across the quarters but as Don mentioned earlier, Q&A, the comp gets easier as we get from the second quarter to the third quarter. So it's less about a change in end market buyer behavior in the last three quarters of the year, and it's more the comp easing in the latter part of the year."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Chris Snyder with UBS. Your line is now open."}, {"role": "user", "content": "Thank you. So the Q1 inventory reduction certainly seems to be tracking ahead of expectations. But you guys left the 1 HD stock guide unchanged at 500 million. Does this signal that maybe some of the destock was pulled forward into Q1? Or should we think about potential upside on the rate of the first half destock? Because it does sound like outdoor is improving in April relative to March. Thank you."}, {"role": "user", "content": "Yes, I'd start by reiterating that, we're committed to destocking 750 million to a billion for the year. And that's the commitment. And the team is working through that, given a dynamic macro environment. The reason to not change the flow throughout the first half and the second half is really, channels remain conservative as you would expect with a dynamic macro environment and relatively high short-term borrowing costs. And so, we'll continue to navigate the same environment that they're facing and achieve the year. But right now, it's just too soon to change our outlook on the first half and the second year, second half inventory changes."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Eric Bosshard with Cleveland Research. Your line is now open."}, {"role": "user", "content": "Thanks. Good morning. Patrick, I hear the guidance on the 750 to a billion. I'm curious as you think about solving that in an environment where retail inventories are a little bit heavy. The demand is where it is. I'm curious as you think about promotions and really working through your inventory into an environment where things are slow and the inventories are a bit heavy. Is there a desire to be patient in the pace at which you work through that inventory? Or is there an opportunity to be more aggressive through promotions to clear out that inventory through 2023 to be better positioned for 2024? How do you navigate or solve through that dynamic?"}, {"role": "user", "content": "Now, thanks for the question, Eric. Our inclination is to be more thoughtful around sales and operations planning. It is not our intent, except for around the SKU rationalization areas, it's not our intent to drive an inventory change through aggressive pricing. That is not our intent. We're going to be disciplined on pricing and we're going to be focused on improving margins throughout 2023 and beyond 2023. So we'll be addressing that, Eric, really by internal planning around production relative to sales and we'll update, the guidance as appropriate as the macro unfolds and as channel behavior unfolds."}]}, {"messages": [{"role": "system", "content": "Thank you. This concludes the question-and-answer session. I would now like to hand the call back over to Dennis Lange for closing remarks."}, {"role": "user", "content": "Thanks, Shannon. We'd like to thank everyone again for their time and participation on the call. Obviously, please contact me if you have any further questions. Thank you."}]}, {"messages": [{"role": "system", "content": "Our first question will come from the line of Andrew Uerkwitz with Jefferies. Please go ahead."}, {"role": "user", "content": "Hey, thanks for taking my questions. I just got one kind of on June and then kind of a big picture question. Chris, could you help me reconcile a little bit the June guidance? I think a year ago, you had one title, in the June quarter, you have five this time. And then clearly, there is some strong momentum in live service. So, is this cautious guide? Is this -- is there something in the live service momentum that slows down? Just a little bit more color you can give on June would be would be great. Thank you."}, {"role": "user", "content": "Hi, Andrew. So, you're talking about the -- our guide for Q1?"}, {"role": "user", "content": "Q1, yes. Yes, Chris."}, {"role": "user", "content": "Yeah. Right, so, specifically, our guide in Q1 is driven really by the performance of our live services business and as you pointed out, we have some year-over-year things on a new launches that are driving that performance."}, {"role": "user", "content": "It just -- but it seems like the five games should drive more than $200 million, right, if I'm doing the math right? Or is it --"}, {"role": "user", "content": "Yeah. And --"}, {"role": "user", "content": "Go ahead."}, {"role": "user", "content": "No, no. No, sorry. And we're happy to sort of take you through sort of line by line on that, but it is relative to the size of the launches, I think, that you're referring too."}, {"role": "user", "content": "Got it, okay. That's great. Yeah, thank you. And then just kind of big picture. Some of the trends that I think you saw on the previous quarters around kind of weakness in smaller titles, I think you guys or some of your peers called out this idea that gamers are kind of coalescing around the biggest titles. Are you still seeing that? And then secondarily, maybe more importantly, how has that impacted where and how you invest in future titles? Thank you."}, {"role": "assistant", "content": "Yeah, thank you, Andrew. I think it's a great question. As we look at the marketplace and as we look at consumer trends, I think there's two things happening right now. One, which -- and both kind of end us in the same place, but I think one is more short term and one has much longer term -- more longer-term ramifications. The first is, anytime through the history of our industry, that there is any kind of consumer softness or consumer trepidation around spending, also macroeconomic uncertainty, what we typically see is consumers move towards the biggest brands and the biggest titles and the most recognizable experiences. And that really comes down to kind of general consumer behavior, which is, they have less money that they're willing to risk against new things or smaller things or unknown things. And typically, our brands like FIFA, like Madden, like The Sims have performed very well at these times. That, however, is a moment in time, and our expectation is that as we move through this particular phase and as consumer spending continues to strengthen over time that there'll be opportunities for new titles and new brands. What we -- but what we don't think that will outweigh is this movement to these broader social ecosystems at our games as platforms."}, {"role": "assistant", "content": "At the very core, we are a games company, but what we are seeing is the evolution of the definition of a game and you hear us talk about play, watch, create, connect, and it's really that last piece -- that connection piece that is driving the future of our business, and as we think about building FC for the future, as we think about building The Sims for the future and Battlefield and Apex and Skate and other properties in our portfolio, we really think about that in the context of building games as a platform or content as a platform to drive these long-term businesses across play, watch, create, connect. We think this will be longer-lasting in the present kind of macroeconomic climate and, certainly, that's where we're investing meaningful parts of our time, money, and resources over the coming years."}, {"role": "assistant", "content": "That's not to take away from the opportunity to launch incredible things like Jedi, which we've just done, which tell unbelievable stories in an interactive world and become a meaningful part of a bigger brand IP like we have with Star Wars, but certainly, as we balance out our investment over time, a great portion of our investment will go into these building games and experiences that entertain massive online communities. We'll then follow up with a more focused, deliberate investment against telling blockbuster interactive stories, and we think that there'll be opportunity for investment over time with the extension of these social and creator tools, both for the in-game experience and beyond the big game experience broadly and you'll see us do some more of that, particularly in the world of EA SPORTS in the coming year."}, {"role": "user", "content": "Thank you. I appreciate that color. That's a great answer. Thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question comes from the line of Benjamin Soff with Deutsche Bank. Please go ahead."}, {"role": "user", "content": "Hey, guys, thanks for the question. Just wanted to dig in a little bit on the expectations for FC. Obviously, you guys had a record year for the franchise, and you're expecting low-single digit growth in the upcoming years. So I just wanted to better understand the drivers there and I think if you see any challenges or execution risks as you go through the rebrand. Thanks."}, {"role": "assistant", "content": "I'll touch on this broadly, and I'll let Chris kind of talk a little bit more on the details of how we're forecasting and planning. First and foremost, we're coming off an extraordinary year. Football, as a sport, is growing globally. We think the World Cup did great things for continuing to grow the sport broadly and the fan ecosystem around the sport. I think what we've been able to do with our football franchise is really become central to the fabric of football culture, and the results that you are seeing is really demonstrative of that importance that we play in that fan football culture. My belief -- and my belief all along has been that as we move through this rebrand and certainly, as we talked about in the prepared remarks, this rebrand was probably the single biggest rebrand moment in the history of -- in the history of the company and almost certainly, the most successful by a fairly wide margin. We've never seen this kind of consumer energy -- and this kind of positive consumer energy around a launch of this nature, particularly for a business that we've been in for 30 years."}, {"role": "assistant", "content": "And so, I continue to believe that moving through this rebrand actually presents us extraordinary opportunities for growth, and I've talked about this before in the context of what we can do for the player broadly, how we can extend the play, watch, create, connect experience, how we can extend the relationships that we have with commercial brands that are equally valuable in football fan culture over time. And I think that as we move through this year and you see what we're doing in the context of the game experience and what's going on around that, we feel very bullish and very confident around growth opportunities of our football business, but we're coming off a pretty big year, and it's a pretty big comp. And so, I'll hand off to Chris, who's going to talk you through how we're thinking about that."}, {"role": "user", "content": "Yeah, thanks, Andrew. Exactly as Andrew said, we're seeing an incredible year for FIFA. We talked about it extensively on the call. Actually, FIFA, for the full year across all platforms, grew 20% this year in constant currency, and that's off of a '22 that also grew double-digits and so, the momentum in the business has been fantastic. As we look forward into the launch of FC, as Andrew I said, we're really focused on the player experience and making this a great experience. We're pleased to be able to grow the business again off of two consecutive years of double-digit growth."}, {"role": "user", "content": "Okay, great. And then just one on the guidance. I think last quarter, you talked about mid-single digit operating income growth, and if I'm doing my math right, I think the midpoint of your guide implies more of a low-single digit growth rate. So, first of all, is that correct, and what changed? And is it FX or maybe something else? Thanks."}, {"role": "user", "content": "Yeah, sure. As we gave the guide at the beginning of Q4, we went through a number of planning assumptions that we shared with you in terms of what we saw in terms of player engagement, quality games, and execution. I would say, the biggest difference between now and then is honestly the performance that we had in Q4. We had an incredibly strong Q4, exceeding our own expectations on a number of fronts that we talked about in the prepared comments and as we look forward into '24, our outlook and our planning assumptions for '24 in many cases remain unchanged, in the sense that all the things that we focus on, which is quality of games, execution, and delivery of our resilient live services, those remain quite stable and consistent and unchanged, and I would say that the comp is just quite a bit higher."}, {"role": "user", "content": "Okay. Makes sense. Thank you, guys."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Matthew Thornton with Truist Securities. Please go ahead."}, {"role": "user", "content": "Hey, good afternoon. Thanks for taking the question. Maybe first on Star Wars Jedi: Survivor. Andrew or Chris, I was just wondering if you could maybe give us a little color, put a little more meat on the bone, just maybe how that's faring relative to its predecessor and how to think about that title for the balance of the year? And then just secondly, on mobile, we've got the Lord of the Rings title here in the first quarter. Curious, how material you think that can be to the full year, and mobile, more broadly, looks like it's starting to perk up a little bit or stabilize a little bit. Maybe just a little more color on what you're seeing in that market as we head into fiscal '24. Thanks so much."}, {"role": "assistant", "content": "Yeah. On the Jedi piece -- and I'll let Chris touch on Lord of the Rings, maybe, Laura can give you a little bit more color on the launch of that and what we expect. On Jedi, again, we are overjoyed. We made the bold decision to move the title six weeks to give the team the opportunity to really get to the quality of games they wanted. And of course, as you heard in our prepared remarks, the quality has been very, very strong, and many are proclaiming that it's going to be a game of the year contender. And certainly, playing it and speaking to people who are playing it, it represents incredible storytelling in the Star Wars universe. And so, I think we're building on where we were with Jedi: Fallen Order, and we're -- and it's certainly been a very strong launch for us. It's very early. I think, we're 11 days in at this point, we're in a different kind of market dynamic, but I would tell you, it's pacing very strongly against our expectations and against Jedi: Fallen Order."}, {"role": "user", "content": "Great, thanks. The only thing I'd add to what Andrew said about Star Wars is that, as exactly as he said, we're incredibly excited about the launch. This is a title that we expect to contribute to our financial performance for a very long time and so, we're in early days. In terms of the Lord of the Rings mobile launch, again, another title we're very pleased at in terms of the quality of the game and the expectations around it. We are being modest and prudent in terms of the underlying implied financial performance within our guide, consistent with what we've talked about in terms of launches of some of our other titles over the last couple of quarters."}]}, {"messages": [{"role": "system", "content": "Our next question will come from the line of Clay Griffin with MoffettNathanson. Please go ahead."}, {"role": "user", "content": "Hey, good afternoon. Thanks for taking the question. I had a question on Apex. I just -- I noted that Overwatch is experimenting with its first kind of IP crossover collaboration, what have you, and correct me if I'm wrong, it's not -- it has been a lever that Apex has really pulled. So I'm curious, just to get your sense of the pros and cons of maybe going down that road. I don't know if it makes sense strategically for Apex, but just kind of the broader point is just trying to better understand kind of what you guys want to do with Apex in terms of monetization or engagement as it relates to those types of activities. Thanks."}, {"role": "assistant", "content": "Yeah, I think what you've heard from us and, certainly, the performance in Q4 is a testament to this, is Apex is one of the strongest franchise in our industry and certainly one of our strongest franchise. When we talk about content as a platform or a game experience as a platform, Apex is certainly front and center as we think about our business model. We have a substantial player base with incredible retention and as is the nature of these free-to-play environments, there are ebbs and flows, and I think what is unique to Apex is its ability to engage and reengage through those ebbs and flows. We're going to continue to invest in the IP broadly, both geographically from a platform, extending modalities of play, extending story. And I -- for what it's worth, I don't think anything is off the table. I think that as we think about game IP today, it's kind of like comic book IP of 20 or 30 years ago. This is the IP that Gen Z and Gen Alpha perhaps identify mostly with, and I think the opportunities for us to continue to grow and expand and stretch the nature of the experiences that we're able to offer to our global player base over the next decade and beyond is unfettered."}, {"role": "user", "content": "Great. Thanks, Andrew. Appreciate it."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Mario Lu with Barclays. Please go ahead."}, {"role": "user", "content": "Hi, everyone. This is Johnny [Phonetic] on for Mario. Thanks for the questions. Two, if I can. So, is there any color you can provide on your mobile revenue outlook in fiscal '24 that's embedded within the guide? And then secondly, for EA SPORTS FC, appreciate the color on the slides that fiscal '24 bookings anticipates low-single digit growth for the title. Are you expecting any margin benefit that will flow down to the bottom line now that the FIFA license has gone? Thanks a lot."}, {"role": "user", "content": "Thanks. Thanks, Johnny. Let me address your first question. I'll start there, and then I sort of missed the first part of your second question, so if you could repeat that here in a second, but in terms of the mobile growth for next year, our expectations are that mobile business in aggregate will be down year-on-year after FY'23, a large part of that due related to the decision to sunset the Apex mobile title. And so that, obviously, is in the comparable for '23. It won't be in the comparable for '24 and that's a big piece of the mobile business revenue performance expectation for '24. And can you go ahead and repeat your second question? I missed the first part of it."}, {"role": "user", "content": "Yeah, yeah. Got it. So, are you guys just expecting any sort of margin benefit that will flow down to the bottom line without the FIFA license for EA SPORTS FC?"}, {"role": "user", "content": "Got it. Okay. It's FC. I missed the part, which game you were referring to. So, thank you for that clarification. As we think about the transition to FC, we really are focused on the player experience and making this transition a great one for our fans around the world. We are going to invest behind that across our brand, rebrand launching as well. And so, as you think about the total economics of the business, I would not anticipate it being materially different year-on-year."}, {"role": "user", "content": "Got it. Thanks. I appreciate it."}, {"role": "user", "content": "Yeah, Mario, I like to -- I'd just like to add some context -- a little bit more context maybe on how we're thinking about mobile -- our mobile growth and even our future beyond this coming year. I mean, clearly, we've all seen mobile grow in the past decade from $11 billion to $106 billion globally, which is massive and significant, but what we'd like to share is that the industry pursued that growth with the philosophy of user acquisition or development for that matter at any cost. And how we're looking at things now is that that era is over. The economics didn't make sense, and we were really focused on -- the industry was kind of focused on the wrong things. How we are looking at it and how we -- what we are prioritizing and our new management kind of a refined approach is around profitable growth. So this means equal attention to topline and bottom line in the market and our business dynamics."}, {"role": "user", "content": "It's easy, clearly, to focus on topline and just look at that growth area, but when we look at our business and our new management approach, we have seen mobile profitability across our portfolio in the last two to three years increase. And specifically, when we look at Glu, we've increased from -- increased three times from FY'22 to FY'23 in our profitability. So, we're really pleased that under our management and how we're thinking about things that we are still focused on growing the overall business in a profitable way."}, {"role": "user", "content": "Now, a couple of things. Andrew mentioned and has outlined incredibly well about this connected ecosystem and our connected communities. Mobile is going to play a meaningful role in that. When we look at our FIFA success, which we've talked a lot about in this call already, but it's just so strong and it's been such a meaningful contributor to the overall ecosystem, players that play FIFA HD and mobile generate a far higher daily average revenue than FIFA players who only play on just one platform. So we know that there's a meaningful contribution that mobile can play in the overall ecosystem."}, {"role": "user", "content": "The second area that we're spending a lot of time in is our existing live services. So, we talked about -- earlier about that we launched the Lord of the Rings game clearly, and that has really modeled after our Star Wars: Galaxy of Heroes game, which has generated nearly $1.5 billion over the lifetime. When we look at the market and we evaluate what's working, when you look at the top chart in mobile -- the top 10 charts in mobile, only two entrants have come in the last two years. Everything else has been there for quite a long time. So, we see a pretty significant runway and continued growth potential in our existing live services. We have Plants vs. Zombies. We have Sims. We have Design Home. Clearly, we have FIFA, we have Tap Sports. We have a really meaningful live service business that we see a really strong runway and still again -- and growing that in a profitable way."}, {"role": "user", "content": "Appreciate the color. That's all from me. Thanks."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Thanks so much for taking the question. And maybe if I could go back to ask another big picture. One, obviously, there continues to be a lot of debates in the industry about distribution and content companies and vertical versus horizontal scale in the industry. Andrew, I want to know, as we get deeper into 2023 and even against some of your longer-term thoughts, how are you thinking about scale, both from a distribution standpoint and from a content creation standpoint, and how that factors back into possible capital allocation for the company over the medium term? Thank you so much."}, {"role": "assistant", "content": "Great question. As you might imagine, we spent a great deal of energy thinking through this puzzle. I think on balance that -- what we have done as a company over the last 40 years is navigated various distribution modalities, from cartridge to disk -- floppy disk to cartridge, cartridge to disc, disc to digital, digital to live service and our expectation is that we'll continue to evolve and we think we're at the forefront of that, particularly as you think about our live services business. When we think about scale broadly, I think there are three core elements to scale. One is the scale of our network, the amount of players that we interact with each year and each month. And as we talked about in the prepared remarks, we've just hit 700 million, which is an extraordinary amount of people and represents some of the greatest scale in and around our industry."}, {"role": "assistant", "content": "The second area of scale, of course, is meaningful IP and what we've discovered over time is that our biggest brands continue to get bigger as we invest in them and this year, as we take more ownership over our football brand with FC, but certainly. FC and Apex and The Sims and Battlefield, and Need for Speed, and so many of our great brands that -- there's a level of portfolio scale that gives us optionality for the future that most in our industry or in entertainment broadly, just simply don't have the benefit of, but there's another element of our business that I think is the most important, and that's our people. We -- the scale of teams that we have that can deliver titles and content and live services year in, year out, and has continued to do that through the ebbs and flows of our industry and through the dramatic consumer trend changes and distribution changes and platform changes. Many other companies have tried and not many have succeeded as it turns out."}, {"role": "assistant", "content": "And as we look to the future and as we see that interactive entertainment is becoming a more and more important part of entertainment broadly, I think that our scale -- our team's scale is actually one of our greatest strengths. Our ability to launch the number of EA SPORTS games and updates every year, our ability to take Apex to 200 million people, our ability to take The Sims to 70 million people, our ability to bring Battlefield back in an entirely new way in the future and reinvent and rethink what Skate might be as a consumer connection platform around Skate culture. There are very few companies, if any, in our industry or in entertainment more broadly that can do that at the scale that we can do it and it's inherent in who we are as a company, we invest deeply in it, in the culture of our organization, in really supporting creators. And I think that as we move forward in entertainment that the combination of our network, our IP and, more importantly, our teams, gives us the kind of scale that means that we have unbelievable opportunities for growth and certainly opportunities for success as we embark in what will be a new competitive marketplace."}, {"role": "user", "content": "Thanks, Andrew."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Stephen Ju with Credit Suisse. Please go ahead."}, {"role": "user", "content": "Okay, thank you. So Andrew, as I listen to you talk about the connected ecosystem, as well as blockbuster franchises, it seems like the complexity to develop a really successful franchise is only ratcheting higher and hence, there is probably a higher level of risk around all of these projects as well. So, do you think you will allow development teams in, say, the non-sports games, longer lead times to make sure the quality is high, and the risk to franchise damage is minimal? Thanks."}, {"role": "assistant", "content": "Yeah. I think it's a great question, and I go back to some of the comments we made earlier, which is, as we think about the notion of a game, the definition is evolving pretty dramatically. And so, when we think about time for development, it's not just the creation of a world or the development of characters or the telling of a story. It's really about how do we build this as a platform that drives long-term live service business over a 10-plus year period and I think as we think about supporting and investing in and growing our creating capabilities, our development capabilities, our studio capabilities, that's really where we're investing meaningfully. And on balance, yes, we will give them more time, and we will let them evolve how they build and what they build, and how they launch their games over time, but it's really not just about the complexity of games. It's really about the changing nature of what it is that we're building, but more importantly, the changing nature of how we derive value from that development over the long term."}, {"role": "assistant", "content": "And so, where we once built games in one year or two years and then monetized them over five weeks or five months, now, games as a platform are taking longer, but the benefits are exponentially greater, and what we're seeing out of FC, and what we're seeing out of Apex, what we're seeing out of The Sims, which again launched in 2014, is meaningful return over a decade's long life cycle. And as we set ourselves up for the future, that's going to be a meaningful part of how we invest in our company, how we invest in the content and service that we provide to players, and how we support our development teams to do that."}]}, {"messages": [{"role": "system", "content": "Your next question will come from the line of Mike Hickey with Benchmark. Please go ahead."}, {"role": "user", "content": "Hey, Andrew, Chris, Laura. Good evening, guys. Thanks for taking my questions. Just two for me. First one, just how you're thinking about industry consolidation, assuming Activision deal gets blocked here, what you think the implications are for the broader industry and on consolidation, Andrew? Second question, not intended to be a softball question here, but curious on AI and development, thinking about opportunities, challenges, winners, losers. It seems like you guys have been very proactive here, already starting to see the success of AI on development, but just curious what you're doing today, the success you're finding, early learnings, and how you think about a step-up growth opportunity over the long term. Thanks, guys."}, {"role": "assistant", "content": "Yeah, great questions. Let me touch on the first part, and then I'll hand over to Laura to provide a little bit more detail on the AI part, in terms of what we're doing. So first, as it relates to consolidation, I'm sure you recognize this is a question I get asked a lot. I almost -- I'm never allowed to answer that question as it turns out. What I would say is, I don't know what's going to happen with Activision and Microsoft. Again, we continue to be Microsoft's biggest partner. I think we're the number one publisher on their platform. So whether that deal goes through or not is not really material to us broadly. We think we have the scale -- again, back to our network, our IP, and our talent to continue to navigate the future and lead the future of entertainment and compete in a marketplace regardless of whether that deal goes through or not."}, {"role": "assistant", "content": "Longer term, will there be industry consolidation? Will there be broader entertainment consolidation? If I was predicting the future over the long term, I would say that's an almost certainty at some level. I would love for us to have the scale to be a meaningful consolidator in that space. I think that we have tremendous assets with respect to the future of entertainment, but as it stands today, I think that we're indifferent as to whether that goes through or not. We feel like we have an incredible strategy. We feel like we have an incredible opportunity and whether it goes through or not, we will continue to be the number one publisher on the Microsoft platform."}, {"role": "assistant", "content": "As it relates to AI, I think that, again, as an industry, we're probably going to be one of the greatest beneficiaries of AI broadly. I think that it will allow us to do what we currently do more efficiently. It will allow us to actually do more things as we think about being creators, our ability to use AI to augment our incredible teams and create even more entertainment for an audience that has an insatiable appetite for what we're doing. And then, ultimately, to allow AI to help our players and our fans create content in our world represents significant opportunity for us."}, {"role": "assistant", "content": "One of the things that we're also very cognizant of is, there are also fears around AI. Of course, the fear of displacement of the workforce is something that we read a lot about and we talk a lot about and as we think about every revolution over the course of time, from the agricultural revolution through the industrial revolution and on, there has been displacement of the workforce in the near term and then meaningful increases in workforce opportunities over the longer term. And our hope is that AI represents the same opportunity and we're working very closely inside of our company to ensure that our people benefit in that way and actually facilitate them to do more things. Of course, then there is the notion of ownership of data and who owns the output of these AI models and we have -- we have the benefit of being around for 40 years and having extraordinary amounts of data from which we can use, and Laura will talk a little bit more about that."}, {"role": "assistant", "content": "And then lastly, of course, it's this notion of what about people -- bad actors using AI and I think what our plan will be is to work with others in our industry, others in entertainment, others in technology, and others in governments and regulators over time to help the laws keep up with the pace of AI so that our consumers, our players, our fans aren't subjected to bad actors and fraudulent behavior as a result of AI in our industry."}, {"role": "user", "content": "Yeah. Hi, Mike, great questions. And Andrew, you framed it -- framed the AI picture incredibly well. There's a few things I can add. Clearly, AI has been a cornerstone of innovation for years, and we have a rich history at EA with AI. I mean, as we look at this next wave of innovation in technology, we see it to be a powerful accelerator for key areas in our business. And as Andrew mentioned, we are incredibly optimistic actually about our unique competitive advantage, given our scale, given our data. Inputs into AI models will create differentiation, protecting our data for having protected IP that we can create generative content from. We have a rich library and history of assets."}, {"role": "user", "content": "So we really like how we're positioned in also, keep in mind that we have great partnerships, and we talked a lot about FC today. We are -- we did a partnership with La Liga, and there's Hawkeye data that we're able to use in our game that is not going to be available out open -- in an open public marketplace. So, again, we really like our position and the advantage that we have, given our history and who we are. And we're thinking about the advantage of this next wave of technology as the accelerator in game development for players and player experience, and then as we also think about truly live services at scale, so in game development, you would imagine the velocity of content, creative iteration is going to be advantaged greatly by having really smart content tools. Andrew mentioned the creator content, life-like animation, real-time text-to-speech for players and what that will mean for them and the experiences they have. As we think about live game support at scale, there's going to be some really great imagery detection, issue detection, economic modeling that we're going to be able to apply as we continue to grow these connected ecosystems."}, {"role": "user", "content": "So, we are pretty optimistic and excited and inspired about this new wave of AI, again, we have a rich history of it, and we're very optimistic about the years ahead and what it means to our business."}, {"role": "user", "content": "Awesome. Thanks, guys. Good luck."}]}, {"messages": [{"role": "system", "content": "Our final question will come from the line of Doug Creutz with TD Cowen. Please go ahead."}, {"role": "user", "content": "Hey, thanks. Just wondered if you could give an update on how the various projects that are associated with the Battlefield IP are progressing and maybe how that plays into some of the things you said earlier about giving your big franchises time to gestate so that they're great when they come out. Thanks."}, {"role": "assistant", "content": "Yeah. I mean, we don't have any date announcements or future announcements, if that's the question, certainly this time. What I'd say is I think we've put together an extraordinary creative leadership team. I know we've got the team gathering actually this week in Sweden. I had to call this morning with some of the leadership, and they're very bullish on how that's progressing. I think we've got extraordinary confidence in that team and extraordinary confidence in the progress they're making against the future of that franchise. And I come back to -- we're not just building a game. We're building a platform, content as a platform, to drive live services over the decades to come. And so, as we continue to move through this process and becomes appropriate, we'll share more about the future of Battlefield. But it is firmly implanted in that first pillar of our strategy; building games and experiences that attract and entertain massive online communities across platforms, across business models, across geographies. And we think that Battlefield is going to be a meaningful part of our future and we'll share more time -- share more as time progresses."}, {"role": "user", "content": "Okay. Thank you."}, {"role": "assistant", "content": "Thanks, Doug. Thank you. That was our last question. Thank you for being with us. Thank you again to all of our extraordinary teams who delivered an unbelievable Q4 in the face of some macro uncertainty. And we've set us up for a very, very strong FY24. And of course, congratulations to the Jedi team, having just launched an extraordinary blockbuster inside one of the biggest IPs on the planet. See you all next quarter."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from George Tong with Goldman Sachs. Please go ahead."}, {"role": "user", "content": "Hi, thanks. Good morning. Organic revenue growth for the services businesses decelerated to 2% in the quarter. Can you elaborate on the factors behind the deceleration in services organic revenue growth? And discuss initiatives or factors that could drive a re-acceleration in growth in the coming quarters? Thank you."}, {"role": "user", "content": "Hey, good morning. George, thanks for the question. So yes, I think overall, if you think about it in the traditional areas, our service revenue growth was quite strong. If you look at just in the RIM business is our Global Organic RIM services grew at 14%, again on an organic and constant currency basis. So very, very strong growth. If you look it on the ALM side, which is where you see the downdraft is, as I've said in my comments, is volume in this quarter was up some 30% year-over-year. So we're actually seeing the synergies -- the commercial synergies that we have as a company and as Barry mentioned, we just signed a new OEM customer as well. So we see really good traction on the volume side. But on the pricing side, if you probably have seen in the electronics industry, some of the components are down 70%. So whilst we still have positive gross margins on that business, is the revenue is heavily impacted by what we've been seeing across the semiconductor industry in terms of record-low pricing. So I think that it's really a two world. So as I say, from a -- even ALM business on a volume basis has shown traction, but it is a downdraft in terms of the overall service revenue. But the traditional areas, I would say, in terms of RIM, also, if we look at our digital services, we're also up year-over-year in the high teens, really good progression."}, {"role": "user", "content": "Yes, George, it's Barry. Thanks again for the question. The only thing I would -- only a couple of things I would add is I think the team, to Bill's point on our Global RIM is doing phenomenally well. And I think that's the way I would point you to look at the services because, of course, the ALM business is masking our total growth there in terms of what's happening with respect to the core. And at that 14% growth rate that Bill spoke about, that is up against some really big comps. So it's -- I mean, it's a very strong performance, and it is driven by the point that he made, the digital solutions as well as other core offerings, which are all growing for us. The other thing I'd kind of call out is it's a small factor, but as you know, we were doing fit-out services in data center in the first half of last year. We completed that in the second quarter. And so that makes the year-on-year comp hard just as we explained it would be. So that is another factor that's weighing on that services total growth rate that you were pointing to. I think as you move through and get into the -- see us getting into the back half, you'll see that growth rate accelerating meaningfully as we get beyond the challenges with respect to ALM and the pipeline that Bill was speaking about really comes to fruition and then we also get beyond that data center services comp in the first two quarters. Thanks for the question."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Kevin McVeigh with Credit Suisse. Please go ahead."}, {"role": "user", "content": "Great, thanks so much. Congratulations on the momentum. Barry, it looks like typically, and I'm just going off the last two years, so maybe it's not fair, you can help me with this. But the sequential EBITDA lift in the last two years have been $24 million to $25 million, it looks like the Q2 is going to be about $14 million. So when we think about puts and takes in the back half of the year, is that more project benefit from Matterhorn that allows you to reaffirm the EBITDA guidance? Is it better pricing? Maybe just help us understand the seasonality a little bit if I'm thinking about that right."}, {"role": "user", "content": "Yes. Thanks, Kevin. Appreciate the question. We feel very good about where we're trending. In fact, the first quarter came in right in line, if not a little bit better than what we were expecting in our guidance for the second quarter is similarly and that is despite the fact that we've adjusted our expectations for ALM down some in the second quarter. And the reason we're able to achieve the numbers that we're putting up in the second -- that we're projecting for the second quarter and our confidence in the back half is because of a couple of things you just pointed out. We are seeing even better revenue management projections in the business. We have, as you've seen in our Global RIM business, we have very strong storage rental growth on an organic basis, almost 9.5%, which marked an acceleration sequentially and year-on-year. Our total organic storage rental growth was over 11%, which was also very strong. And I will tell you that in light of the fact that we are going to see more revenue management activities we've recently passed some here even in the second quarter, and we'll be passing more as we move through the year, together with the fact that data center pricing continues to improve, and that's an industry phenomenon. You will see, together with that, our commencements are very strong in the back half. So data center will be accelerating as we get into the back half. And as you know, there's very strong visibility on that business. So it's a high confidence point that I'm making there. So we feel very good about where we are. In terms of -- you mentioned the specifics around second versus the -- quarter versus second half. I'll just note that in light of the timing of the U.S. dollar strength, we still have an FX headwind in the second quarter. In the first quarter, that was almost $30 million of topline. But as we said on the last call, and I'll reiterate, that becomes much more muted, in fact, may even be a slight tailwind in the back half. We also get through a few items that are in the first half from an EBITDA standpoint. As you know, we did some sale leasebacks last year and we comp over those as we move into the back half and with our productivity initiatives and additional commercial investments we've made, we get to a more favorable comp in the back half from those as well. So I'll tell you, Kevin, we feel very well positioned about accelerating business even with more muted expectations around ALM. Thanks for the question."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Jon Atkin with RBC Capital Markets. Please go ahead."}, {"role": "user", "content": "Thanks very much.Towards the beginning, you pointed out a number of wins with government agencies and large enterprises and so forth. And I was curious to maybe get a little bit more color on what's kind of the tone of discussion around sales cycle compared to what you're accustomed to? And then the competitive set that you faced with those deals to the extent that you faced with these bake-offs or just kind of the decision to go with you is really more of a bilateral discussion, but maybe a little bit about the competitive dynamics and sales cycle would be helpful for both government and enterprise? Thanks."}, {"role": "user", "content": "Okay. Well, thanks, Jon, for the question. So the -- and I was actually involved in a couple of these, so I could probably give you more color on them. The sales cycles, for instance, the aerospace company that we talked about was like over a year, but this is a company that we've been doing bits of work for decades, right? So it's a natural conversation that they start talking about, well, they want to actually do something different. And this speaks of case, they actually had an in-house vendor for part of it but that company wasn't able to do the full range of services. As I said, they were looking for someone to really takeover of full outsourcing and they're very sensitive, right? Because if one of these things goes missing, aircraft around the world get grounded. So they were very, very sensitive about the security and the reliability of their vendor. And then the other side of it, obviously, they've known us for decades in different areas that are very sensitive to them. And we were able to bring a full range of services that we're able to do, not just the storage, not just the digitization, but also to give them the tools that they could visualize what was both stored physically and what was digitized and they could do that in a consolidated basis. In other words, they could do that and see that anywhere in the world. So that was a huge win for them. Now you can say the sales cycle was like over a year. I think I've been visiting with the sales team at customer for over a year but it's been part of an ongoing conversation, and that's the power of having the 225,000 customers that we've had decades and decades of relationship. The government one, which I mentioned, which -- two of them, one was in the U.K. and one was in the -- with the United States government. For the folks that have been following the company for quite some time, we've been talking about the government sector as being our huge potential for Iron Mountain. And it was slow-going at the beginning because government contracts, as I'm sure you're aware, have very long lead times. But both of those have been customers that we've actually been working for the last two or three years with -- so again, we were -- there was a big investment, I would say, starting 5, six years ago with both the VA and with the British government in certain segments. But that's again now starting to become more of a normal course. So one level is the conversation started five years ago, but now it's just a regular course of business that some of these things are as short as three or four months' lead time where they come up with a statement of work and because we already have a track record, and we're able to do that."}]}, {"messages": [{"role": "system", "content": "Next question comes from Shlomo Rosenbaum with Stifel. Please go ahead."}, {"role": "user", "content": "Hi, thank you for taking my question. Hey Barry, you alluded a few times on the call to good revenue management and improving revenue management. Can you talk a little bit about what the pricing lift in the quarter was and what investors should expect for 2023? And you guys had very good revenue management last year. Is the revenue management straight out being able to raise prices now? Or is there some kind of favorable mix going on? Maybe you could just give a little more color there."}, {"role": "user", "content": "Okay. Goodmorning Shlomo. So thanks for that question. I think our team is doing a phenomenal job with revenue management. It's been a real standout. When you look at Global RIM in terms of its storage rental organic growth that was almost 9.5%. And as you know, we saw good solid volume trends. It was up about $2.5 million on a cube on a trailing 12-month basis. So as you can gather from that, the vast majority of the growth was driven by revenue management. And importantly, we feel very well positioned in terms of the whole year. And I'll tell you that in terms of the total storage rental growth rate that we put up 11%, which is, of course, benefited by data center commencements with what we see on data center commencements through the remainder of the year. Together with the revenue management activities we've already put in place and additional that we have going into market over the next few months, I feel very confident that we are going to continue to see total company organic storage rental growth of this order, I think, 9%, 10%, 11%. And that the environment for revenue management continues to be strong. We will have relatively more revenue management this year, Shlomo, than we did last year. And that is a factor of both what we're wrapping from last year as well as the activities we've had in this year. Importantly, we continue to see excellent customer retention, and I think that just demonstrates that we are bringing forward very significant value for our clients in these areas. In terms of mix, I would say we continue, as we talked about before, to expand the revenue management program beyond just storage. So you are seeing improving revenue management trends in our services, and that's generally across all line service in our core offerings and so we feel like it's on the right trajectory, Shlomo. Thanks for the question this morning."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Nate Crossett with BNP Paribas. Please go ahead."}, {"role": "user", "content": "Hey, good morning. This is John Carter [phonetic]. Maybe you can just remind us on the funding plan for development this year? What does the pricing look like for any debt needed? Would you do asset or company level financing? And then I also wanted your updated thoughts on the dividend here with the payout, the lowest it's been in a while."}, {"role": "user", "content": "Good morning. I appreciate the question. Let me take your last question on the dividend, and then I'll let Barry comment on the funding plan. And as you know, our plan from -- when we talked about Investor Day, it's a fully funded plan, but I'll let Barry comment on that more. On the dividend, you're right to point out is we are now in that zone when we said kind of low to mid 60% payout ratio, which becomes a natural forcing function for increasing our dividend. So that's something that we're now starting to settle into that range. So you can expect that it will just become a natural course of events as we get to that payout range, which on the REIT guidance rules just force as a natural increase in the dividend. So I think we're now in that area. So I think when we start getting into the back half of the year, and we start drifting down to the low 60s, then I think you can expect just a natural progression in the dividend."}, {"role": "user", "content": "Good morning. Thanks for the question. When you work through our guidance, as Bill mentioned, as we discussed at the Investor Day, we have a fully funded plan for this year and going forward. And as you know, we will be a routine debt issuer, and while the market has clearly been moved up in terms of rate over the last couple of years with the Fed moves, I would say it's become much more -- it's an improved market as compared to where it was over the last couple of quarters, and we see generally a favorable outlook from a standpoint of issuance. And I think from a standpoint of where we could issue today, that's improved some versus the last couple of quarters. And to your point, there's a lot of interest in asset-level financing, whether it be for construction or otherwise. And so we're looking at all those options and making sure that we have the best plan for our shareholders. But it's not something that we have to do, as you see, we have plenty of liquidity, but you should expect us to be an issuer on a routine basis. I want to just kind of continue to see what's out there from a market perspective. Clearly, rates are a little bit higher than where they were a couple of years ago, but we still see them being very attractive and partly because pricing in data center has continued to lift and we see continued improvements. In fact, year-on-year, net new retail-type data center deals we're seeing up like 20%, pretty much consistently across our entire portfolio, and that's trending more toward, I think, by the end of the year, early next year going to be about like 30%. And so that is a pretty significant move. And then importantly, on hyperscale side, I think the whole industry is generally seeing cash-on-cash unlevered returns moving up, I think something like where a lot of folks were writing in the high 7s or mid-7s, I'm seeing a lot of stuff that's in the 8s, if not even higher. And so I think that's a good trajectory for the industry. It's healthy and it supports the point that I was making earlier. So we feel really good."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Andrew Steinerman with JPMorgan. Please go ahead."}, {"role": "user", "content": "Yes, hi good morning. This is Alex Hess on for Andrew Steinerman. I wanted to ask briefly about the ITRenew callout. You highlighted that services revenue growth would have been 11% organic, excluding ITRenew, which implies a pretty sharp deterioration quarter-on-quarter and year-on-year in that business, if my math is right. Could you maybe break that out into what degree that was driven by pricing versus ability to sell through into end markets? And any other dynamics that sort of give you confidence that, that will eventually recover?"}, {"role": "user", "content": "Thanks Hess for the question. I'll start, and then I'll ask Barry to comment and really kind of talk about how we see that trending as we go forward into the year. So as I said in my comments, actually, if we just looked at volume holding pricing constant, is, quite frankly, Q1 would have been a great year for the ITRenew asset that we acquired because the ITRenew, as you know, was really focused at hyperscale. And if we look at that segment alone, I mean, we made very good progress in terms of expanding across our customer portfolio on the enterprise. But if we just look at hyperscale, which is the ITRenew asset is volume was up 30-plus percent year-over-year. So the volume growth was really good. However -- and I'm sure you're probably seeing this in some of the other companies that you follow, anything that touches the electronics industry when you start seeing what's happened to the chip manufacturers, the memory manufacturers, et cetera, is the pricing has gone down substantially in that area. So we're talking about for a number of components down over 70%. So you're right to point out, if we look at sequentially Q4 to Q1 is we have seen a drop of revenue on the ITRenew portion of the business or the hyperscale portion of the business even absent -- even -- in spite of the fact that volumes are up 30% year-over-year. So now the good news is that we do see stabilization on those prices, and we see a number of the memory manufacturers and the chip manufacturers, CPU manufacturers, we see them taking capacity out of the market, which gives us further confidence that we've seen kind of a stabilization of prices, which we've seen, I would say, starting towards the end of February going into March. So we don't see right now that the prices are going to go down further. So that's the good news. But we don't expect that the -- I would say, the chip/memory CPU market is really going to start firming up until we get into the early parts of next year. But Barry?"}, {"role": "user", "content": "Alex, I appreciate the question. I'll give you a little bit more of the detail, which you could find in our filings. So in the fourth quarter of last year, our total ALM business was about $56 million. And in the first quarter, it was $41 million. And so -- and that compares against $70 million last year. Now as I talked about previously, the second quarter of last year was in light of the timing of lockdowns and the pricing trends by the end of the year, second quarter was the peak for our ALM business at $83 million of revenue. We've assumed in our guidance for the second quarter that revenue is consistent with the first quarter this year. So that is a drag on, of course, the services growth rate in the first quarter, and it will be again in the second quarter. At the -- if you wanted to sort of sensitize our guidance, I would tell you at the low end of our range, which I did not anticipate this is what's going to happen, but just at the low end, we would assume that it just is flat at this level of revenue for the whole year. I really don't see that happening in light of the very strong pipeline opportunities we have in the trends we're seeing in the business. But that's conservative posture for the low end. What we think is probably going to happen is we will be slight to -- slightly up sequentially. We're running a little bit ahead here already in the second quarter of the projection I'm giving you. And then in the second half, the way we're planning is for the third quarter to be essentially flat year-on-year. So that implies a little bit of a lift and another lift in the fourth quarter. But I will tell you that we have pretty strong confidence in our ability to do that. And I called out one deal on -- in the prepared remarks around OEM, and maybe I'll give you a little bit more color. This is a situation where we're dealing with one of the largest manufacturers of devices in the world. There are several of those, as you know, and we're approaching all of them because what we're finding with large multinationals is very similar to our core enterprise clients. These companies are looking for a partner who can work with them everywhere they do business all around the world. They're currently using a lot of point players in very specific markets on a local basis, and they'd like to have more uniform standards and consistency, and we can provide them with the sorts of services they're looking for things like data [Indecipherable], recycling, remarketing. Ultimately, we'll be working with them on things like asset tracking and storage, IT asset management, things of that nature. So it's -- another example of how our team is continuing to diversify and grow our ALM business and it bolsters our confidence. And just to reiterate, this is a huge market ALM. We really like the space. It's very fragmented, and we think we're in a very good position to take a tremendous amount of share over time. We're working through what everyone in the industry is working through right now, which is pretty low component pricing. We feel good about the opportunity. Thanks Alex."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question comes from Eric Luebchow with Wells Fargo. Please go ahead."}, {"role": "user", "content": "Hi, great. Thanks for taking the question. So I wanted to touch on the data center demand. So you're more than 60% towards your leasing goal for the full year, so a really strong start to the year. And if you look -- it looks like your in-place and development portfolios are pretty highly leased up. So maybe you could talk about your ability to accommodate additional demand, whether through future development of your land holdings, additional expansions? And then if leasing continues to trend at a high level, could you accelerate some of your data center capex this year beyond what you initially guided to? Thanks."}, {"role": "user", "content": "Thanks, Eric. And I'll ask Barry to talk about how we think about being flexible or responsive on the capex side. But I think generally, yes, we've had a really good start, as you point out the year. We reiterated the 80 megawatts plus for the full year, even though that we've achieved more than half of that in the first quarter because I think as you can appreciate, especially with hyperscale, there's a little bit -- the timing is never fully under your control. So I would say that we -- some of that -- the new leases that we signed in Q1 were things that we expected in Q2. So I kind of think of it as two halves of the year rather than quarter by quarter, just especially when you're talking about hyperscale clients and we had one hyperscale client in Q1 that signed up in two different contracts for 44 megawatts. In terms of having enough capacity for further expansion, you see we're holding like up to 747 megawatts of land, which is a big uptick from where we were a year ago, but we are making really good progress. So we're constantly -- we're not standing still in that regard. I mean just in the last couple of months, I visited both our Northern Virginia campus with a potential customer and now done two trips with our Indian team since the beginning of the year. So both of those markets continue to develop. And we're not standing still in making sure that we have more land and more capacity to meet our growth. But if you think about just year-on-year, the uptick that we have in terms of the land bank that we have and sitting on 747 megawatts is that we feel good for the next number of quarters that we can accommodate the demand. But Barry, you might want to talk about how we think about the flexibility around capex."}, {"role": "user", "content": "Thanks, Eric. It's good to talk to you this morning. I appreciate those kind words. We -- obviously, the team is doing really well and continuing strength and strength in terms of new signings and also margin performance in our data center business. So hats off to our team there. In terms of data center capital, as you know, this year, we had penciled to deploy about $850 million of growth capex and with the vast majority of that going to data center. Year-on-year, we put a considerable incremental amount of capex into data center in the first quarter. I think we do have the benefit of so much being pre-leased and the team continue to sell that, yes, it is conceivable to me that we will be, over time, ramping our capex for data center and it's sort of a bit of a high-class problem, so to speak, as the team continues to sell through our pipeline plans. So we have ample capacity to do so in terms of deploying additional capital. We were always planning to spend from a timing standpoint, more capex, relatively speaking, in the first half this year than we did last year. As you recall, last year, it was a little bit more shaped towards the back half in terms of data center deployment where deploying a considerable amount here in the first half, we'll continue that trend in the second quarter. And after we get through midyear and see how the additional pipeline looks, which is quite strong, I'll note, at this time. As we see how that is at midyear, we may talk to you about a little bit more, but that would be a very positive development in terms of continuing to see really high levels of organic growth rates driven by commencements. As you know, we're very pre-leased in terms of our underdevelopment. I think we're now pressing over 90% in terms of pre-leased in terms of what's under construction. So it's a good place to be. The only other thing I guess I'll call out is that churn has been relatively low, and we continue to expect it to be relatively low for the full year. So thank you, Eric, for your questions."}]}, {"messages": [{"role": "system", "content": "Next question comes from Brendan Lynch with Barclays. Please go ahead."}, {"role": "user", "content": "Good morning and thanks for taking my question. I wanted to discuss a little bit about Project Matterhorn. I understand it's still very early days, but you called out some large multiple vertical wins. I'm wondering how you expect that type of contract to trend in your revenue mix over the long term as Project Matterhorn gains more momentum. Do you expect to see a lot more of these large multi-vertical wins relative to kind of the legacy revenue mix, which might have been more of a fragmented customer base?"}, {"role": "user", "content": "No. Thanks, Brendan. It really is -- first and foremost, Project Matterhorn has being customer-centric. So what we try to do is make sure we bring full range of Mountain range of services that we have to, to our customers. And if you probably got picked up on a sense is there is a big service component in some of these wins, especially around the digital side. But it's also a big co-location and physical storage. So it's almost -- if you think about even the aerospace company that I've referenced a couple of times in the Q&A and also in my remarks, is there is everything from physical storage to digitization to visualization of their assets. So there is a -- it's a full breadth of the different types of storage solutions we have."}, {"role": "user", "content": "But I think you can expect like and even if you look at our physical -- our organic storage rental revenue growth of 11%, a part of that is, as we said, 9.5% of that growth rate came from our traditionalized physical storage business a bit, but a big part of that came from our data center growth as well. So we see kind of a -- we still see storage. It's one of the most profitable part of our business. We still see that whether it's data center storage or physical document storage and other types of physical storage driving a big part of the growth of the business. But when we actually go talk to a customer, and it's really about helping the customers solve their problem, then it's usually a hybrid set of solutions, which quite frankly, differentiates us when -- even on a data center deal or a physical storage deal. They really see Iron Mountain as someone that can be a one-stop shopper relatively few stops to actually solve the problem that they're trying to solve rather than what we're trying to sell."}, {"role": "user", "content": "Brendan, I'll just add, as we talked about before, one of our key initiatives within Matterhorn is cross-selling. And if you go back to what I mentioned in the prepared remarks and our data center team signed 22 new logos within data center in the quarter and when we segment that on a megawatt basis, 75% of that was cross-sell from our existing client base, those 225,000 clients. So I think that's a good indicator of what we are trying to drive with our Matterhorn initiatives around cross-selling. Thanks Brendan."}]}, {"messages": [{"role": "system", "content": "Our next question is a follow-up from Shlomo Rosenbaum with Stifel. Please go ahead."}, {"role": "user", "content": "Hi, thank you. Bill, I thought you had missed it if I don't ask you about the underlying volumes in RIM. So I'm going to ask you now if you can provide a little bit of more color on the breakout like RIM adjacent businesses, consumer and other, just how are the underlying factors playing out and maybe talk a little bit about developed markets versus emerging markets as well?"}, {"role": "user", "content": "Thanks, Shlomo. I appreciate you coming back on. So no, so it's pretty much the same trend that we've seen. So if you think about on the record business on that side is in places like North America that are mature, I would say, it's flat to slightly down in terms of volume. Eastern Europe and some of the emerging markets, it's continued positive volume trend. And as you and I've talked about, it's really about the maturing of the markets. But at the same time, every single customer around the world is continuing to send us new, what I would call, document storage as we come into our facilities. But the growth areas, our combination is, as we've discussed before, is whether it's kind of in Eastern Europe, Latin America, Asia Pacific as well as some of the new storage areas that we're doing for our customers. So expanding what their needs are around physical storage."}, {"role": "user", "content": "So the business, as you noticed, is that -- continue to build positive volume. We continue to have very high utilization across our industrial real estate footprint. So really hats off to the team as they're continuing to provide what is a key platform or a key need for our customers around the whole physical storage pain point that our customers have across the industry. Even the aerospace company that I keep referring to is a big part of that, was providing secure physical storage, which before we weren't doing for them, but because we bundled it with a solution of really end-to-end solution around their information management and digitization of some of those assets, and we can do that seamlessly by storing those documents in our facilities for them. Even in a mature market like the United Kingdom had unlocked new storage opportunities. So it's really part of now a broader conversation of the Mountain range that we have with our customers. And you can see the numbers, it continues to kind of move forward. So thanks for the question."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now begin the question-and-answer session."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]"}]}, {"messages": [{"role": "system", "content": "Your first question comes from the line of Doug Mitchelson with Credit Suisse. Please go-ahead."}, {"role": "user", "content": "Thanks so much for taking the question. David and JB, I think most interesting, how would you define success for the launch of Max or the relaunch of Max as you want to define it? I think, there's lot of discussion in terms of choosing Max as a brand and the need to build that or rebuild that, David you mentioned actively trying to include News and sports in the lineup and so, I just curious whether it's engagement, whether it's subscribers, whether it's ultimate profitability? How should investors think about what to expect from Max in the coming quarters?"}, {"role": "user", "content": "And Gunnar, I think you made some strong statements in your prepared remarks, but obviously, a lot of investor focus on free cash flow generation and balance sheet here, and I guess the just general question is, what's your level of confidence in the balance sheet targets over the next couple of years and what gives you that confidence, especially with the year being back-end weighted? Thanks so much."}, {"role": "assistant", "content": "Thanks, Doug. So we're excited about the 23rd. And look, we've turned the corner on our streaming business. We had a different view of it. We've -- we've focused on it very hard and we built what we think will be a very strong Independent business and it starts with profitability. And so we made $50 million this quarter. Our US streaming business will be profitable for the year and we have real scale. And so, and when you run a business, you're looking for growth, which we're going to get in the streaming business, and we're driving to get throughout the company. And there are a number of areas where we think that we're, as we know that as the economy improves, we'll see real growth. But the key here is, our US stream business is no longer a bleeder. It's hard to run a business when you have a big bleeder. And so, getting this business under control, focusing on what people love to watch, how do we create content that people love. And now, as we launch Max, we'll be able to nourish and delight subscribers with the greatness of HBO, which on Sunday nights is really a cultural moment, whether it's White Lotus, House of the Dragon, The Last of Us, Succession and then put it together with Discovery, which has Discovery -- the Discovery content, which has been really strong for us."}, {"role": "assistant", "content": "So, number one, we want an easy smooth transition. That's why we're not doing anything with pricing, we focused very hard on letting everybody know how to make that transition. We have a -- right now, we have a really good hand. And so let's make the transition. We've got technology that's far superior in terms of delivering the platform itself and how it can work against all this great content, but let's do a smooth transition and then have people discover the quality content, the diversity of content and the quality of the platform itself, which will only accelerate growth. JB?"}, {"role": "user", "content": "Yes. I think, Doug, just to add on to David, I think in the very near-term migration success is sort of one key metric, are you getting the customers who are on HBO Max today successfully migrated over to Max? And then over time, there'll be three other metrics and a fourth that will come, the three would be brand awareness, obviously, we're building a brand with Max, now that is new, that has a different proposition, a broader proposition for something for everybody in the family. Number two, customer satisfaction. Number three, engagement. As we talked about on April 12th event, a lot of it is around seeing all this content coming together and the breadth of the proposition driving higher utilization and therefore, helping retention. Those I think are core ones in the initial few months and then over time, obviously, as that flywheel continues, we obviously want to see subscriber growth and scale as the additional metrics. So those are the ways that we look at success."}, {"role": "assistant", "content": "Right, and Doug, on the free cash flow question as you -- as you just heard me say in the prepared remarks, I have -- I have a high-level of confidence in our guidance and our ability to deliver here and taking a step-back, there is no doubt the environment continues to be challenging. We're working against pretty significant reductions in ad sales. And as I laid out, we see a gradual improvement for the second-quarter, but it's gradual, so, so there is that. But what you're also seeing in our results is what we refer to as a built-in hedge, right. We've got a great game, Hogwarts Legacy, box office was a little weaker, but across the entire footprint of the company, managing as one integrated company, we have enormous opportunity, and so we don't want to be in the business of predicting ad-market developments in the second-half, as I said. I am confident in our guidance without assuming a complete turnaround here because we're focusing on what we know and what we know is the control that we have over the initiatives that we put in-place over the past 12 months and they are -- we're knocking them out month-after month, quarter-after-quarter. We've got systems coming online, we've got individual workflow that are going from from 10 to 12 hours a pop to three three minutes. I mean there's a lot that's happening and we have clear milestones scheduled out for the rest of the year and looking at that, I will -- I have great confidence that we're going to continue to deliver these these improvements and as I pointed out earlier, on the cash flow side, it's even more exacerbated than on the P&L side, with the seasonality of our free cash flow. And the $930 million in Q1 was pretty exactly in-line, actually a little bit better than what we had budgeted for and with that, I have full confidence we're going to deliver free cash flow."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Robert Fishman with MoffettNathanson. Please go-ahead."}, {"role": "user", "content": "Hi, good morning. I have one for David and one for JB or Gunnar. First, David, can you expand on the strategy you mentioned in your prepared remarks. And maybe that financial benefit of licensing your HBO and Warner Brothers library content internationally and some of the deals you discussed? And how do you balance those licensing deals with your ambitions to scale Max outside the US, if and when you choose to launch in those markets?"}, {"role": "user", "content": "And then for JB and Gunnar, on DTC, anything you can share about the DTC retail versus wholesale trends, noticed the wholesale revenue dragged down overall DTC revenues and just whether that wholesale pressure should continue throughout the year? Thank you."}, {"role": "assistant", "content": "Thanks, Robert. We are, we're focused on taking HBO around the world. The fact that we have real scale around the world, that we have content in every language, we have channels in every country to promote is a real advantage for us, but we're really driven by free cash flow and long-term free cash flow growth. And so, if there's a market like India, where we could -- we could structure a deal where we can make a lot more money by licensing our great content in that market, with an option, which we always have at the end of that deal to take another look at that country with our platform that's already built. We're not building a new platform for each country and see if we can go in ourselves, can we generate more long-term profit and free cash flow?"}, {"role": "assistant", "content": "And so it's really an economic analysis. You will see in most markets, it will be us building asset value, owning it, driving it for long-term value and growth. You saw us do it at Discovery. We were the first outside the US, we were in 200 countries and it generated a long-tail of free cash flow and real EBITDA growth for us. So I'm very optimistic, we're in less than 50% of the countries."}, {"role": "assistant", "content": "It's very hard to have a business that's profitable just in the US. I've always thought that you really need to be above the globe and that's the advantage. That was the value-creation of the parent companies, that they had that scale. We own all of our content and the idea that we're starting off by having a business that's profitable this year, in the US, and then we go on this journey of driving it outside the US with a strong platform that's already built. I think it bodes very well for us."}, {"role": "user", "content": "Yes and Robert. I'd just add to what David said, there's two filters as we look at it, there is the strategic filter and financial filter that David just talked about, which obviously, is pre-eminent, which is a market like India, if we don't believe we can be profitable at a streaming service within a three to five year time horizon, at the end-of-the day, right now, that's not going to be our priority focus. And so if there's opportunities to license, take a bunch of money off the table to help support our growth initiatives in other markets where we think we can scale more profitably and more effectively, we do that, number-one. Number two, there's just a practical reality that some of these licensing deals are done in markets where we're just not going to be ready to launch from a platform perspective, as you talked -- as David mentioned in his prepared remarks, we've got a timetable to rollout our new product and convert and migrate our existing HBO Max customers over the next 12 months plus. Then some of these things are going to take into '25 and even beyond to launch in new markets for our platform to be ready. And so in the meantime, it just makes perfect sense for us to take as much money off the table as possible. And so, that's the thinking."}, {"role": "assistant", "content": "The added advantages in these markets, there's still seeding our brands in those markets. So we're getting value. The brand itself is being driven as quality curated and then we have the hand-off when we think that market can be profitable."}, {"role": "user", "content": "And we have -- sorry, one other thing I'd say is, in all these deals, oftentimes, what we've done, which is better than what we have in existing licensing deals, is ensuring that when those deals expire, we have stronger cliffs for the content to come back, so we can actually, when we're ready to launch, if we assume we're going to launch in those markets at the end of those deals, we get more of our content back immediately."}, {"role": "user", "content": "Well, the only thing. I would add is, on your revenue growth and wholesale question, two things to keep in mind, number one, Q1 had a bit of an overlay with content sales revenues and as we pointed out in the prepared remarks, obviously, the ad market, also on the digital side isn't the greatest right now. I see a lot of upside opportunity here as that market comes back. And specifically, for wholesale, remember that our subscriber base contains the linear HBO subscribers there are obviously showing similar trends to what we're seeing in other parts of the linear ecosystem. Needless to say, we expect the total to be a growing business. We'll see how the launch goes in May. We're looking-forward to getting that product out, I pointed out some of those overlapping subscribers. We'll see how those wash out, but we're definitely looking for revenue growth for the second-half of the year and then many years to come."}, {"role": "user", "content": "Great. Next question."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Steven Cahall with Wells Fargo. Please go-ahead."}, {"role": "user", "content": "Good morning. Maybe first, David, and JB on DTC profits that are tracking ahead, just curious what's performing ahead of your expectations there, is it the subscribers and revenue, is it more about the cost-reduction? And I know you're new into the Max launched domestically, but I'm just curious if you're seeing legacy HBO subscribers, which I think, David, you were talking about on CNBC this morning if you're seeing those folks engage with the Discovery content. It's kind of in different genres, but I know that's the hope. So just wondering what kind of early trends you might be seeing there?"}, {"role": "user", "content": "And then Gunnar, on the adjusted EBITDA guidance for the year, I think it's still implies low $11 billion, from your comments, it sounds like the macro is still a little tough, but you're bullish with the incremental US DTC profits. So I'm just wondering with DTC performing better and no change to that guidance, is there anything that's performing worse or is that better just kind of in the range as we think about all those different components? Thank you."}, {"role": "user", "content": "Let me to start with the second, with the guidance quickly, because you're right, obviously, the DTC point is a big, big positive driver here. The most important point as I laid out is, we have very clear visibility into our transformation initiative and the impact that's going to have on the cost base, also for the studio, definitely, a support here for the second-half of the year, very strong summer slate that we're really looking-forward to launching, and the revenues of those are going to hit from Q3 onwards."}, {"role": "user", "content": "Again, don't want to speculate about the linear business, but remember that the comp in the second-half is going to be much more beneficial, because especially the fourth quarter last year was pretty anemic in the scatter market and but at the end-of-the day, we still have a lot of shots on goal here and it's a hit-driven business, especially on the studio side. That's why we're giving a range and I feel comfortable with that range with what I know today."}, {"role": "assistant", "content": "When we think about Max, as we launch, we have real scale, quality content, a broader aperture. The real challenge is the churn. Very difficult to build a strong business with churn, the churn on Discovery Plus is quite low. The churn on HBO Max is high. And so driving that churn is as or maybe more important than driving the growth. If we can drive down the churn, the growth will be very substantial. And so we have a series of attacks in order to do that. The primary one is how do you know or some more people in the family? And the more people use it, we've seen that we've been at this in Europe for more than eight years, the more people that use it in the family, the more engaged people are, the broader the offering, the lower the churn. We also have a technology advantage now, in terms of catching people that want to buy the product that we weren't able to reach-out to. And this is a business of artillery. We're adding a lot of artillery here to the offering in order to get more -- to get more viewers in the family engaged and excited about the the amazing quality content that we have, but we have more weapons. When we have sports, and we have news, and those are on the sidelines right now, we have a great product, we're going to -- that's now going to be profitable for the year. Let's drive that -- let's drive the brand and know that we have, we can move to the left and into to the right with sports and news, which we've done in-markets in Europe, which has been additionally advantageous. JB?"}, {"role": "user", "content": "Yes, Steven. To echo what David said, we've seen it across multiple metrics. We've seen it across retention, as David rightly pointed out. We've had in the first few months of this year, record-low churn on HBO Max."}, {"role": "assistant", "content": "But the churn is still -- is still pretty high."}, {"role": "user", "content": "It's still high, but we've been with the acceptable range in order to build the kind of business that we will build, yes."}, {"role": "user", "content": "And as we've talked about at the April 12th event. That was all done through kind of what I'd call a slightly more analog attack plan, we're now getting to a tool and a platform as we launch, Max, that we think there's a lot more ammo to be able to actually attack churn and more aggressive fashion. So we think we're just at the beginning of that upswing."}, {"role": "user", "content": "The second is, we obviously had price rises in the US as well as a few of the Latin-American markets. And the reality is the great news there is we've seen much better reaction and much better retention as well on ARPU increases in those markets. And so that's been a positive. We've seen efficiencies across-the-board in some of the items that Gunnar talked about. And then obviously, over time, we've started seeing some scaling. But we've been measured in our scaling. And so that's been great."}, {"role": "user", "content": "And as it relates to the content, the cross-pollanization, reality is, we've done very little so far, but we have done stuff with Magnolia, for example, and as you've heard us, I think to what we've talked about before, it was a top 10 performer on the service at launch, and even at top-five in the initial week of launch. And so we feel very positive about what that means. And as we've cross-pollinated content outside of the US, we've seen similar trends of great reaction and reception from HBO Max consumers to Discovery Plus content. So when we go full throttle with it when Max comes together, we feel very optimistic."}, {"role": "user", "content": "Steve, if I can just add one thing, from the perspective of the longer-term outlook here again, we gave guidance a year-ago. Around how we see this DTC business developing, as I said earlier today, many of the operating KPIs are tracking much better than what we assumed. Again, the big thing is getting this product launched and then we will learn so much about assumptions that are now assumptions and hypotheses and in two-three months, those will be backed-up by a lot more actual data. So this is going to be super important period, but needless to say, with the US breakeven and actually hitting profitability for the full-year happening this year, a full-year ahead, now remember, as we said before, we are obviously losing money in the business internationally, as we are launching market and as we are earlier in the the maturity curve in many of the international markets and that's going to continue. But as I said earlier, we've got that $1 billion-plus guidance for 2025 for the entire combined business and we'll update that on the basis of what we're learning once the once the product is in the market."}, {"role": "user", "content": "Great. Thanks for the question"}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Peter Zaffino with Wolfe Research. Please go-ahead."}, {"role": "user", "content": "Hi, good morning and thank you. On the subject of free cash flow, adjusted for one-time charges, you mentioned that the last 12 months, the company had produced a little over $3 billion free cash, adding that one plus of one-time charges to the two-plus of underlying. If your expectation is that synergies will contribute $2 billion in '23, it seems like your free cash flow has an easy path to $4 billion, which is within your guidance range. I'm wondering if you'd add any significant puts or takes to that analysis and specifically, is the DTC upside that you described today, the idea that EBITDA will be $1 billion better than previously expected in '23, incremental to the math I just laid out? Thank you."}, {"role": "user", "content": "Peter, again, in the current environment, I wouldn't characterize anything as easy, but I have very-very high confidence in the range that we laid out. We have confidence in the ability to generate these these synergies, you're right on the trailing 12 month number, but it's -- it's a lot of work, we have we have line-of-sight. And we'll take it from there. I don't want you to take this as an upgrade to our cash flow guidance."}, {"role": "assistant", "content": "So we were the -- I think, we were among the first to say that the advertising market was basically -- was starting to be challenging. And so we have been pretty careful in projecting because you can't, how an advertising market is going to turn and when it's going to turn. And so for purposes of how we looked at this year, the market is quite challenging, it's improved a little bit, but it still remains a really challenging environment. But the good news for us is, we've built that into our projections for the year and into how we talk to you about what this -- what we'll face this year and how we'll perform."}, {"role": "user", "content": "Great. Next question."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Bryan Kraft with Deutsche Bank. Please go-ahead."}, {"role": "user", "content": "Hi, good morning. I wanted to ask you about Hogwarts Legacy, sales have obviously been extremely strong to-date, can you talk about what you expect for sales of the PS4 and Xbox One versions, which I think become available today. Maybe just relative to sales to-date, how much of a lift could you get?"}, {"role": "user", "content": "And also, I wanted to ask how the next let's say X hundreds of millions of dollars of sales would be --would look from a margin perspective relative to that first billion? Because I would assume that there is a lot less marketing and amortization running through in the second-quarter and beyond. So just wanted to ask about that as we think about profitability for the studio going-forward. Thank you."}, {"role": "assistant", "content": "Thanks, Brian. We have a very, very good gaming business, with 11 different Studios and a real talented capability. But the real differentiator for us as a company is, we own our IP. And that IP belongs to us and we're developing it, in some cases, we may decide to develop it with a third-party game technology company, but we may be the only media company that owns, whether it's the DC Universe, Harry Potter, all of the content that we own, Game of Thrones, that's for us to deploy and I think that's particularly strategically important, because if you look at Hogwarts Legacy, a big piece of the success of that game, if you go into it, if you're a player, you go into that game and you're in that world. That's kind of a new concept, before it was really it was gaming and it was storytelling. And now, I don't -- it's very difficult to figure out what anyone's definition for the Metaverse is, but when we launch a product as a motion picture or a long-form story on Max or HBO, and then we have a game, that game belongs to us, but now there's this tweener, which is that may be in the next couple of years that we launch our Superman movie and then -- then people spend more time and there's more economics of people just hanging out in the Superman world and universe, and the fact that we own all that is something that I think is going to be really important as we look for -- as whether -- as technology develops and given the amount of time people spend on gaming, we don't want to be in the motion picture and story and long-form storytelling business and have somebody else in the business of hanging out in those worlds, those world that they are going to be quite profitable in the years ahead."}, {"role": "user", "content": "And Brian, to the Hogwarts Legacy, obviously, the gen 8 release is going out today. Is -- it's important, I would say, obviously, those consoles are a much smaller base than the current-generation consoles that we released back in February. So it's obviously a much smaller portion of the whole, but nonetheless important. I think the other big call-out is obviously, the Nintendo Switch release which will come later this year, we see that as probably a much bigger install-base and a fan base that as it relates to the franchise of Harry Potter, which obviously appeals to a very big audience globally and a more -- and in-markets like Japan where Nintendo has a big footprint and Harry Potter skews very strongly in terms of popularity. We see a much bigger upside probably from that release, certainly with the gen 8. So that's kind of how we see the rollout over the next few months."}, {"role": "user", "content": "And the margin profile, Bryan, is not going to change materially. We'll be a little lighter on marketing obviously, retail price points are a little lower. So I from a gross margin perspective a little bit of a headwind, but no material change."}, {"role": "user", "content": "Thanks very much, appreciate it."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Jessica Reif Ehrlich with Bank of America Securities, please go-ahead."}, {"role": "user", "content": "Well, thanks. Two questions. So, David, if you step-back and think about the last year, where the heavy-lifting is done, integration and the restructuring, and now the focus is on operating and building your businesses, where do you see the most opportunity and maybe you can touch on timing beyond the existing business? You touched on games, but this I'm sure there is a bigger business plan? [Indecipherable], you've mentioned in the past, you were talking about driving your franchises deeper and animation, you just mentioned you hired a head of animation. So -- and that's a huge driver for Universal, so maybe if you could -- maybe there's something I'm missing."}, {"role": "user", "content": "And then secondly, on sports. You kind of alluded to it coming to Max, I don't know if you can say anything more about that and maybe touch on the NBA, what do you think the timing is and ways to slice -- are there ways to slice and dice the rates among the various players, so that you insure it's a profitable contract in the next round?"}, {"role": "assistant", "content": "Thanks, Jessica. There's when we look at this business, you're exactly right. We reset the business for the future by looking at each company and saying what should this comp-- how should we be structured to have the best chance for sustainable growth today? We took out a lot of layers, we built a new leadership team, but we still have a lot of the benefits that will be flowing through this year and next year and we're still finding -- we're still opening up some closets and stuff, which I think is a good thing, more opportunity. And we've got some businesses that aren't doing well."}, {"role": "assistant", "content": "Warner Bros. turns 100 and they've had two of the worst years, if you look-back at Warner Bros., it was really just very difficult, very difficult on every level in terms of what was turned out. And so we think we've turned the corner on that, we've got a very strong leadership team in place now. We got James Gunn, and Peter working very hard on DC, which is going to be a very big growth driver for this company. And so but very bullish on DC and you know -- we -- the Superman script first draft is done, Gunn is -- he is on a mission from God. And I think it's a really good moment for us to prove out on DC, what we got and how strong it is globally for long-term sustainable growth."}, {"role": "assistant", "content": "We got some more movies coming up that are better. We've been working hard on fixing them and enhancing them and investing. We said no movie before it's time. With with Barbie and Flash, we have two very good movies, Dune two, very strong and so I think the slate coming up now, that will make a big difference. We've lost a lot of money in the motion picture business and making that turn is important. Continuing to build on Max and we haven't done much with animation at this company. We own Hanna Barbera, Looney tunes, if you take a look at animation, t's a critical -- we have, we have three animation studios and we don't have a lot of you know, production in terms of -- it's not productive in terms of free cash flow. It's not productive in terms of market-share, it's not productive in terms of growth. And so driving that, and we now have a a really strong leader, our leadership team is in-place. If this was Formula One and we're dealing with a very difficult environment and it's raining and the track is wet and it's a challenge, we've got a leadership team of race car drivers here, in every case. And so we got a lot of confidence in Mike and Pam on the Warner Brothers side and the games business is just getting started, which I think is something that people didn't really pay a lot of attention to, and maybe the most important portion is the fact that we have this great diversity of assets, it's hard to predict what's going to go on, but we've restructured this company now, we're really tight. We're really tight and we're continuing to figure out how do we drive productivity, so we can invest more in storytelling. that's all we do."}, {"role": "assistant", "content": "And right now, it's sort of the environment is challenged, challenged, challenged. But as things start to pick-up, and they will, in different areas and we can't predict exactly when. You're going to see a very quick turn at this company. So the idea that we can end this year, drive toward, to be less than four times levered, with a very tight cost structure, with command and control of this business, with strong brands that people love around the world, and then all of a sudden, things improve a little bit and you will see an acceleration."}, {"role": "assistant", "content": "The NBA, look, I just saw Adam two days ago at the Nick game, go Nicks, the night at the garden. Well, I've been waiting a long-time for that one. And -- but -- we'll -- we're doing a terrific job with the NBA, when you look at Barkley and Ernie and that team and Shaq. The programing we're putting on. We're setting records with the NBA, we're setting records with hockey. We also have March Madness, where we did very well. We couldn't do as well with the -- with the marketplace because Sports is relatively strong, but sports used to be strong enough that it was also able to help you with the rest of the business and that was happening for a long-time, and the market was just quite soft. And so we're able to take advantage of the sport. But we weren't able to take advantage of the piggyback halo and I think that's true in the industry, it just got more difficult, but between baseball playoffs, March Madness, hockey, we have, we have long-term deals that are quite favorable to us. We like the NBA. The deal's coming up in '25, there's lots of, lots of ways it could be conjugated, you know, we did a very favorable deal in the UK with our BT Eurosport business, where we ended-up with 90% of the football -- the soccer games and Amazon got less than 10% of the of the Champions League games. We produced that content for Andy Jassy and they promote to us, we promote to them and the economics of that deal very favorable for us."}, {"role": "assistant", "content": "And so there's lots of ways to re conjugate it. We like the NBA, we hope we can get there, but we're going to be very disciplined. We worked very hard to build this company to drive profitability, to have a strong balance sheet, to provide real growth and real free cash flow, that's the long-term sustainable nature of this great company and we're not going to jeopardize that for any piece of IP."}, {"role": "user", "content": "I would like to add one slightly less strategic or operational point, that nonetheless I think is super important, Jessica and that is our -- for the sake of the argument, we're spending $20 billion of content, a lot of that still goes through siloed systems, still imperfect processes, and in many cases, still through a mindset that's very business unit oriented. So I have no doubt, we're in the very early innings of looking at this as one Warner Brothers Discovery content."}, {"role": "user", "content": "We talked a lot about the stuff that we discontinued because it didn't make sense financially. I think the opposite is true as well. I think the Company also passed on very-very interesting and attractive investment opportunities, just because someone into our company budget wasn't in-place or. So all of that is going to change, will get much better in allocating capital as a company and we'll get much better in the day-to-day operational management of spending of that cash. We just harmonized those processes and centralized those teams, they were all fragmented. So looking at that, the ROI on our capital in the ballpark of $20 billion, hopefully growing over the next few years, is set to improve and I have full conviction in that."}, {"role": "assistant", "content": "When we talk about our marketing campaign, one of the things to bear in mind is, we're using our platform now. That wasn't happening in -- we're really hyper-focused. As I've said on many nights now, we're getting 48%, 45%, close to 50% of all viewership, broadcast, cable. On any given night, we have 25% to 30% of viewership on the platform and using that -- using Bleacher and House of Highlights, which is a very young demo, using CNN.com, so yes, yes, we're -- the campaigns are bigger, but we're one company. And so the ability to promote on HBO on our own platform is a big savings. It's a big savings for us internationally and we're deploying it."}, {"role": "user", "content": "Great. Let's go to the last question please."}]}, {"messages": [{"role": "system", "content": "Your last question comes from the line of Matthew Thornton with Truist Securities, please go-ahead."}, {"role": "user", "content": "Hey, good morning everyone, thanks for taking the question. Maybe a couple on Max, if I could. Could you update us just how you're thinking about migration later this month, in terms of any friction as folks go from one app to the next? Your latest thoughts on any potential friction there and how you're managing that?"}, {"role": "user", "content": "Secondly, you talked about the overlap of Discovery Plus users that also have HBO Max. What about those that don't, how you're attacking and trying to up-sell those to the the more the higher price point Max service? Any color there."}, {"role": "user", "content": "And then just final one, I think this was mentioned on a prior question, but any thoughts around a fact here and just how to think about the fact here around Max helped drive top of funnel, help drive advertising, help monetize deep library any incremental updated color there would be great as well. Thanks so much."}, {"role": "assistant", "content": "Yes, thanks Matthew. Just on the migration point first. A couple of -- couple of things, number one is, remember there has been no change in the billing process. So as it relates to revenue, there is no change and there is no migration as it relates to billing. So revenue and billing continues to be exactly the same, irrespective of whether somebody has actually clinical migrated, i.e. accepted the new app or downloaded the new app if they need to. Number two is, as we said at the April 12th event, there's a large portion of the basin that will have to do absolutely nothing, where the app will automatically convert and upon streaming again you'll have accepted the terms of use and you'll be off and running. For the portion of the base that actually has to download, re-download. We've done everything we can to make it as seamless as possible, including not having to input -- basically two clicks to get to the -- to streaming again your video content, you have no need to -- your username, password will be migrated, your watchlist, all your history will be migrated and so we tried to make everything as possible. Now, inevitably, in these processes, you're going to find some friction. But we think it's fairly limited in terms of the subscriber risk associated to the migration. And so we feel very good going into it. We've tested it, we're already for the migration. And the flip side is on then switching to the Discovery Plus as Gunnar said, we do see about 4 million subs, largely in the US, but there is some of that internationally as well, that overlap between the two services and obviously, we're gonna be doing everything we can to upsell those that are not subscribed. But as we said, again, the flip side is, we're not going to be too in-their-face about it, at the end-of-the day, if people want to stay subscribed to Discovery Plus and that's the environment they prefer, that business by itself is profitable and we will continue to maintain it and serve them there, but we will over time, initially through marketing efforts, try and see if we can get them to come in and sample it, we will have offers that incentivize them to sample it for some period of time at favorable economics and we'll see how successful we can be in upgrading them."}, {"role": "user", "content": "On fast, we always believe in what we call a hybrid strategy, which is ultimately first and foremost, kind of what we call channel syndication, which is ultimately, we realize that the platforms and the distributors out there, there are many who have the scale and the size and we want to get our channel portfolio out there and viewed, as it's audience aggregation and advertising business. We've already gotten out with Roku and Tubi, and we've been very pleased with the initial success with a very small, but a handful of channels that we out there already. We will continue to look to see if we can increase that volume, to your point for a second, third, fourth monetization windows for certain content. And then we are continuing to explore the owned and operated strategy and at some point in time, longer-term, we do see this opportunity for the WBTV brand and platform to exist in an owned and operated environment. I think at some point, that'll be dovetailed with the state of the advertising business and we want to make sure we come to market at the right time when the demand is sufficient, but we will continue to execute this hybrid strategy of syndicated channels initially and then over time, at the right time launch our own service."}, {"role": "user", "content": "Great, that's it, thank you very much for joining and we will speak with you soon."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from David Karnovsky from JPMorgan."}, {"role": "user", "content": "All right. Thank you. Robert, following up on your comments about generative AI. I'd be interested to get kind of your expanded view on how you think this tech is going to impact how consumers receive their news and information and what opportunities or risks that opens up for you in terms of your relationship with readers. And then maybe as a follow-on, what use cases do you see for the technology and the generation or repackaging of some of the news content produced? Thank you."}, {"role": "user", "content": "David, a very thoughtful question. We're obviously at an early stage of the evolution of generative AI, it will have a profound impact. And I was recently tech hosting our teams, and in recent months, HarperCollins Japan has been using sophisticated programs to create images for manga stories by transforming a sketch or a photo or just inputting words through a separate generative AI programs. We use an image from our library to create complete manga scenes, obviously saving a lot of time and transforming potentially the character of that business. But it's not only going to have an impact on content, it will clearly have a profound impact on the management of the business, whether customer service or billing or whatever. I mean one contradiction of any business is that the more you customize, the harder and more expensive it is to scale. And that contradiction can be overcome with AI. I think as the well-known management consultant Socrates observed, the secret of change is to focus all of your energy not on fighting the old, but building the new."}, {"role": "user", "content": "Thanks, David. Thanks Leila, Later on, we'll take our next question, please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Kane Hannan from Goldman Sachs."}, {"role": "user", "content": "Well, guys, thanks. The question maybe just the cost out. I'm just interested, I suppose, on some of the commentary there, particularly Dow Jones, and then books was pretty positive on the top line outlook and how things have been improving. Just interested why the cost out target has been upgraded with that backdrop. And I suppose as a follow-on to that, just what the net benefit of the cost-out program was in the first quarter, if we think about all-in with the restructuring charges potentially coming through?"}, {"role": "user", "content": "Kane, look, obviously, the headcount reduction is about calibration, not celebration, but it's fair to say that the savings will exceed the -- significantly the $136 million that we identified in the last earnings call, and we'll now surpass $160 million. That's attribute to the diligence of our teams undertaking difficult work. And to emphasize that's just one element of the cost cutting that's underway at the company as we severely scrutinize everything from tech spend to travel expenses. So the total savings number next year will obviously exceed that total."}, {"role": "user", "content": "And Kane, just to add, our business units, they're quite experienced at identifying areas for improvement, and we can leverage those across the group as we look for cost savings, which is one of the reasons we've been able to drive additional cost savings. We're not going to get into the details about sort of the net off of the cost savings, but we can expect that as we head into fiscal 2024, from Q1, we really would expect to see the majority of those cost savings hit the P&L."}, {"role": "user", "content": "Thanks. Kane. Leila, We'll take our next question, please."}]}, {"messages": [{"role": "system", "content": "The next question comes from Craig Huber from Huber Research."}, {"role": "user", "content": "Yeah, hi, Craig Huber. Thank you. I had a similar question on the cost. Obviously, you've announced 5% head count reduction three months ago. That's roughly about 2% of the total costs. Can you quantify at all what the other cost savings you're talking about is? I mean, a few companies just reduced headcount but don't touch other stuff, and you guys are taking costs out elsewhere. Can you quantify that for us? Is that possible?"}, {"role": "user", "content": "We haven't quantified it, Craig. But what I can say is cuts across a couple different areas. We're looking at discretionary spend, as you'd expect, office expenses, T&E, we have a look across our print sites, and we're constantly looking for opportunities around our manufacturing plants and what we can do there. We look at our casual cost base with the variable costs. We have a look at marketing costs as well. So it's really a variety of costs that we continue to focus on. As I said, the businesses are pretty good at actually having a look at this now."}, {"role": "user", "content": "Thanks, Craig. Leila, Later, we will take our next question, please."}]}, {"messages": [{"role": "system", "content": "The next question will come from Darren Leung from Macquarie."}, {"role": "user", "content": "I just wanted to ask around the high printing costs and supply chain issues in books, please. So I think we had talked about it being a headwind in prior periods. And looking at it, it looks like it's flat versus the prior year. Can you just give us a feel as to what we've achieved or what's changed in the business to sort of maintain that, please?"}, {"role": "user", "content": "Actually, I think the comps are up year-on-year because we are still experiencing some of those supply chain pressures. I mean what I would say is freight costs, we're seeing a moderating of that as we're seeing easing of some of the supply chain pressures on shipping costs. But we are seeing enhanced paper costs still coming through, and we're seeing some additional fuel costs that are coming in because of the inflationary pressures. So it was a little bit mixed. We are seeing them moderating, but they have been up."}, {"role": "user", "content": "And so Darren, just to supplement Susan. Of course, what has been particularly prevalent over the past year is the change in purchasing, as I said, at Amazon. And now that the reset has been reset, we have more confidence in the profitability of HarperCollins. And no doubt that the current crop of bestsellers will make a positive difference in coming quarters."}, {"role": "user", "content": "Thank you, Darren. Leila, Will take next question please."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Alan Gould from Loop Capital."}, {"role": "user", "content": "Thanks for taking the question, Robert, Susan, I'm always shocked how well the News Media business continues to hold up. Two things on there. Can you give us a little more detail of what's happening with TalkTV and the plans to turn that profitably? And secondly, just shocked to see print advertising actually doing better than digital advertising this quarter. What is happening there?"}, {"role": "user", "content": "Well, Alan, on TalkTV, we've always said it will be a low-cost, high-quality project, and that we'll constantly review progress and technological developments that give us flexibility in delivery and reduced expenses. In the coming months, you should see that incremental costs are falling with a naturally positive impact on our earnings. And I have to say the venture has certainly enabled us to promote products across a plethora of our platforms and enhanced our video capability globally, given that we're able to slice and dice programs in different formats for different time zones. And as you can imagine, increasing our video expertise generally is a core priority for all our businesses."}, {"role": "user", "content": "And then Alan, just on the print side, I mean, look, it has been a pleasant surprise, and we've seen this over the last couple of years as it relates to print advertising. It really just depends on the categories. Down in Australia, they've seen a pickup in travel advertising, which has really helped Dow there as the market has started to open up. They do get some good tailwinds from retail in different quarters as well. So it really is variable each quarter, but it's down to the different category."}, {"role": "user", "content": "Thanks, Alan. Leila. We'll take our next question, please."}]}, {"messages": [{"role": "system", "content": "We'll take a follow-up from Craig Huber from Huber Research. Your line is open."}, {"role": "user", "content": "Yes. Sorry. Sorry about that. Your book revenues held up much better than we thought in the quarter. I mean, given the issues you guys have called out in the past about Amazon and warehouse issues with them and stuff, can you just talk through that? Or do you think that's all behind you now?"}, {"role": "user", "content": "Craig, as I mentioned earlier, there clearly has been an adjustment at Amazon. That adjustment, as we understand it, is complete. And so those awkward moments are passed. And now really, it's down to the quality of the frontlist and expanding the impact of our backlist. For example, in the most recent quarter, backlist was 60% of sales. As you know, backlist generally is more profitable for us. And so now we have an opportunity to make the most of our excellent authors and our marketing potential."}, {"role": "user", "content": "And Craig, we're also -- I mean, for April, we've just had the results come in, and there has been a little bit of softness just in consumption. So we're still waiting to see where consumption settles down in the post-COVID world. But pleasingly the results for Q3 were much better than the first half."}, {"role": "user", "content": "Thanks, Craig. Leila. We'll will take our next question, please."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And our first question will come from Eric Percher with Nephron Research."}, {"role": "user", "content": "Thanks for all the detail. Thank you. I'd like to dig into the increase in long-term profit growth targets in specifically pharma at a massive absolute number at the high end of the new range. And for '24, that range comes with medium to lap brand benefits. So I'd love to hear what gets you to the high end of the range factors within the year and what drives the long-term guidance in macro trend versus strategy averse investment?"}, {"role": "assistant", "content": "Thanks for the question, Eric. I think what -- as we look at the business, we've already previously indicated that we thought we could grow the business faster than the originally indicated long-term guidance. I think there are a number of factors that are a part of that. First of all, we've seen strong utilization. I think that as a baseline, we've seen that actually increase throughout the year and we expect that utilization will remain solid going forward. We've built a lot of momentum across our health systems business, our retail pharmacy network and the value that we're providing there. And we've been growing our oncology platform. You heard Brian and I both reference a number of providers that we've added."}, {"role": "assistant", "content": "Certainly, if you think about the value that we provide not only as a distributor, but GPO services and now the added capabilities with Ontada and Sarah Cannon Research and the opportunities going forward as it relates to biosimilars, all of these things really point to these for us to grow faster in the future than the original long-term target rate. And the business continues to generate good cash and efficiency through our scaled operations. So I think all of those things and the momentum that we've shown now over a number of years lead us to have some confidence in a higher growth target."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And our next will be Michael Cherny with Bank of America."}, {"role": "user", "content": "Good afternoon and thanks for taking the question. Congratulations on really strong guide. Maybe to take Eric's question, but pivot it a bit onto the Med-Surg side, it seems like the multitude of factors, even backing out COVID has continued to help you, strong market positioning, site of care, volume G&A. As you think about the build, you did take out that guidance as well. What do you think the steady state looks like in terms of where we had been pre-COVID versus going forward among all those different metrics, among share gain, among site of care, among private label that allows you to build to that higher and consistent double-digit growth rate within what already is a pretty sizable segment from an EBIT perspective?"}, {"role": "user", "content": "Yeah, thanks, Michael. I'll take that one and give Britt a minute of relief. So our medical business is incredibly diverse, I mean, across. It's really -- shows up in all of the alternate sites or everywhere that's not a hospital setting to be truthful. And even amongst hospitals, we tend to serve all of their community, not all, but we do serve their community-based locations. And then it's also diverse from a sense of multiple product lines, not just commodity medical products. It's equipment, it's lab, it's pharmaceutical, it's specialty pharmaceutical."}, {"role": "user", "content": "When we look at utilization broadly across the industry, we've been pleased to see it come back. We've seen prescriptions come back, oncology visits come back. Medical has probably recovered a bit over the course of the last year, but we are encouraged by recent common criteria and stats on the recovery in ambulatory surgery centers, for example. So I think there is a base utilization that we think continues to underlie this business. There is the diversity of the products and the new segments that we can penetrate. There is opportunities for us we continue to believe in our private brand portfolio. So I'd say it's the confluence of all those things that give us the confidence."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Lisa Gill with JPMorgan."}, {"role": "user", "content": "Thanks very much. Good afternoon. Just, Britt, I first wanted to follow-up on the $0.40 range as we think of the guidance and just understand some of the puts and takes in the upper end and the lower end. And more importantly, as we think about, for example, the changes in insulin pricing and how drug distributors make money, so one, can you maybe just walk us through how are you pleased to think about insulin? And then, secondly, in the answer to an earlier question, you talked about lapping the brand benefit, but I'm also curious as to how you and Brian are thinking about new products that are coming to the market. I think it's things like GLP-1s and other really expensive drugs that will have a big top line."}, {"role": "assistant", "content": "Thanks for the question, Lisa. So a lot there. Let me just see if I can kid of tick through it and if I miss something, please remind me. As we think about the products that we serve across our biopharma partners, our first job there is to think about what is it that our customers need and then work with our biopharma partners to determine the services that they need us to provide on behalf of those products. And when we do that, we work to establish a fair value for those services that we provide regardless of what the product is."}, {"role": "assistant", "content": "That's what we do on a constant basis working with our manufacturers. So I think we've talked about this for a number of years that we've continued to evolve our manufacture relationships and our pricing to be reflective of the fair value of the services that we provide and as we go forward, that's going to be -- continue to be our focus so that we maintain the economics that we have for the services that we provide."}, {"role": "assistant", "content": "In terms of GLP-1s, again, it's part of a broad set of products that we distribute on behalf of manufacturers to our customers. One of the other things I would remind you of is over the last several years, we've been on a journey to ensure that all products regardless of the category individually are reflective of the economics that we receive in terms of how we price those back with our customers. So we're on that. We continue to be on that focus and I think we're well positioned to do that as we go forward."}, {"role": "assistant", "content": "I don't know Brian if you would -- anything you would add to that?"}, {"role": "user", "content": "No, I think that's well done. I mean, obviously it's hard to go anywhere these days without talking about GLP-1s and I would just characterize it generally. I think their growth will be positive for us and have big impact on hopefully patients and health of the country."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Brian Tanquilut with Jefferies."}, {"role": "user", "content": "Hi, good afternoon, guys and congrats again also on the guidance. I guess, Britt, as I think about the guidance, obviously, raising your operating income target. You don't have an EPS growth target here in like the last time when you did the Investor Day. So just curious if the bridge to EPS has changed from the operating income targets that you've laid out there. Maybe how should we be thinking about EPS growth? Thanks."}, {"role": "assistant", "content": "Yeah, Brian, thanks for that question. I think what we've done here is we've updated the segments. There really is no change to the range that we provided for adjusted EPS. One of the comments that I made as we think about capital deployment, we're going to continue to focus on growing the business, whether that be organically and the investments that we make in it or more -- as we go forward more on M&A. You saw us do a couple of really key M&A transactions last year that were right on strategy. And as you know, it generally takes a few years to get the full synergies from that M&A."}, {"role": "assistant", "content": "We expect that we'll continue to do M&A on strategy at the right multiples. And that even with the increase in the operating segment guidance that overall, the overall EPS guidance would still be within the range. There's opportunities obviously for us if we're able to generate more capital deployment and we're able to get some acquisitions here that we can realize the synergies in an earlier manner for us to be at the upper end of the range that we provided you, but really no change to the overall range in this update."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Charles Rhyee with TD Cowen."}, {"role": "user", "content": "Yeah. Thanks for taking the questions and then congrats as well. I wanted to focus a little bit on within the -- going back to earlier question about the increase in the long-term guide for the U.S. Pharma segment. Can you talk a little bit more about Ontada and sort of the progress you've made there? The increase in guide -- in the long-term, would you expect to come from Ontada and maybe talk a little bit more about what's been going on there? And then, I guess, is the JV with HCA, the Sarah Canon Cancer Institute, is that part of the Ontada sort of partnership or is that separate? Just trying to understand a little bit more where we've gotten to at this point because I know a couple of years ago when you announced it at the Investor Day, you kind of suggested it was kind of immaterial in the near-term, but just trying to see how far responsible."}, {"role": "user", "content": "Yeah. Let me jump in on this one, Britt. So we call an oncology ecosystem because we really think there is this value of all of the pieces together and I'm really pleased with the progress that we're making overall. You've seen the growth that both Britt and I talked about in the U.S. Oncology Network now scaled to over 2,300 providers. We've made tremendous progress at a record year of adding providers to the network last year and that's a piece. And that -- as that grows, that obviously feeds more data, gives us more provider insight."}, {"role": "user", "content": "That allows Ontada to continue to work with our partners to create products and services that help them develop, commercialize and get their products to market and understand how to most effectively go to market to have the utilization and patient impact that they want. We think that Ontada is in year three or four of its development building off some assets that we have long had, but we continue to invest in new product development. We continue to see that business improve year-over-year."}, {"role": "user", "content": "We think the partnership with the joint venture we did for the Sarah Cannon Research Institute brings additional insights, moves us up stage into the clinical trials in a very prominent way in the community setting. So again, we think that trial early insight business that helps feed Ontada. That helps our providers navigate the clinical care that they have to provide everyday. The insights we get from that clinical care can feed back through some of our data assets to provide information back to the biopharma. So each of the pieces is sort of additive to the overall solution."}, {"role": "user", "content": "And I'll just say that while we're probably I would characterize it it's still an investment phase in Ontada because we still believe there is opportunity and a big long-term market out there and lots of space for us to be innovating in with the unique assets we have. Overall, I think it was a -- we're very pleased with where our oncology business has developed."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Daniel Grosslight with Citi."}, {"role": "user", "content": "Hi. Thanks for taking the question. If I back out the impact of divestitures from the international business, it looks like you're growing in Canada around 8% to 10% or so depending on what the Norway contribution is assume this year. Curious what's driving the strength of the Canadian business in '24 and if your international guidance contemplates a full year contribution from Norway."}, {"role": "assistant", "content": "Well, we don't really break out Norway and Canada and talk about them separately. But what I will say about our Canadian business is we have again a very diversified set of assets in Canada. We have leading distribution position. We have a leading retail banner position. We've got a leading chain pharmacy position there. We've got biopharma and specialty assets. Now those work very differently than the ones that work in the U.S., but really in many ways getting at kind of the same overall need just in a very different healthcare system. And so on the basis of our scale and our breadth, we are a really important player in the health of Canada and I think we've been able to leverage that scale. We were able to find efficiencies across the business to continue to support growth that we're very pleased with."}, {"role": "user", "content": "Maybe I'll just answer the one mechanical question as it relates to Norway. We do have Norway included in our full year FY '24. Just to repeat, though. we continue to strategically look for an opportunity to exit European operations completely, which would be Norway. But you should anticipate that there is a full year of Norway in our numbers."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "The next will be George Hill with Deutsche Bank."}, {"role": "user", "content": "Hey. Good afternoon guys and thanks for taking the question. Brian, I kind of want to come back to one more on oncology. You guys announced a couple of smaller transactions in the prepared commentary and your friends in Philadelphia recently announced the deal. I guess, I would ask as you guys look out from kind of the practice management and partnership perspective, how much greenfield opportunity do you guys see left? And I know that you have the Ontada business that's spudding, but would just kind of love how you think about the runway to continue to either work more tightly with practices or help them grow their business, which serves as an opportunity to grow McKesson's business as well. Just trying to figure out what inning we're in there. Thank you."}, {"role": "assistant", "content": "Yeah, thanks, George. Thanks for the question. So we've been at this for a long time. I think we acquired U.S. Oncology in 2010. So it's been a long time. We've got a lot of experience. And if you think about the breadth of our solutions in the community oncology space, I mean, we start with -- you can start your relationship with McKesson with just basic distribution. Then you can add on distribution and our GPO services and then we have ala carte services to support you in the running of your practice. And that gives us great relationships, great insight into the practices that are out there in the community and helps us really identify who we consider to be the leaders, businesses that are run with similar clinical and operational philosophies to the U.S. Oncology Network."}, {"role": "assistant", "content": "So it's not uncommon to see us start with just a very transactional relationship, but then over time grow that into inclusion in the U.S. Oncology Network. We have a very disciplined model for the types of practices that we think fit the use on model. And I think over the last couple of years, you've seen us pretty successfully attract them into the U.S. Oncology Network."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Kevin Caliendo with UBS."}, {"role": "user", "content": "Hi. Thanks for taking my question. So about the long-range plan, if I'm looking at the pharma segment, it looks like margins should be flat or maybe up. You have operating income kind of growing in line, but yet for fiscal '24 if we back out the COVID benefit, it's below and meaning this margin shrinkage is expected. So I'm just wondering if that's insulin or something else. And then with the long range plan is the up -- is the reaping of the long range plan like from fiscal '24 forward or is it inclusive of what just happened in '23 as well?"}, {"role": "assistant", "content": "So thanks for the question. Let me maybe answer these in reverse order. What we've done here is provide you our FY '24 outlook and at the same time looking back at our performance over the previous five years, updating our guidance going forward from fiscal '24 forward as a long-term rate. As we look at the margins year-over-year, I think there's a few things that will impact us. Clearly, the mix of both products and services that we provide with a heavier and faster growing specialty product portfolio as well as the mix of customers, we continue to see growth -- faster growth in our largest customers."}, {"role": "assistant", "content": "And then the last thing I would say is we are very proud of the oncology business that we're putting together including our Ontada business and Sarah Cannon Research. And we're continuing to invest in those capabilities and services to support a lot of what Brian just talked about in terms of how we really think about the growth opportunities that we have going forward. So I think those would be the couple of things that I would point out that could lead to margin variation from one year to another."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Steven Valiquette with Barclays."}, {"role": "user", "content": "Thanks. Good afternoon, everybody. Just on the 340B topic, we're getting some questions on that as far as exposure from McKesson kind of heading into these results. I guess, I'm just curious for fiscal '24 guidance. What's baked into the outlook for any sort of 340B impact and how that compares to fiscal '23 if that's even material one way or the other? Just wanted to get some color on that. Thanks."}, {"role": "assistant", "content": "Yeah. Mechanically, clearly, we feel like we're well-positioned to manage through any impacts that come from 340B. Any impacts that will come from that are assumed within our guidance. There is nothing additional to call out."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Erin Wright with Morgan Stanley."}, {"role": "user", "content": "Great. Thanks for taking the question. Can you comment a little bit on the dynamics of what's driving the strength across the generics program? And is there anything to call out there or changes in fundamentals across the generics business? And have you seen some of the disruption amongst some of the certain larger generic manufacturers flow through to your business? Thanks."}, {"role": "user", "content": "Thanks for the question. As I talked about a little bit in my remarks, maybe I'll expand on that. We have a very scaled generics operation. And we start with a very scaled and efficient sourcing program that we've been running now for a number of years and we had some great partners and we have great partnerships with generic manufacturers, very diverse and very broad set of partners. That helps us manage through any supply shocks that may happen. And those are -- those happen every year. We're able to manage through that. For as long as I've been in this business, you will see from time to time you will see. generic shortage or generic impact to supply."}, {"role": "user", "content": "We've been able to manage through that very well given the strength and the breadth of partnerships that we have. I also talked about the fact that the marketplace has very stable fundamentals. And so when you think about our -- the focus that we have in a scaled and efficient sourcing program, stable set of market fundamentals which again very competitive environment, but a stable environment and then our disciplined focus that we have on the sell side with our customers. We've been able to manage very effectively through this. Our focus is to provide low cost, high availability of supply to our customers that is really the bedrock of the success that we have with our generics program. And we've been able to do that quite well for a number of years."}, {"role": "user", "content": "Next question please."}]}, {"messages": [{"role": "system", "content": "And next will be Elizabeth Anderson with Evercore ISI."}, {"role": "user", "content": "Hi guys. Thanks so much for the question. One -- two from me. One is on the -- obviously, you had some changes and cost cutting on the opex line, so in the fourth quarter. How do you see sort of any potential pacing of that impact in the fourth quarter? And secondly, can you talk a little bit maybe more specifically about sort of what you have embedded in the 2024 guidance for biosimilars versus the longer-term plan? Thank you very much."}, {"role": "assistant", "content": "Yeah, sure. Thanks for the question. So as I talked about, we enacted a set of initiatives and we recorded a charge for restructuring that was primarily in our U.S. Pharmaceutical and Prescription Technology business. We expect that those initiatives and activities will be complete by the end of fiscal 2024. So I think that would answer your question on that. And from a biosimilars perspective, we continue to believe that there is great opportunity here. As we continue to add providers to the network, that provides more opportunity for us. And we think we're very well-positioned and we've certainly embedded the opportunities within the guidance we provided you today."}, {"role": "user", "content": "Yeah. What we know is and obviously 40 approvals, 27 launch, the big event this year will be HUMIRA, which is going to be a Part D product, not Part B. We have many more services to offer and assets to leverage and use in the Part B arena. So we will track kind of payer response and pricing strategies and patient adoption over the course of this year. But what we know is baked into the guidance we provided."}, {"role": "user", "content": "Operator, we have time for one more final question."}]}, {"messages": [{"role": "system", "content": "Certainly. That question will come from AJ Rice with Credit Suisse."}, {"role": "user", "content": "Hi, everybody. Thanks for the question. In the prepared remarks and maybe this is what you were just touching on a little bit, but you mentioned reprioritizing some investments in the Prescription Technology Solutions business. I wonder if there was any way to flush out a little bit more about what specifically you're doing there? And when I look at your '24 guidance, it actually looks like you're assuming the Prescription Technology Solutions grows faster 11% to 15% versus your updated 11% to 12% long-term target and I wonder what was driving that."}, {"role": "assistant", "content": "Yeah. Well, I mean, if you think about this business, I mean, first off, we've had really strong growth the last several years. We actually combined and formed this business a couple of years ago, just a couple of years ago by bringing various businesses and assets across the company together. And as those things continue to come together, we continue to look at our resources, our product offerings. We have conversations with manufacturers about their lifecycle and service needs across that life cycle. And we just felt like as we evaluated investments, we had been making and where we thought investment opportunities were for the future, it just made sense for efficiency and focus purposes to make sure we align those to where our best possibilities are."}, {"role": "assistant", "content": "And when you make those realignments, the skill set is not always the same what you're moving from to what you're moving to. And so unfortunately that did impact some of our team maybe, but this is our job. This is more of our strategy to simplify the portfolio and be focused on efficiency and positioning the business for long-term growth. So we feel very good about the performance this past fiscal year. We feel good about the targets we have set for fiscal '24."}, {"role": "user", "content": "And I guess, I would just remind you, again, these are long-term target rates. So we expect that we'll be able to achieve as this business is broad and diverse. So we have it as a strategic focus point. We're going to continue to invest in this business from year to year that may vary, but over the long-term, we feel comfortable with the updated guidance that we've given you. But it's a business that we're going to continue to make investments and to grow it and to support our customers."}, {"role": "user", "content": "Great."}, {"role": "user", "content": "Well, thank you, everyone, for joining us this afternoon or evening depending on where you are. I appreciate all the thoughtful questions, your support and interest in McKesson. Thank you, Rachel, for facilitating this call. I want to conclude by just stating McKesson had a strong fourth quarter and full year result. I'm really pleased with the continued momentum in the business. Britt and I remain confident in our ability to deliver sustainable long-term growth. I want to-end though with a note of acknowledgment to the McKesson employees. It's really thanks to their dedication and their commitment to our customers, our partners and to each other that enable us to truly improve care in every setting, one product, one partner and one patient at a time. Thank you, Team McKesson. Everyone else thanks again for joining. Have a terrific evening."}]}, {"messages": [{"role": "system", "content": "Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Your first question comes from Steve Hansen at Raymond James. Please go ahead."}, {"role": "user", "content": "Hey, good morning. Mike, the new force multiple air contract appears to be another important win in Europe for that segment. It also is one of the longest duration contracts I think you've discussed thus far. Can you just maybe give us a sense for what that means for the program longer term and whether this opens up additional opportunities in that region?"}, {"role": "assistant", "content": "Yeah, we are really excited about the ability to put FMX out on a prolonged basis. Many of you will recall, we built FMX as an opportunity to respond to hotspots in the world where there was a need for an immediate surveillance aircraft, but nobody has the staff available and ready to go. It's something that always needs to be built. And so we built this -- and tearing COVID, quite frankly, it's been less busy than it had been before, simply because governments are focused in other areas. With ongoing immigration issues, governments around the world, but in Europe, in particular, are very interested in patrolling their waters and one of the governments approached us and said, we need an immediate solution. And by immediate, we're going to stand up that operation in a matter of a few weeks. And I'm not just me getting the plane there. We're going to basis staff, everything to fly that aircraft more hours than we've ever flown it on a monthly basis. In fact, the government would like us to fly beyond the capacity we think it could fly. So we're going to be pushing the limits of our team to keep it maintained and in the air. But what's unique about that is that we only just signed our first -- or delivered our first contract in the Netherlands. This is a second opportunity. And we see opportunities like this continuing to pop up. It's highly likely that the government that we're doing this for, will follow up this 18-month contract with a long-term RFP. And while we have to win such an RFP, I think we're in a good position. We at least have a head start because we're working for them already. And so I think it just speaks well to [Indecipherable] reputation in the world and credibility in solving ISR and maritime surveillance issues. Yeah, and Steve, what I would add is it really showcases the capability of first multiplier. I think can we think of it as an object, it's an aircraft, but it's really a full service. And for our folks to stand up in just a matter of weeks, the aircraft to get it ready for the type of deployment that's going on to do the necessary modifications and to quickly adapt our technology on the aircraft to suit the government, the customer that we're servicing is quite remarkable. And we're also excited about the CarteNav system, which you've heard us talk about before because it is on other surveillance technology that this government has. So we'll be very integrated with them. And I think it just showcases our international capabilities and I think that will lead to a lot of additional opportunities in the future. One last thing before we leave this topic. We're not being cute or vague about who it's for. The government we signed the contract with allowed us to announce it because it's our AGM later today, but they will be making their own announcement very shortly, and it will become public who this is for, but we are at the request of our customer letting them announce that."}, {"role": "user", "content": "Okay, that's great, that's good color. Thank you. Just maybe one follow-up, and I'll jump back in the queue is around the Window Solutions business. I'm still getting used to all these new names. Just wanted to make sure I'm understanding it properly. The backlog there has been deep for some time. I think we all know that but there has been challenges. You referenced the ability to ramp up here through the balance of the year. I'm just trying to get a sense of the cadence at which you see that production schedule improving and how we should think about the economics for that business that goes forward. I think you've also described it in the past as one of your most underutilized businesses with the most upside. So just some sort of sense for how we expect the balance of the year play would be helpful thanks."}, {"role": "assistant", "content": "Well, I think you see two things. We've already seen the revenue start to increase as our production is normalizing. And so you'll see that continue to go through the year and quite frankly, into next year. We've got more and more projects, the farther we go, the deeper the order book is. But in addition to that, it really, the returns go not only with the volume but the gross margins are better because they were priced at higher input prices. So we have better gross margins. And then quite frankly, the factory is more efficient because it's running more than it has been in the past. And one of the best indicators of that is we're in the midst of setting up a second shift in Dallas for the first time since we built that factory. And for those of you who had the opportunity to see it, it really is a state-of-the-art manufacturing facility. And so the more product we could run through there, the better."}, {"role": "assistant", "content": "It really was a part of your question, but I'm going to add something else because it's related to this as it relates to BV. They have a strong order book and you'll see that instantaneously as they come into Q2 with the May 1 closing. But you're going to see significant synergy opportunities as those companies are put together. Revenue cross-selling or railings and curtain wall and installation where they can help each other out. And then consolidating our manufacturing, we have five or six facilities in Southern Ontario. We'll shrink that down materially and have more Dallas like production. Now, that stuff obviously not going to happen overnight. We'll see that over ensuing quarters. But I think we use cadence. We're going to be talking about this quarterly for the next three, four, five quarters as we start to see the benefits of the higher contracts, the increased demand, and then following that, the synergies of the two operations."}, {"role": "user", "content": "Thanks."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Matthew Lee at Canaccord. Please go ahead."}, {"role": "assistant", "content": "Good morning, Matt."}, {"role": "user", "content": "Hey, good morning. Thanks for taking my question and congrats on the results. I just maybe want to start [Technical Issues] manufacturing side, based on my calculus, you did high-single-digit organic revenue in the business. Can you maybe break-down what's driving that and if we should expect that rate of growth to kind of continue throughout the year, even though Northern Mat has seen some rate ease?"}, {"role": "assistant", "content": "Yeah, I mean we need to talk a little about Northern Mat separately from the precision manufacturing stuff we do. Your calc on the high single digits is pretty close to bang on. It's driven by -- really by two things: strong demand and passing on some of the cost of increased products like the raw materials in there. But virtually, every one of our businesses has a record or near record order book. So in that part of our business, it's easier to forecast and quite frankly, pretty positive because of the demand across the board. We don't have a lot of direct-to-retail kinds of products we're producing. So the discussions and rumors of recession, we really don't see having a big impact there. So I think continued growth of the type you're talking about is a reasonable estimate."}, {"role": "assistant", "content": "As it relates to Northern Mat, they performed at a rate very close to last year, when we didn't know the business. But last year was clearly the best in Northern Mat's business. Carmele mentioned during the call that we don't anticipate and we've said all along that last year was kind of a perfect storm of good things. Having said that, this year remains strong. Demand is good. We have a lot of mats on rent price may come down somewhat as our competitors have more supply, but demand remains strong. The results coming out of Northern Mat are going to remain far higher than what we have. [Technical Issues] We're looking forward to that. And so where we are, I don't think we're particularly vulnerable to somewhat deciding they want to start flying in those areas."}, {"role": "assistant", "content": "Same thing with maritime surveillance. It's a great marketplace. But the amount of time that's gone into designing the aircraft we have and the expertise we have, it would be very difficult absent an acquisition to quickly become a player in those spaces. Chorus is a well-run company, and they generate free cash flow. So if they want to move into something, I'm sure they'll be able to do it. I mean, they bought Voyageur a number of years ago in North Bay, and that was a company we were interested in, and it's a great company. So I think there's room for more than one player in niche aviation. I don't want to sound overconfident, but I think if they decide that's what they want to do, there's lots of room for both of us in this."}, {"role": "user", "content": "Yes, and the other comment, I mean we get competitors from time to time always in our markets. And we've got typically long-term contracts, great relations with our customers, a high level of service, and significant experience and great management team. So that's a phenomenal combination that makes us very difficult to compete with. And we have competed with Chorus on certain contracts in the past and been successful. And if there's more, we're happy to have them come on and compete with them. We certainly have a lot of faith in what we've put together."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Cameron Doerksen at National Bank Financial. Please go ahead."}, {"role": "assistant", "content": "Good morning, Cam."}, {"role": "user", "content": "[Technical Issue] either pilot specifically. So I know you're in the process of, I guess, renegotiating labor deals with the various unions at your various operating entities. It sounds like you've had some success so far on that. I just wonder if you can just update us on the progress there, like what's left to do? And can you maybe talk about the impact on margins? I mean, Carmel mentioned this a little bit, but I mean, I guess sort of the time frame it might take to kind of offset some of the margin pressure from higher labor costs as you kind of renegotiate contracts with customers to reflect those new costs."}, {"role": "assistant", "content": "Sure. We -- I mean, I don't want to get into company-by-company assessments of it. But a number of our pilots are represented by ALPA. ALPA is a strong advocate for their pilots, and they could be challenging to deal with. But we've had success. We've completed at least two of our negotiations, and we're well down the road on a couple more. So like I say, it's a tough time in aviation, and that there's less available people. And so those negotiations perhaps take longer and are a little more difficult than they would have been five years ago. But having said that, we have good relationships and we're making our way through it. We should be through most of it by the end of this year I would think, and some of it will be done in this quarter I would think."}, {"role": "assistant", "content": "In terms of passing it along, we have a pretty strong market presence. And so on the passenger businesses in most places, we're able to pass that on reasonably quickly. Where we have contracted pricing, it can take a little bit longer. But I don't think you're going to see a material impact beyond a quarter or so with most of our airlines. I think where you would see the biggest impact would be in -- the longest term impact would be in a place like Kuwait as an example where we have long-term contracts with the government where we are tied to inflation, not specifically to employee costs. So those may take us a couple of quarters to get things lined up. But it's more of a time taker and a distraction from our management teams with these prolonged negotiations that are required less than the pure cost. We aren't in a lot of places where we don't have enough market presence to pass the ultimate cost of the service to our customers."}, {"role": "user", "content": "Okay, that's great to hear. And I guess maybe a related question. I mean, I know you guys have done a good job of creating a pilot sourcing solution internally. But it does sound like there's some short-term challenges with finding pilots. I mean you mentioned there was maybe some contracts on the charter side that maybe you could have captured earlier if you had available aircraft and pilots. I'm just wondering if a shortage of pilots just industry-wide is having a limiting impact on your ability to grow. Or is it more the aircraft the ability that's the problem?"}, {"role": "assistant", "content": "Yeah, I think sometimes -- and Cam, if this gets oversimplified to be just about pilots, it's about pilots and about AMEs. So some days, it's got out enough iron ready to fly and other days, you need the pilots to fly in. And so it definitely limits how fast you could move on expansions. But having said that, we've been able to do it. We bought extra aircraft. You saw in our results. I mean Rich mentioned in his talk that we have a significant internal beat in our Essential Air services, and that beat was relative to our own expectations. So even with the pilot shortages, we've been able to cover most of that off. There are certain times in certain markets for certain things that a given type of pilot can be hard to find. And that's where you would see the results the most distinctly. You don't see that in EIC as a whole results because they're very niche problems and they are a problem for my management teams. But in terms of our overall performance, the impact is limited."}, {"role": "user", "content": "And pilots can vary by aircraft or platform type. You tend to see more turnover in pilots with your smaller aircraft and less so in the larger ones that we fly, whether that's an ATR or DASH or a Q400. So our focus has been on ensuring that we have a continued flow of those pilots so that we can ensure that the aircraft that we do have are manned and that we've got room for expansion."}, {"role": "assistant", "content": "I think one last thing on this before we drop the topic is we chose -- we believe this is a long term issue. We don't think this is just a COVID issue. If you go back to our conference calls from 2019, we were talking about a pilot shortage then, and that's why we bought Moncton Flight College. Having gone through the pandemic, we realized that that's not enough. That's why we bought the simulator to internalize the training for our smaller aircraft. But it's also the [Indecipherable] pilot pathway. Last year, we started it with a dozen First Nations people. And most of them got through with private pilots licensing. They're back getting their commercial pilots. We doubled the size of the program this year in terms of number of students. And I can tell you we intend next year to expand it beyond Southern Canada into Nunavut. And we think a big part of this is enabling our First Nations and indigenous customers to dream to be pilots."}, {"role": "assistant", "content": "If you live in some of these northern communities where the economic opportunities are very limited, kids don't wake up and say, \"I want to be a pilot.\" Well, we want to wake up and say, I want to be a pilot. And we think it's our responsibility to help provide a pathway for them to get there. And we believe that the reward for us for doing this beyond doing the right thing because it's the right thing, is that the pilots we will build will want to service their own communities. And so they're likely to stay longer and not move on to the major airlines flying the 787 to Singapore. And so it's a long-term focus. We know it's going to take investment. We're prepared to spend on it. And we think it's one of those great crossovers where economic reconciliation and ESG ties into selfish profitable motives."}, {"role": "user", "content": "We've also taken advantage of immigration. We've had several pilots come over from Ukraine, where we've got them licensed in Canada and now becoming pilots for us. So that's been another great stream for us to tap into."}, {"role": "user", "content": "Okay, that's great. I appreciate the color on that. So, congratulations on the results. Thanks."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Konark Gupta at Scotiabank. Please go ahead."}, {"role": "assistant", "content": "Morning, Konark."}, {"role": "user", "content": "Good morning, Mike. Thank you, operator. Morning, everyone. So maybe just wanted to kind of get back to the BC medevac contract, Mike. I think you mentioned you are expecting the award pretty soon this quarter. Can you refresh our memory on how many contracts are going to be awarded? And what would be the expected capex spending for each if they come through?"}, {"role": "assistant", "content": "So there were two main contracts that are being left. One was for the rotary-wing Medevac and the other was for the fixed-wing Medevac. We do not have a presence in BC in the rotary-wing Medevac business. We did bid on it. We were not sort chosen bidder. BC announced that one a few days ago. We believe the fixed-wing announcement is imminent. And imminent could literally mean this afternoon or it could mean a couple of weeks. We don't know. That's in the hands of the B.C. government. We currently cover a significant portion of BC, over half of it. But the new contract is not only just a single omnibus contract for the whole province. It requires a whole new fleet of aircraft."}, {"role": "assistant", "content": "So they've decided that notwithstanding the aircraft we operate there are actually for Medevac standards a very young fleet, they want it because they're putting it into a single contract, bidders to provide all brand-new aircraft. So for us, it's an investment of depending on how the contract is awarded approximately $200 million, that's over probably about 18 months because it's not like if we need a dozen or so, Dave, can you... What's the right number of aircraft?"}, {"role": "user", "content": "12."}, {"role": "assistant", "content": "12 aircraft is where we think it's going to be. You can't go to the airplane store and pick up 12 aircraft. We've bought spots in the production line, should we be successful, but those come on every couple of months or two in one month, and then we have to convert them into Medevac aircraft from brand-new aircraft, and then they go into service. So should we be successful and even if it was announced 10 minutes from now and we were the winner, it's not something that's going to impact this year's financial results from an income statement point of view. We would start investing this year in new aircraft, and it would probably only really have a meaningful impact at the very back end of next year as these go into service. But remember, this is a minimum of a 10-year contract from when they go into service. So summarizing all that, a couple of hundred million bucks, it would give us the whole province. It would be fair -- they would go into service over the next 18 months or so roughly, and you would see the full impact of it beginning in 2024 -- 2025 sorry, yes."}, {"role": "user", "content": "'25, right, that makes sense. That's great color, Mike. Thanks so much. And then on the Alberta forest fires, I know you guys mentioned the Northern Mat opportunity potentially, right? But just looking at a shorter term in the second quarter, can you help us identify what your exposure to the Alberta operations are? I mean, again, in the sense that the forest fires can impact any of your working subsidiaries there, not Northern Mat? And any tailwinds for your firefighting business?"}, {"role": "assistant", "content": "Good question. In terms of the fires impacting our existing operations, they can. Right now, the existing fires are not near any of our bases or any of our people. So right now, it doesn't have an impact, but a wind could change in three days from now, that could be different. Those impacts tend to be short term, not [Indecipherable] the responsibility of our customers. And the ones that entering our yards are insured. So it's not dramatic. It could slow our ability to lay mats or do a project for a given short period of time. But again, that would really be more of a timing issue that would bounce back as soon as we could get in there and go do it. So not dramatic, clearly stressful for the people there, and our thoughts and prayers are with everybody in Alberta. But in terms of our mat business right now, so far, so good. In terms of firefighting, this is one of those good news, bad news stories. I called my CEO, [Indecipherable] custom aviation and I said, \"So how many planes or how many helicopters you got going in Alberta?\" He said, \"None.\" And I said, \"Why is that?\" He said, \"Because they're all already contracted.\" So in a normal year, yes, this would have impacted us, but we're so busy as it is. It really hasn't done anything for us directly because our planes are already working."}, {"role": "user", "content": "That's a good problem to have. I guess. Okay, perfect. Thanks."}, {"role": "assistant", "content": "Yes."}, {"role": "user", "content": "And last one from me, on the balance sheet. So if I look at your credit facility debt today, your senior leverage ratio would be below 2.5 times on the updated EBITDA guidance. To what leverage levels, do you think you would be comfortable going before looking at other alternatives?"}, {"role": "assistant", "content": "I think the organic growth rate and on the acquisition front where we're taking in a piece of equity on the deals we do. Like if you saw with BV as an example, 20% or 25% of the deal is funded in equity. But we really don't have a limitation, especially with Rich's work on extending and increasing the facility. Our appetite for leverage hasn't changed. And if you roll out my kind of [Indecipherable] for next year, at 600, you put that into our current debt level, you get much closer to 2% than 2.5%. And our converts at that level fall to, I don't know, 0.6% or so of return. You get us at the lower end of our range. So we have dry powder. I would say that nothing has changed with our business strategy. We always said we wanted to retain a strong balance sheet with liquidity and reasonable debt levels. So if we get the right opportunities, I would move to raise money if as and when that happens. But we have no pressing need to raise equity. We've got -- we're in a great spot. We've got the better part of $1 billion worth of liquidity if you include our accordion on our debt facility and our aggregate debt is moving down to the lower end of our historic range. So I think we're in a good spot as it relates to that, Konark, but we remain committed to maintaining a strong balance sheet. And because everything we look at is on an accretive nature on a per share basis, if at some point you need some equity, it's not going to hurt the existing shareholders because whatever we're spending the equity on is accretive to the existing shareholders."}, {"role": "user", "content": "Perfect. That makes sense, Mike. Thanks so much. Just to clearly understand what's your incremental cost of borrowing on this credit facility under this fixed-rate swaps."}, {"role": "assistant", "content": "My CFO did a weaker [Phonetic] good job of negotiating and it's the same as it was for the existing part. There was no increase in the cost of borrowing. I mean, obviously, the cost of SEDAR and those things bounces up and down, but our markup to the banks is unchanged from what it was in last year's facility."}, {"role": "user", "content": "Yeah, And just because I think on the tail end, you asked about the swaps. I think in Mike's message, he talked about 100 to 150 basis points of conversion. So that's kind of pick the midpoint over the two swaps. It's probably a good starting point compared to where you see SEDAR or SOFR setting plus our margin."}, {"role": "user", "content": "Makes sense. Perfect, thanks so much guys. I'll turn the call over. Thank you."}]}, {"messages": [{"role": "system", "content": "Thanks, Konark. Your next question comes from Chris Murray at ATB Capital Markets. Please go ahead."}, {"role": "assistant", "content": "Good morning, Chris."}, {"role": "user", "content": "Yes, thanks, folks, good morning. So I want to turn back to the B Glazing acquisition. And it's interesting your commentary that it's probably one of the more unique opportunities you guys have had around doing an acquisition but actually having synergies to work with. So I just wanted to kind of work through this a little bit. You've talked a little bit about maybe some end-market support and things like that. But a couple of things to think about. So we think margins in that business were historically kind of plus or minus 20% and just looking at the acquisition price and what you guys have historically bought or done transactions at, and we think that is going to be kind of in that range. But I'm kind of thinking about this from a couple of things. Like, first of all, utilizing manufacturing footprint. So I guess, straight up, can you build the BD product in your other facilities? So can you use Texas, for example, to build that? And then second, is there anything else on the cost side that we could see that margin profile materially change? Or is it mainly going to be on the sales side? So wonder if any additional color that can we kind of walk through how to think about how you guys are thinking about synergies would be helpful."}, {"role": "assistant", "content": "Yeah, so as you put it, we've got the market synergies, which is really three different product offerings, Quest, our existing company didn't have the capability to make railings or stick with no-wall for the joint use buildings where you've got retail on the bottom or commercial on the bottom. Now we can acquire both of those products from BV Glazing. BV didn't have an installing capability in the U.S, they had to use third parties. So now they'll immediately use Quest. So those will happen more rapidly because they're more easily done and internalized. Then as it relates to the manufacturing, we have I believe it's either five or six facilities in Southern Ontario, all in leased buildings, we will amalgamate that production. Whether it goes to one building, two buildings or three buildings. We're still running models. We just closed May 1. So the management teams are just starting to talk about the best ways to do this."}, {"role": "assistant", "content": "And so what that's going to enable us to do is you've got the opportunity to go through our Toronto plant for Quest and see how that's built until it's absolutely filled the four walls versus how we built Dallas, which is obviously much more efficient and effective because it was custom designed. You're going to see a new facility or facilities for Quest and for BV in the Southern Ontario marketplace. And then we will also determine how we're going to specialize manufacturing between Dallas and Ontario. I think it's highly likely that we'll do certain kinds of work in certain facilities. So one may do the more complicated doors and open windows and that kind of stuff, and the other may do the more vanilla but larger run window wall segments. We're still working on that. But I think this is something I want to make sure crystal clear on is that this is not about building the same number of windows with less people. This is about being able to take that equipment, put it in a bigger space and do more stuff with the same people. This business is growing. The opportunities are huge. I don't know if anybody saw in the article of the globe a few days ago, where they opened up sales on a condo project with two towers, and it's sold out in a matter of days. With today's interest rates, that's a tremendous statement about the demand for high-rise living quarters, particularly in big cities where the cost of single-family housing is prohibitive. So we believe what we need to do from a synergies point of view is take the skilled people we have and get way more out of them by changing our manufacturing footprint. That's obviously going to take us a few quarters to do, and we may invest in some bigger, faster, more effective equipment, but that's going to let us build more windows with the same people."}, {"role": "user", "content": "And as we look at the operations as a whole, and Mike touched on this, it will allow us, we believe, over time, to specialize so that one line will just do glass and you'll get increased throughput on that. You'll get that specialization. All of that drives efficiencies. And then just you have two great operators looking at best practices in and of themselves, that will drive, in my view, some additional synergies, all of which take time, but that's just part of the excitement that we see in bringing both BV and Quest again."}, {"role": "user", "content": "Okay, that's helpful. Thank you. And any thoughts around kind of overall margin and overhead absorption or anything direct that we could think about?"}, {"role": "assistant", "content": "Yes. I mean the 20% you mentioned would be at the high end of the range for that business. And it does touch that in places, but it depends on whether you include installation in that, which is typically a lower larger part of the business. But I think we're going to need a quarter or two of having to be able to give you meaningful guidance on how fast it changes. The one thing I can tell you is that we fully expect BV to contribute starting May 2, the day after we closed. So you'll see an immediate impact from an acquisition point of view, and then the synergies will bleed in over time. And either in our Q2 or Q3 meeting, I'll give you some more precise guidance as to how we see that margin growing over ensuing periods."}, {"role": "user", "content": "Okay, that's great, thanks. And then the other question, and this one a bit of a change in the presentation. And in some ways, removing some of the transparency on some of the segments. I guess a couple of pieces of this. Is there any way that we can get kind of a revenue in some of those subsectors and an EBITDA breakdown? And just in thinking about making the changes, last time we kind of were facing some criticism around the transparency in your reporting. Any thoughts around the writing off of the changes and how to maybe address some of the criticisms that might return?"}, {"role": "assistant", "content": "Yeah, I'll tell you the changes we've made to discussing this in terms of our 6 key areas of operation came from outreach we've done with our shareholders. You told us we make our things too complicated and too hard to understand, and they really didn't need to understand who [Indecipherable], if they're both flying passengers into Northern First Nation communities. So we tried to align those things. This is just the first reporting period under this. And if there's some disclosure as it relates to revenue in a given part of that, I think that's something we're prepared to provide. I'd us come back to us and we can go off-line in terms of in future periods or what you're looking for is like you want to know in a central air revenue and EBITDA number, those things that are things we could consider. But the idea was, is we want to stop talking about all the brand names and all the great companies we have because it confuses most people. So we tried to make this a little more linear. And if there's things we can bolt on to that in the future, we're glad to consider it certainly wasn't meant to reduce transparency. It was meant to improve how opaque, the number of companies were and how much you had to understand about our company to get there. So very interested in your feedback."}, {"role": "user", "content": "All right, thanks, folks. I'll leave it that."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Krista Friesen at CIBC, please go ahead."}, {"role": "user", "content": "Wondering -- first-off. Good morning, thanks for taking my question. I was just wondering just as we get to understand Northern Mat a bit better. Are there any incredibly large contracts for Northern Mat that are rolling off in the next year to 18 months that it will take some effort to really backfill?"}, {"role": "assistant", "content": "The short answer to that is there is always big contracts rolling on and off in that business. We had a big one in Ontario that we had putting in hydro lines into northern indigenous communities that we've completed. We have a fair number of mats on with one of the pipelines, which should expire sometime next year. It keeps extending. I don't know exactly when. So yes, there's always some of those. But conversely, there's always new ones coming in behind them. And so that's what makes -- when we bought it, we talked about it, it's not particularly cyclical. It is a little bit choppy in that sometimes you'll have a new one doesn't start exactly when the old one finishes. But yes, there can be variations period-to-period. But it's not that right now or next year or last year is more driven by individual projects than the businesses as a whole. So like I say, right now the single biggest stuff we would be doing would be on the pipeline, the Trans Mountain pipeline. That's expected to be finished sometime next year. But then very quickly after that, you go into the maintenance and the testing and the service. So while fewer maths [Phonetic] it's replaced with that business. And then quite frankly, we're expecting some material new work that we don't have today in Eastern Canada for some electrical distribution projects that are available."}, {"role": "user", "content": "Okay, great, thanks. And then maybe just a follow-up question on the acquisitions and the guidance raise. Are you including much in terms of synergies this year from the acquisitions in your guidance for 2023?"}, {"role": "assistant", "content": "No. There's virtually zero. The reason being is we -- to be honest with you, when we built the numbers out, we didn't even know when we get Competition Board approval. So we weren't sure we're going to take over. And because of the nature of that, Krista, we really didn't allow the teams to talk to one another, even though we had closed -- announced the deal back in March, we needed the Competition Bureau to placid in case they said you can't do this, we didn't want to start anything. So it's going to take us some time to get that. We've got the whole team together here in Winnipeg, actually. It was fun watching them say, we could do this, yeah, we could do that. And I think I mentioned previously in the press release that we're actually going to have Darwin Sparrow, our COO, spend a fair bit of time in Toronto and help with the integration of the businesses simply because it's such a big opportunity. And it's not like our typical deals where we buy one company in full, build another one into it. This is more you've got two peers and how are we going to put them together into an entity. I think it's very likely you're going to continue to see BV product line and the Quest product line within our Window Solutions project, but we may well have common production or common marketing or common installation. And so we're just working on that. So the numbers we're giving you are based on just owning the things we own, and we'll start seeing synergies next year. And that's why I'm not really ready to give a hard guidance number. We just gave the indicative kind of the $600 million because we know there's stuff to come there."}, {"role": "user", "content": "Right. Okay, perfect. Thank you. Thank you very much and I'll jump back-in the queue."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Matthew Weekes at IA Capital Markets. Please go ahead."}, {"role": "assistant", "content": "Good morning, Matt."}, {"role": "user", "content": "Right. Thanks, good morning. Thanks for taking my question. The first one just on Northern Mat. And as you think about that business and maybe seeing a bit more supply and kind of pricing pressure in the market. Just trying to understand your kind of cost leadership efficiencies in that market. If you can comment on anything the teams kind of doing there to maybe get ahead of it a little bit, sort of capture, take advantage of the market environment capture more work, sort of mitigate downside from the competition? Thanks. I think that the team at Northern Mat is exceptionally good at having their finger in the water of where things are going. And our key competitive advantage, both from a cost and a strategic point of view is vertical integration. Most of the people we compete against in the rental business, which is the core part of the business, don't make their own bots. So they got to make decisions well in advance of where they're going to buy from them, what they're going to do, whereas we ramp up and ramp down our production as demand requires. We carry months of wood supplies. So the wood that's using a map, it comes from a very few number of trees because it requires such large timber. And it's available and sometimes it's not available at others. So one of the other things we do is we make sure we've always got lumber in the yard if we want to ramp up, we can do it tomorrow. And then the other thing we're doing now is we're looking at investing in even better technology to make the math. We already have a state-of-the-art process, but it's still labor-intensive. We continue to examine opportunities to make it more efficient, more automated, which again increases the delta between our mat costs and our competitors' back costs. In terms of putting that out now versus later, the customers are pretty sophisticated about that. if you put it out now, they're still negotiating. And not prices are still strong. The reason why you keep hearing us talk about it's not as good as last year is last year was a perfect storm. And we didn't buy it off of last year. We bought it off of an average. So we benefited from that last year, and this is going to be way above the average as well. It's just we're trying to be transparent with the market that it's not always as good as it was last year."}, {"role": "user", "content": "Yes. The other thing to do -- is they have the ability because they own the [Indecipherable] the balance between net sales and leasing mats to get -- maximize their revenues on that basis. And of course, as pricing has gone down, their input costs have also gone down for the actual production of the mats and hence the margins on the sales. So by getting that balance right and taking opportunities that exist on the sales side that helps them as a market leader and then obviously deploying mats the most effective way, whether that's leasing or sales."}, {"role": "assistant", "content": "And you see -- I'll just add further on that, you'll see where customers will come to you and they've got to use from mat that's going to be very destructive to the mat. And so they want to buy mat, but there's no mat advantage for them for having brand-new mat. So we've got the ability to say, okay, well, we've got this batch that are two years old. We'll sell you those for last, and then we'll just backfill our fleet with new ones we produce. And so we have the ability to participate in all age of mat sales without impeding our ability to take advantage of leasing opportunities."}, {"role": "user", "content": "Okay, that makes sense. Thanks. And just flipping over to the Aerospace and Aviation segment and thinking about the guidance, are you assuming there's a bit of kind of margin lever as it comes from last year? You had sharp volatile increases in fuel cost. Should that impact sort of you lessen this year as those have stabilized and you've had a bit more of an opportunity to sort of build in fuel surcharge into your contracts and pricing?"}, {"role": "assistant", "content": "I mean, yes, the answer to that is yes, but it comes with a big but because I don't know what fuel prices are going to do. The fuel prices are linked to happen this year, which is relatively stable. Your assessments bang on. We got hit by really sharp short-term increases over last year. And this year has not been that, we've been able to price our product in line with current fuel prices. If the Saudis were to stop production all of a sudden and fuel prices spiked, we could have another one of those where you have a short-term impact until we adjust. Or conversely, if it's like it's been in the last 25 days or so, where fuel prices are softening, you could actually have a short-term benefit while we take fuel surcharges off. So your statement about more stability in front of higher margins is correct, subject to any changes in the macro environment."}, {"role": "user", "content": "When talking about margins for the entire segment as our aircraft leasing portfolio comes back online and is being utilized at a higher rate, margins should tick up when you're looking at the segment as a whole. Okay. And at that point, that's kind of being viewed probably is more of a later-in-the-year sort of second-half event for the leasing portfolio."}, {"role": "assistant", "content": "Yeah, I mean I think you'll definitely see a higher lease number in Q2 than in Q1, and you'll see another pop in Q3. So it's not all I want to always try to explain to my board. It's not like a light switch, all of a sudden, they're all out. But we can see into the future because we have contracts signed for we'll think this plan in this month or those engines starting in this month. So I think you'll see kind of a -- not quite a straight line, but it's pretty close to it in terms of improvement over the next two or three quarters."}, {"role": "user", "content": "Okay, excellent. Thank you for answering my questions. I'll turn it back."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from Jonathan Lamers at Laurentian Bank Securities. Please go ahead."}, {"role": "assistant", "content": "Good morning, Jon."}, {"role": "user", "content": "Good morning. I think my questions have largely been covered. But just on the Quest Windows business production. Could you comment on how you see production at the facilities, including the new Dallas one ramping up into Q2 and how it ramps up in Q1?"}, {"role": "assistant", "content": "Yeah, I mean we produced materially more windows in Q1 than we did last year in the same period. And that will continue to grow, albeit more so at the back half of Q2 to the beginning of Q2. But I think the best way I can qualitatively explain that without publishing Window friends, which Jody may kill me if I published as it's too competitive, we're opening up our second shift at Quest Dallas. And we never got there, pre-Covid. We were talking about a second shift. We're now opening it up for that. And so I think that can tell you what we think about our volume requirements. And I can tell you that BV in our due diligence, we expect them to be busy through the balance of this year for sure and into next year. But they're instantly into a busy period as well. So I think you'll see growth in the amount of window frames we do in each of the next few quarters. And the margins on each window frame will also improve because of efficiencies of the plant and because of better pricing."}, {"role": "user", "content": "Thank you. And just on the R1 leasing business, I appreciate the color there. If possible, it would be helpful if you could provide us with the revenue for the leasing business just because the margin profile is so different from the aircraft sales or perhaps the EBITDA. Thanks."}, {"role": "assistant", "content": "We'll deal with that for next quarter. This was a learning curve for us in terms of the new disclosure. We wanted to make it easier for our readers to understand, but I appreciate for modeling purposes. There's probably a couple of numbers you'd like to have. So we'll take a peek of what we disclose and give you a few more of those pieces for Q2."}, {"role": "user", "content": "That's great. I just wanted to provide that feedback. Thank you."}, {"role": "assistant", "content": "I appreciate that. Thank you."}]}, {"messages": [{"role": "system", "content": "Your next question comes from [Indecipherable] at TD Securities. Please go ahead."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Good morning, thanks for taking my questions this morning. My apologies if this question was already answered. My line has been dropping in and out. So my first question is regarding the two acquisition. Could we get a sense of what the annualized revenue and EBITDA contributions were for those two acquisitions in 2022 and how do you guys kind of see that -- see 2023 play-out with those two businesses assuming obviously BV Glazing that you guys closed on that -- closed on the acquisition."}, {"role": "assistant", "content": "I think what we provided on that was that in both cases, they were above our 15% return threshold. So if you back into that from the acquisition price, you can come up with the EBITDA, the maintenance capex in those businesses are very modest. So EBITDA and free cash flow are very similar. And then when you look at margins, I think what we said is they tend to -- both of them would be sort of mid to the higher end of our -- of the range of our existing companies. We have not disclosed a specific revenue number for competitive reasons, nor a specific margin number. But we explained that they were purchased off of a return north of 15%. And so you could back into those, I think. And then in terms of next year, I talked about earlier in the call that there's going to be significant synergies on the BV deal, both from a multiple products point of view that they're able to provide products to Quest to BV that we don't currently have where they are outsourced. And then additionally, we're going to consolidate our manufacturing footprint in Ontario from five or six facilities down to a couple of three facilities, which will increase efficiencies and generate greater throughput, so we can grow the business. But those synergies obviously take time. We just closed eight days ago. So that's more of a 2023 story. In terms of the details of that, give us a quarter or two to get the plan in place. I don't like shooting from the hip in case I back my operating guys into quarters with my promises. So we'll give you better color on that in Q2 or Q3."}, {"role": "user", "content": "Perfect. I appreciate that. And then my last question is which one of your businesses, if any, I think you guys kind of hinted that you guys haven't seen any impacts from the economic headwinds. But which one of your businesses, if any, do you expect to be impacted the most, if economic headwinds persist?"}, {"role": "assistant", "content": "To be perfectly honest with you, what we see from a recessionary point of view really does not impact. At this point, anything. Our order book is strong across the board. The one that's -- like we said, regional ones improving. We thought it would have improved faster till now we now are signing contracts and growing the business. If we've got one that's a little lower down the hill in terms of the climbing back out of COVID, it would be one, but it's well on the way. And in terms of any declines, things could change in the future. But where we are now, we just don't see any."}, {"role": "user", "content": "Perfect. I appreciate the color, guys. I'll hop back-in queue."}]}, {"messages": [{"role": "system", "content": "At this time we have no further questions. So I will turn the conference back to Mike Pyle for any closing remarks."}, {"role": "assistant", "content": "I want to thank everybody for hanging around listing to all the questions and talk. I look forward to seeing some of you today with our Annual Meeting in a few minutes over at Com's new facility at the Winnipeg airport. We're excited about the rest of the year, and I can't wait for August to tell you all about it then. So have a great day, and hopefully, we'll see you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question comes from the line of Heidi Vesterinen with BNP Paribas. Your line is now open."}, {"role": "user", "content": "Good morning. So I wondered if you could please talk more about the cadence of volume and margin performance to the quarters to get to your guidance, please? And specifically on volumes. So you reported Q1 volumes down high single digits, which I think is what you had guided for originally, within in your speech, you said that it was better than expected. And then you're now saying I think Q2 is looking somewhat worse than expected. And I think your guidance used to be down low single digits. So can you clarify what the guidance for Q2, please? Perhaps if you can also comment by segment? And then same for margins through the year, please."}, {"role": "user", "content": "Yes. It's Frank. A couple of things. So in Q1, we had guided to your point, high single digits in volume decline, and we actually performed a little bit better than what we had assumed in that original guidance. Sales was up 1%, as you know, on a currency-neutral basis. So a little bit ahead in Q1. Q2 is slightly down from what we had assumed originally. However, when we take a step back, Heidi, think about the first half of the year, mid-single-digit volume decline, which is pretty much right on what we had expected at the beginning of the year. So really, what you're seeing is a phasing and shift, but the first half of the year, mid-single-digit decline in volume. And we'll talk a little bit more about some of the different areas here in just a bit. The second half of the year, what we are anticipating and assuming is against -- obviously against a much easier comp as we get to the back half of the year. We are making the assumption that we will have mid-single-digit growth in the second half of the year, which then when you look at the full year, has our volume being flat year-over-year. So let me unpack a little bit about some of the key assumptions as we get into the back half of the year and even into the second quarter."}, {"role": "user", "content": "First, destocking, we are assuming that, that ends pretty much in Q2. So if you think about destocking, Heidi, we saw this really come to fruition in Q4 where volumes were down high single digits in Q4 '22. We continue to see destocking in Q1 and some destocking is continuing in Q2, but we think destocking is at the end as we head into the second half of the year. This is really important for our Protein Solutions business and Health business that were significantly impacted by destocking. Second, the assumption is that consumer trends do remain resilient. There's some uncertainty in that. But if we look at what we have heard from our customers and as we're working with them and bringing innovative solutions. In Home & Personal Care, we saw good growth in the first quarter. We anticipate that will continue dish detergent, a lot of innovative projects that we're working on, and we see good progress and acceleration as we go into the second half of the year. We think food and beverage will still remain resilient. Obviously, our Flavors business is really important there, grew in Q1, and we anticipate we will see accelerated sequential performance as we go throughout this year and in the back half. We also are focused on improving our Ingredients business. We've discussed that really a focus on putting some additional resources behind Ingredients. Our customer service has improved significantly. We have the capacity to serve customers."}, {"role": "user", "content": "So that's something that we are also assuming as we go forward in our Ingredients business. And then we're seeing resilience in Consumer and Fine Fragrance and we anticipate that to continue and then also Pharma continues to be resilient as well. So when we take a step back from a volume perspective, Heidi, think of first half down mid-single-digit volume, second half, up mid-single-digit volume and then ultimately volume flat for the full year. The third thing that we are seeing that we believe will accelerate in the back half of the year and improve sequentially is geographical volume growth in the back half. For instance, China this quarter, Heidi it was up 2% in sales. Asia Pacific or I should say, Greater Asia was up 1%. As we talk to our teams in Asia and in China, while the opening is still slow in parts of China, we are seeing improved signals from customers and that gives us confidence as we get into the back half of the year that you will see geographical improvement. And we've also noted that North America has been challenged for us over the last couple of quarters. We anticipate sequentially that will improve as we get to the back half of the year. So that's the assumptions from a volume perspective. A lot of like we said, there is some uncertainty, but we're believing that those three assumptions and drivers are what gives us the assumption at this point in time to hold our volume flat for the year."}, {"role": "user", "content": "In addition to that, as you look at the back half of the year, there's a couple of other things I will highlight. On the call, we spoke about the fact that absorption in the first quarter was a headwind for us. It will be a headwind in Q2 to a lesser degree. Obviously, as you get to the back half of the year, that will go positive and help us. And then in addition to that, if you recall, we highlighted that we have our cost reduction program. Full year, we highlighted a cost reduction program of $100 million. We highlighted a run rate of $70 million to $75 million for the year. And if you look at the back half, that is where you'll see the majority of that benefit in the second half of this year. as we execute on our cost and people reduction programs. So when we take all those things into account, Heidi, that is why we feel as though holding our EBITDA guidance to the $2.34 billion that Glenn highlighted was the appropriate assumption at this time."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Mark Astrachan with Stifel. Your line is now open."}, {"role": "user", "content": "Yes, thanks and good morning everyone. I wanted to ask about guidance and then some of the troubled areas within the business. So in your opinion, are you being more conservative or optimistic than you were previously, it seems like underlying assumptions maybe from a consumer dynamic has changed to be more positive within the underlying guidance. I'm curious if you could comment on that. And then for the more challenged portions of the portfolio, things like the legacy N&B and Ingredients in terms of what you highlighted, what proactive steps are you taking to offset what seems like perhaps more permanent and structural volumetric share loss, meaning like improving service levels doesn't seem like it could be enough to change the trajectory of the business, but perhaps I'm wrong. So just sort of curious how you're thinking about what you can do to improve those pieces of the business, which have been dragging performance and losing share."}, {"role": "user", "content": "Yes, Mark, it's Frank. A couple of things. One is with regards to the businesses that were challenged. And some of these, as we have highlighted, clearly were due to what we see more destocking and end-market demand and not necessarily share loss, but I will also acknowledge there has been share loss in other -- in parts of our business. So for instance, in Health, Mark, you highlighted, we have discussed that the probiotic market in North America several times. In that business, in particular, we have been really focused on our resources into that marketplace. That is really -- the down in volume has been driven much more by destocking and end market softness. But with that said, we have a strong focus on our -- with our Health team. There's a lot of reviews with our commercial team. We are starting to see sequential improvement in that business mark as we go forward. In our Ingredients business, as I just highlighted, there's a couple of things that we have put in place. One, our customer service levels were not where they needed to be. We highlighted that during our Investor Day, they have improved significantly, Mark."}, {"role": "user", "content": "So that is a big, I would say, plus for us, and we're getting good positive feedback from customer. So customer service levels in the on-time performance range of 90% to 95% is really important, and we're there. Second, we now have the capacity that we need to supply customers. We had run into capacity challenges in the past. So we now have the supply that we need. Third, we are putting targeted resources in specific markets that are going to be focused on commercial customers around ingredients. So additional resources, Mark, to your point, are also a part of what we are doing. And then four, what has been encouraging, we had gotten away from really good pipeline development with our customers in that space. And I can tell you this is going to take some time, but we are seeing good projects now come to fruition, and we are seeing pipeline progress in Nourish and in Ingredients and specifically. So those are the areas of focus the team is spending a lot of time really looking at how we can accelerate our sales performance in those areas."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Gunther Zechmann with Bernstein. Your line is now open."}, {"role": "user", "content": "All right. Thank you. Hi Frank. Hi Glenn, can you please provide your insight into the cash flow progression, the cadence throughout the year and the $1 billion free cash flow -- adjusted free cash flow target? And also within that, could you just discuss and outline what you've embedded in terms of working capital improvement, please?"}, {"role": "user", "content": "Thanks for the question. I think the summarized version is we're actually tracking quite well against our objectives and sort of unpack, as you know, the two big contributors relative to our adjusted free cash flow combination of achieving our earnings guidance and then secondarily, all the work on working capital. We had a very good quarter relative to our expectations around working capital. As a reminder, our full year objectives for working capital consisted of a $200 million point-on-point year-end-to-year-end reduction in inventory and then $100 million increase between payables and receivables for a net $100 million reduction in net working capital. The biggest driver of that, obviously, is inventory at that $200 million. That $200 million reduction is actually a $350 million volume reduction with $160 million of basically price escalation, i.e., raw material cost increases coming through. In the first quarter, focusing on inventory, we actually were over $200 million down, inclusive of around $80 million of price escalation. So the volume component in the first quarter was $280 million against our full year objective of $350 million. So we're trending quite well. We will probably actually get to the full sort of our initial level of inventory reduction by the end of the second quarter at this point in time. Payables and receivables, they're a little lumpy seasonally. We're feeling very good about achieving those objectives at the end of the year. So overall, we feel very good, particularly relative to the working capital improvements."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of John Roberts with Credit Suisse. Your line is now open."}, {"role": "user", "content": "Thank you. How do you explain what appears to be underlying consumer strength in Fragrances versus the underlying consumer weakness in Food Ingredients? Or maybe the question should be, how did the channels get so overstocked in Food Ingredients and not so overstocked in Fragrance Consumer products? And are there significant divergences in the current point-of-sale volumes between packaged food and fragrance products?"}, {"role": "user", "content": "Yes. John, this is Frank. What we have seen in Consumer Fragrances, in particular, we saw a very strong Q1. In fact, we also saw a very strong Q1 in Fine Fragrances as well. So we feel really good about what we're seeing. I think Consumer Fragrances, it was a lot of, I would say, pent-up demand. I think you are seeing clearly some positive trends on what we have been working with our customers, in particular, bringing new innovation to Consumer Fragrances. We've worked with a lot of the large consumer packaged goods companies over the last several years. And I think this is where we really have brought strong innovation in our Consumer business. So we feel really good about that. There clearly was an inventory build significantly in Ingredients. As we've highlighted, you could see it as you go through the first part of '22. And then you look all the way back to '21, I think that what took place in those businesses, in particular, uncertainty around supply chains and companies wanting to make sure that they have the supply necessary as you went through a lot of volatility in the supply chain, which is what caused the build. And obviously, now is what we're seeing is some of the destocking from those efforts in those businesses."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Joshua Spector with UBS. Your line is now open."}, {"role": "user", "content": "Good morning. This is Lucas Beaumont on for Joshua. So I just wanted to focus on the production costs under absorption. Could you please tell us sort of what was the actual size of the impact there of 1Q look like maybe $150 million or so in the EBITDA bridge. And then looking at 2Q in the second half, how much residual impact you're assuming in each period as the year progresses? And finally, if we get a scenario where volumes kind of disappointed to the downside, would that get larger?"}, {"role": "user", "content": "Yes. Thanks for the question. This is Glenn. Within the first quarter, the negative absorption impact was $100 million, which translates actually into 330 basis points of impact on EBITDA margin. That represented a year-over-year volume decline of about 20%. So think about our annual fixed cost base for our manufacturing base of about $2 billion. Every one point on an annualized basis is basically worth about $20 million. So we -- hence, why we're able to reduce our inventory so significantly, we took production down significantly. So I would say, onetime event of $100 million. We are expecting, as I mentioned, to continue to make progress on reducing inventories and expecting to have mid-single-digit down volume in the second quarter. That translates into another $50 million of negative absorption. We are anticipating actually positive absorption in the second half of the year. As Frank mentioned, we're expecting mid-single-digit growth in the second half of the year. So production volumes being up year-over-year. Again, the context of the risk associated or opportunity associated with declines or increases in manufacturing a one point on a full year basis is equal to $20 million of negative absorption. So if you think about two points in the second half, that would be equivalency of that $20 million. We have discussed in the past that we will have to continue to consider that if we continue to see volume softer than our expectations, what will be the balance of continuing to manage cash flow and keep our inventories in the right place for production efficiency purposes versus basically the earnings profile. So they're clearly in a softer environment than anticipated, there is some risk of further negative absorption in the second half of the year. Thanks for the question."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Ghansham Panjabi with Baird. Your line is now open."}, {"role": "user", "content": "Hi everyone, good morning. Yeah, just judging by some of the comments from your major customers out of this earnings season, it clearly looks like the global consumer is a little bit weaker. Just curious, given inflation has peaked and just your more recent conversations with your customers, do you get a sense as to whether some of the promotional activity that your customers typically resort to during periods of weakness? Are they starting to contemplate that? Just trying to get a sense as to the risk profile as we cycle through the rest of the year because you will be passed the stocking, but we still have a weaker consumer."}, {"role": "user", "content": "Yes, this is Frank. I think as we talk to our customers, at least the big consumer good companies, I would say they're probably cautiously optimistic on the resiliency of the consumer. They are stepping up in certain categories, promotional activities and efforts. We have clearly seen a lot of, I would say, good focus from them on innovation and looking for new projects. As they continue to focus on building out their future offerings to consumers. I also think that what is taking place is if you look at from our lens and it goes back to what I was highlighting, we do anticipate that sequential improvement will continue from a volume perspective. So just to reiterate a couple of points, in particular, in the areas that are really key for us, the sequential lift going from first half down mid-single digits to positive mid-single digits in the second half. We do continue to see working with our customers very clear opportunities for that sequential step-up, especially against a softer back comparison quarters in the back half. So we believe that our consumer companies that we're working closely with are the ones that are highlighting differentiation and innovation has been key, and that's something that we will continue to focus and work on as a company."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Andrew Keches with Barclays. Your line is now open."}, {"role": "user", "content": "Yeah, hi, good morning. Glenn, I was hoping we could get a little more context for your deleveraging plans over the next -- well, this year and next. So you came into this year, a little over four times on a net basis. That figure has gone up, I think, as expected. You do have those divestitures announced, which will help you get leverage back down, it looks like to about where you came into the year. But I think it still looks like we're going to end the year around flat in 2023 from a leverage standpoint. So I guess that leaves you with a lot of wood to chop next year to get down to that 3.0 times target. So I guess the question is, do you expect to get there organically? Or at this point, do you actually need this additional portfolio actions to drive the accelerated deleveraging and actually get you there next year? And then related to that, it's last from me, that your dividend is really absorbing all your cash flow at this point. So to the extent that conditions do deteriorate from here or you can't optimize the portfolio further. Are you open to considering a dividend reduction or cut at some point to preserve the investment-grade status?"}, {"role": "user", "content": "Andrew, this is Glenn. Thanks for the question. I agree relative to wood shopping. That's why I have a hatchet with me today. But relative to your assumption for this year, you're correct. We were a little over four times at the beginning of the year. We will be receiving net proceeds after tax distributions transaction over $750 million, combination of this quarter and next quarter related to the sale of Savory Solutions and FSI, which will all go to debt pay down. Relative to getting to the three times or less by the end of next year, we are fully committed to them. That will be achieved through a combination of three elements: one, we continue to have opportunity to improve our working capital position. We expect to continue to make progress next year from this year. Secondarily, we do expect the earnings trajectory will improve significantly next year. Part of it is overlapping some significant items, such as $100 million of negative absorption. And then getting the top line going with our productivity program. So that's the second thing, the denominator improving. And -- but that all being said, divestitures clearly play a role in getting to that less than three times. We have been very active in reviewing the portfolio. We are proceeding on multiple fronts. We are fully confident that we have an attractive set of assets that actually aren't ideal fits for our portfolio. We are past the two-year anniversary of the Reverse Morris Trust considerations as of February this year of note, and we are proceeding quite well on that path. So I'd say our confidence remains high and commitment remains high to get to less than three times. And regarding cutting the dividend, that is not on the table at all."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Christopher Parkinson with Mizuho. Your line is now open."}, {"role": "user", "content": "Thank you. You adjusted your revenue guidance a little bit and you're setting some energy and raw movement. Just can you remind us just how much of your portfolio passes through? And just as a corollary of that, could you also just give us a real quick update on price cost movements for the balance of '23 and just what portion of your portfolio you believe will rain resilient in terms of pricing?"}, {"role": "user", "content": "Yes Chris, it's Glenn again. Relative to energy, as a reminder, in our original guidance at the beginning of the year, we had 6% gross pricing in the P&L. 30% of that or a little less than two points was associated with energy, about 75% of our energy prices are either directly via index or indirectly via aligned surcharge attached to energy pass-through to customers, and they are generally reviewed on a quarterly basis. We expect that, as we mentioned, we're taking a point out of that just because it's been a very significant decline in energy prices globally. We believe that, that will be relatively net neutral this year, in part, not only because the pass-through, but secondary timing, the majority of our energy prices actually sit in inventory because they're part of production costs. So with 140 days of inventory, they sort of matched by the end of the year. There should be some overlap as we roll into next year. But for this year, we're assuming that the energy net is sort of neutral from a P&L standpoint. In general, we are seeing positive deflationary trends, not only in energy but in logistics as well as in certain raw materials. So that is favorable relative to the portfolio. As we've mentioned in the past, we believe that, that is a potential upside. It would be either late this year because generally, the roles obviously run through inventories but could be meaningful next year. And relative to our portfolio, we would say that roughly 60 to 2/3 of our portfolio has some degree of resiliency i.e., less commoditized, more uniqueness relative to characteristic. But I would caution, we're in the early days of deflation. So I think it's a little early to declare sort of significant margin capture relative to improvements in raw material and the other costs as well. Thanks for the question."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Lauren Lieberman with Barclays. Your line is now open."}, {"role": "user", "content": "Great, thanks, good morning. In the prepared remarks, you guys commented on pricing, particularly in Nourish as a revisiting of pricing strategy. So I was just kind of curious if we could talk a little bit more about that kind of where you think there are areas to adjust what you kind of meant by that? And then a corollary would be just a discussion on Nourish margins over time, kind of been in that like 12% range over the past two quarters. And I was just curious how you're thinking about Nourish profitability perhaps looking further out and also, again, notice adjustment in pricing strategy?"}, {"role": "user", "content": "Yes, Lauren, it's Frank. On the pricing strategy, we are working with customers to balance price volume opportunities. So clearly, this is not across the board but very surgical, Lauren, in our practices, in particular in certain geographies, and I would highlight in great areas of China and certain markets where there is more price sensitivity. We are looking at price volume, but not across the board. It's a very surgical approach to pricing. Margins will improve, Lauren over this year and over time. Remember that Nourish, based on the first quarter, a lot of the manufacturing absorption impacted the Nourish division in Q1. There'll be some impact as we've highlighted in Q2, and then things will improve in the back half for Nourish and for the company."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Matthew DeYoe with Bank of America. Your line is now open."}, {"role": "user", "content": "Good morning, everyone. Thank you. Frank, you talked a little bit about the Enzymes business. I know it's a big consumer of energy and footprint is pretty European based. So the gas price in Europe with that coming off a lot. Is that an area where energy will be given back and price? Do you think you can hold on to it there? And I guess given all the volatility on the cost center, I mean where are margins now for Enzymes versus maybe where they were in 2021? And where do you think they may be by the end of the year?"}, {"role": "user", "content": "Yes. So I'll have to take a look back in '21, but let me give you the enzyme business and take a step back. One, we think this is a really important business for us, and we're seeing great innovation in our Enzyme business. As I highlighted, we saw really good growth in Home & Personal Care. We've continued to see really good growth from our Food & Cultural Enzymes, and we're seeing encouraging now trends as destocking improves in our Probiotic business. Grain Processing, Animal Nutrition is still somewhat challenged, but we are working very diligently on those businesses. From a margin perspective, I'll take look, remember that as we look at 2021, our overall margins we're obviously, I think, better in '21. We did see a obviously decline based off of what has happened from inflation. So clearly, that has impacted us in 2022, manufacturing absorption also impacted us as we hit the fourth quarter of last year and the first quarter of this year. But over time, we're really confident in the margin progression and improvement in the Health & Biosciences business as we go forward."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from the line of Silke Kueck with JPMorgan. Your line is now open."}, {"role": "user", "content": "Good morning. There's like $52 million in severance charges you recorded this quarter, is that roughly like 500 people that are supposed to leave? And can you tell how many have left so far and how many are to leave? And I have a follow-up on volumes, if your volumes were down mid-single digits for the quarter, does that mean that we're down high single digits in Nutrition and in Health & Bio."}, {"role": "user", "content": "Silke, this is Glenn. We are expecting charges of roughly $75 million full year for the cost reduction program that will be an annualized impact of about $100 million. We expect to be kind of around $72 million to hit the P&L this year. For obvious reasons, I'm not going to describe sort of the pace at which exits in the organization are happening from the standpoint. So that covers that. Can you remind me the second question again?"}, {"role": "user", "content": "I was wondering whether your volume headwinds was just like in the high single digit were down -- I was wondering with our volumes we had high single digits in both Nourish and in your Healthcare & Bio segment."}, {"role": "user", "content": "Yes. Yes. As we had mentioned, the softest part of our business from a volume standpoint was in Nourish. But more specifically, that really was in the Ingredients portfolio, which is roughly $3 billion of Nourish on an annualized basis. So that's where it was concentrated. Flavors and Food Designs generally were fine."}]}, {"messages": [{"role": "system", "content": "Thank you. There are no further questions. I would like to turn the call back over to Frank Clyburn for closing remarks."}, {"role": "user", "content": "Thank you, everyone, and I appreciate the time today for our first quarter earnings call, and we look forward to future updates and continuing our transformation and our overall path to a very strong profitable growth profile company and helping consumers around the world. Look forward to speaking to you soon."}]}, {"messages": [{"role": "system", "content": "We will now begin the question-and-answer session. [Operator Instructions] The first question is from Jay Vleeschhouwer with Griffin Securities. Please go ahead."}, {"role": "user", "content": "Thank you. Good morning. Ajei, let me start first with your comments regarding multi-solution sales. And you -- on occasion given the statistic as to the contribution of the number or -- of those transactions? And within that are there any notable mix trends that you're seeing with regard to the contribution of various types of solvers for example is CFD growing in particular industries relative to solver mix or electronics perhaps within certain industries becoming as material as structural or CFD or others. So I think if you could comment on some of those solver mix trends, I think that would be interesting on a per-industry basis. My follow-up question is with regard to your comments on the partner ecosystem. If you could speak more broadly about that, within engineering software ANSYS has an unusual number of such relationships. So it would be very interesting to hear, if you could comment on the materiality individually or collectively of those relationships, or how you think about that ecosystem relative to guidance in terms of your, relationships with companies like Synopsys, Altair etc. Thank you."}, {"role": "assistant", "content": "So Jay to answer there was a lot of -- there were a lot of questions embedded in there, so let me try to do some justice to a couple of them perhaps. So when you think about the large sales so customers who have purchased more than $1 million or so in the quarter, I would say over 90%, have three or more physics and purchased three or more physics from ANSYS. And so that gives you some perspective of the strength of the multiphysics capabilities that we are able to bring to bear. As far as our products are concerned, obviously the strength of our flagship products is legendary. I mean everybody understands that we have a terrific product in the space. But what we've also seen is the interplay between products and the multiphysics nature of the portfolio I think coming through. So that's also been really helpful. And obviously the advances that we've made that I've talked about in electromagnetics, in CFD and structures etc. across the portfolio in Optics, all of those advances we've made across those five vectors of technology that I talked about are all helpful and important in the way that we engage with our customers and in the value that they see from our products."}, {"role": "assistant", "content": "So I'm feeling very good about our product portfolio. I'm feeling very good about our multiphysics strategy and our ability to service our customers. With respect to our partnership ecosystem maybe it's best to step back and talk a little bit about the philosophy. Look, we believe in an open ecosystem. I think it's very important for us for our customers to recognize that the vendors that they're working with are participating in the open ecosystem which means providing APIs, which means providing for interoperability and things of that nature. And so we are committed to that. We are working obviously with multiple -- other vendors to make sure that customers can benefit from technologies. And obviously no single customer is going to be completely dedicated to a single-vendor. They're going to have technologies from multiple-vendors. We want to make sure that that works for our customers. And so our partnership strategy is driven by that belief in an open ecosystem and the ability to work collaboratively to support customer needs."}, {"role": "user", "content": "Thank you."}, {"role": "assistant", "content": "Thanks Jay."}]}, {"messages": [{"role": "system", "content": "The next question is from Jason Celino of KeyBanc Capital Markets. Please go ahead."}, {"role": "user", "content": "Great. Thank you. Ajei, you mentioned cloud native the strategy is targeting new users and new use cases. Can you just talk about the SAM extension a little bit? Is it about moving down or earlier in the design cycle or down market? Thanks."}, {"role": "assistant", "content": "Yeah. So as far as moving earlier or sort of the democratization of simulation there are a number of things that we've been doing and I think that's continues to be important in our strategy. Number one is making our technology more accessible easier to use. We have certainly advances with respect to our discovery product portfolio. We continue to try to make the technology more accessible to less experienced engineers. Some of the -- if you -- I talked about some of the advances that we've made on technology on things like numerics and other areas of physics. We're democratizing simulation by really expanding the use case of problems think about problems that we can solve today that couldn't be solved earlier in a reasonable amount of time. The investments that we're making are allowing customers to take advantage of this advanced simulation capability and we see that as a form of democratization and certainly the investments that we're making across the GPUs, as well makes technology easier."}, {"role": "assistant", "content": "There's some really interesting work that we're doing with AI/ML to help democratize simulation. As you know simulation can be difficult to set up and take an example of setting up something like a turbulent flow can be quite complex. And we're using AI/ML techniques, for example, to help democratize that and make that easy for end users to set up fluent simulations. And I could go on and on. With respect to cloud, obviously, accessing simulation on the cloud opens the door to smaller customers who may not necessarily have access to high-speed computing. That's certainly democratizing simulation and our continued investments in APIs I think also makes that easier for customers to build automation or special purpose applications on top of simulation. All of this in the aggregate extends the reach of simulation into areas where it wasn't being used before."}, {"role": "user", "content": "Okay. Interesting. Thanks. And then just a quick follow-up, really strong Q1 ACV. I know you mentioned for Q2 some renewal dynamics, but I thought I'd just double check. Was anything closed earlier in Q1? Thanks."}, {"role": "user", "content": "Yeah, Jason, thanks for the question. Yeah, the business is playing out as we expected at the start of the year. Our Q2 renewal dynamic is something that was considered in our full year guidance when we initiated in February. And as I mentioned in the prepared remarks, there's a structural dynamic -- timing dynamic in our renewal base for Q2 and that happens from time to time. But quarterly dynamics as we've always said can be really volatile and are not representative of momentum in the business. But what has changed since we initiated guidance in Q1 was as you point out we had a great Q1 where we not only grew 19% in constant currency, but we beat the midpoint of our guidance. And in addition to that our constant currency outlook for the quarter has improved. Our view of ACV growth before the impact of foreign exchange, which we talked about in the prepared remarks it's increased based on the development of our pipeline since initiating guidance in February. It's also underwritten by a highly recurring ACV model with over 80% of our ACV is recurring and a very strong base of renewals that we see in the second half."}, {"role": "user", "content": "So if we step aside from the volatility quarters can have and you look at the implied ranges in our guidance, our guidance range implies double-digit constant currency growth for the first half and growth above our model of 12% in the second half again underwritten by that very strong renewal base, resulting in a 12.5% constant currency growth outlook at the midpoint, which is almost one point above the midpoint we indicated in February. So we feel really good about where we landed in Q1 after a really strong Q4 and strong 2022. And the guidance that we gave reflects the continued and improved optimism that we have overall in the business, notwithstanding, structural dynamics that sometimes happen in quarters, which introduced volatility. And that's why we are always focused on the full year and how we progress our view of the full year."}, {"role": "user", "content": "Great. Thanks for the comprehensive answer. Thank you."}, {"role": "user", "content": "You're welcome."}]}, {"messages": [{"role": "system", "content": "The next question is from Steve Tusa of JPMorgan. Please go ahead."}, {"role": "user", "content": "Hi, good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Just a follow-up on that question. You mentioned the structural dynamics. Can you maybe just delve into that a little more? That just sounds like it's some timing from that perspective? And then secondly just on the remarks there were a few less seven and eight-figure deals mentioned in the remarks than last quarter in particular. Anything to read into there as far as the size of the deals that you're booking this quarter?"}, {"role": "user", "content": "Sure. So let me start with the first -- your first question. And then will go to the second. So in terms of the renewal base, the timing of customer renewals happen at natural cycles within the quarter. And as we have been moving to the strategic selling motion and bringing individual, kind of, development teams projects, in a customer to more strategic multiyear lease arrangements, sometimes the timing of renewals can shift on a year-to-year basis over time, right, which is the reason why we're very focused on the full year dynamic, because we take deals when they naturally occur because it optimizes the outcome for our customers, and it optimizes the outcome for ANSYS, which ultimately optimizes the outcome for investors. And so, the dynamic around the quarter is just something that happens from time to time. We had very, very strong Q1. The first half, is still strong in double digits. So we're feeling really good about where we're at, and there's nothing about Q2 that wasn't contemplated or seen or known when we started the year. As it relates to fewer seven- and eight-figure deals, I would say, the underlying dynamic around our large deal progression is not unchanged from any other prior Q1s. As you know, Q4 is our seasonally highest quarter, you tend to have a lot more closing in the quarter. And so on a relative basis, there may be more mentions. But the underlying dynamics, around the strength of the pipeline, around the ability to drive strategic relationships, and larger deals with our customers customers' willingness to engage, customers willingness to close. None of those aspects have changed since we spoke in February, about how the shape of the business is progressing."}, {"role": "user", "content": "That makes a ton of sense. And then just one more longer-term follow-up Ajei, I'm probably not the smartest tech guy on this call for sure, but obviously, AI/ML HPC all this stuff just seems to be pretty incredible and moving at a very fast pace. When do you think that inflection can tangibly influence your growth rate? I know you guys, have kind of a 10-year view on this stuff. But I mean, it seems like with the acceleration in these technologies that may be it is, pulling forward that impact to your growth, perhaps from several years from now, to maybe I don't know 18 24 months? I mean, is it that visible of a growth driver, given the progression that's happening and how accelerated it's been?"}, {"role": "assistant", "content": "Well, Steve, I think one of the important things to recognize is, we've been investing in these technologies for a while. And so one of the reasons why, I wanted to take the time during the call, to go through them is, because there's just -- because of exactly the dynamic you mentioned. There appears -- there is a lot of activity in the marketplace and certainly people are aware of advances in technologies, and it's an area where there's been a lot of discussion. But if you think of areas like numeric, as an example, that's been the bread and butter of ANSYS. That's really understanding the mathematics, and the engineering, and the science around being able to appreciate and predict physical phenomena, and that is applicable of course across our portfolio. The HPC activity is certainly been included within our business, for a while. And if you think about the vectors of growth that we talked about in our Investor Day last year, we talked about more users. We talked about more products, and we talked about more computations. And the more computations vector is being driven by high-performance computing, and the desire for customers to solve larger and larger problems, which are solvable as you start to introduce additional cores, you starting to use GPUs and other architectures. So AI/ML is obviously, an area where we've been investing, as I said, for a while. And we have products in the market today, that are taking advantage of AI ML capabilities. So these are all technologies and I don't want to repeat what I said on the call, but these are all technologies and areas where there continues to be investment in -- within ANSYS, of course, across the industry and we continue to reap the benefit within our products to benefit our customers."}, {"role": "user", "content": "Great. Thanks a lot."}]}, {"messages": [{"role": "system", "content": "Next question is from Ken Wong of Oppenheimer. Please go ahead."}, {"role": "user", "content": "Great. Thank you for taking the questions. Nicole, just back on the 2Q ACV, I realize you're maybe beating the dead horse here, but I think kind of the one kind of consistent question, we're getting from investors is, just making sure that this has nothing to do with extended sales cycles or potentially smaller deal size commitments. The structure of those particular KPIs are consistent with, what you're seeing in past quarters?"}, {"role": "user", "content": "Yes. That's absolutely, the case. I mean this is just about an over -- and you -- I know have been have been with us quite a while. You've seen quarters go up and down based on these renewal dynamics which is again why we focus on the full year. So there's nothing about the underlying dynamics in Q2 that are indicative of anything other than an underlying renewal base that has a SKU within the year that is driving those dynamics."}, {"role": "user", "content": "Got it. Perfect. Perfect. And then maybe just wanted to check on direct versus SMB. I mean with all the kind of disruption in our banking system right now, I was always a little concerned that maybe SMBs will have a harder time getting financing. Any changes in terms of what you're seeing on the lower end of the market?"}, {"role": "user", "content": "No. I mean the underlying dynamics across all of our different customer segments have been performing pretty consistently as we've seen in prior Q1s. We had a lot of strength of course in the enterprise segment with the larger deals that we did this year and really strong in the Americas. But I would say we had strong growth across all three customer segments consistent with what we've had in the past."}, {"role": "user", "content": "Great. Thank you very much."}]}, {"messages": [{"role": "system", "content": "The next question is from Adam Borg of Stifel. Please go ahead."}, {"role": "user", "content": "Hey, good morning. This is Mike Richards on for Adam Borg. Thanks for taking the question. I was just wondering if you could talk about linearity in the quarter and how that's shaping up so far in the second quarter. Thanks."}, {"role": "user", "content": "Yes. I mean I would say overall revenue linearity was somewhat -- was pretty similar to what it was last year. It was slightly more skewed to the third month but it was pretty much in line overall."}, {"role": "user", "content": "Great. Thanks."}]}, {"messages": [{"role": "system", "content": "The next question is from Joe Vruwink with Baird. Please go ahead."}, {"role": "user", "content": "Hi, everyone. Ajei just going back to your earlier discussion on democratizing simulation. I think to this point a lot of people think of Discovery when you say that and moving ANSYS into design and early stage development. Do the AI capabilities you've embedded with the high-end solvers begin to remove any sorts of bands or ceilings you maybe once associated with just the addressable users of an upper end products?"}, {"role": "assistant", "content": "So when you think about the AI capabilities that we've got, we're using AI in multiple areas. And one area that I mentioned of course is making it easier for people to use products. And I gave you example of Fluent earlier in what -- in response to one of the questions. That's a great example of making the technology, making our flagships easier to use. Discovery is also making the technologies easier to use in a more in a more broad-based manner. The use of AI/ML is very targeted within the portfolio. But another direction that we're going and we talked about this in our investor meeting or Investor Day last year was our ability to start to support applications. And so one of the ways in which we can democratize simulation is not -- is allowing users to take advantage of applications, purpose-built applications for their needs that are built -- that take advantage of simulation. And to that end we've created a set of APIs based on Python which allow people to build applications workflows things of that nature that further democratize simulation. So we're taking multiple routes to be able to make that happen. And in each of the directions we're addressing a different opportunity to be able to broaden the use case of a simulation."}, {"role": "user", "content": "And then maybe just as a follow-up and related to your last comment when you have customers, end users creating purpose-built applications, this really gets into I would imagine more domain expertise aligned within high tech, within Aerospace and Defense, within Auto. Do you think this is kind of the conduit for of course, bigger deals more strategic deals that's already been happening but does this kind of unlock a second wave of that phenomenon?"}, {"role": "assistant", "content": "Well certainly, the fact that we have the ability for people to write these automations or extensions taking advantage of the power of our portfolio using Python, where they can use other routines open source other things that are outside of simulation to bring that into a sort of an overall workflow. That is something that has helped us -- that's helping us today. I mean there are examples of customers who have increased their use of ANSYS technologies because they've been able to build a very integrated workflow on top of this technology that allows more users to take advantage of what was previously restricted to a relatively small number of users. So that phenomenon that you're saying of driving incremental opportunity within our portfolio is absolutely the case. Furthermore, we would imagine outside of our outside of -- even outside of the engineering use case you could imagine long-term and this is a long-term statement, you can imagine other applications targeting others who are looking for the insights of physics-based simulation to be delivered to them. And we've talked about -- and certainly last year we talked about a healthcare example where someone delivering medical care or surgeon delivering medical care uses an application, which is built for that surgeon. It has nothing to do -- as far as their concern nothing to do with physics per se. They're all about delivering the care that they need to deliver. But underneath simulation is being done to influence the directions that they go. So those are examples of next-generation applications, which we believe will happen in the long-term but that's not a short-term impact. And so as we build out our capabilities we believe that we're enabling both the short-term opportunity as well as the long-term opportunity, which we've been calling the notion of being able to get pervasive insight."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "The next question is from Blair Abernethy of Rosenblatt Securities. Please go ahead."}, {"role": "user", "content": "Thank you. Ajei just wondering if you could drill in a little bit for us on the aerospace and defense vertical $74 million deal there. That's great. And I just wanted to see -- what are you seeing in the defense side in particular given what's been happening in the last 12 months? And any shift in buying patterns in that market?"}, {"role": "assistant", "content": "Well, I mean, obviously A&D continues to be one of our top industries. And our aerospace customers are facing complex challenges things like engine width design lightweighting those continue to be areas of investment for our customers, but also a lot of work on Space 2.0 and the ability to be able to launch payloads into space. That's another area where there continues to be a lot of interest. Obviously, commercial air is recovering post pandemic there continues to be more interest. And then of course from a defense perspective there's obviously a global perspective. You're seeing this certainly in the United States. You're seeing this as you see increased spending in Germany, for example. So all of that represents long-term tailwinds into the aerospace and defense industries. And we certainly are very well-positioned given the nature of our technologies to be able to take advantage of that."}, {"role": "user", "content": "Great. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question is from Josh Tilton of Wolfe Research. Please go ahead."}, {"role": "user", "content": "Hi, guys. Thanks for taking my first one. My first one is an easy one. What was the contribution of DYNAmore to ACV in the quarter?"}, {"role": "user", "content": "Yes. So we had spoken about DYNAmore for the full year as being about EUR30 million to EUR35 million with about half of it being in Q1 in our February call. And you can -- the underlying assumption you can make is that we're pretty in line with what we expected in February."}, {"role": "user", "content": "Perfect. Thank you. And then, I guess, my follow-up is. I totally understand that the first half, second half dynamics are kind of playing out as you expected when you first gave guidance in the beginning of the year. But I guess, my question is the world has kind of changed since then? And is there anything you can give us maybe from your conversations with customers that's just increasing your confidence that some of these second half renewals won't get pushed out if the macro continues to deteriorate?"}, {"role": "user", "content": "Yes. I mean -- so here's the pragmatic answer to that is, if customers don't renew they lose access to the software and they can't build their products. And so the renewal base is very, very sticky because it affects their R&D cycles. And so -- and just to kind of take it a step back and to contextualize kind of, where we sit in the corporate decision-making process and what has happened in other kind of economic events. Simulation tends to be the last thing that gets shutoff and the first thing that gets turned back on. And that's because it is connected to people's R&D. And R&D tends to be -- the investments in R&D tend to be longer -- long-term views as opposed to short-term tactics. So that's one. The second is, even within the R&D process the areas that are most susceptible would be areas that are connected to seat counts and people and that's not how the economics of our software work. So our software is -- the way customers use our software is based on the capacity of compute that they need and the software that they need to run their simulations within their R&D cycle."}, {"role": "user", "content": "And so, if there are underlying changes in the footprint of the R&D part of the business, it doesn't really affect our part of the software stack in the R&D cycle. And the last part is, simulation actually can provide tailwinds for -- and support the underlying cost efficiencies of our customers in their R&D cycle. Using simulation reduces the need for physical prototyping. It shortens the innovation cycle. You can have a single analyst run multiple simulations at the same time. And so, the throughput that you get and the efficiency that you get from using simulation to build products, has a very high ROI. And in times where you're looking to transform simulation is valuable, not just in accelerating time to value to accelerate the top line, but also to support running R&D in a more efficient manner. And so, those are the underlying qualitative dynamics, but the real answer on the renewal base is that, it's very, very sticky and a small short-term disruption in economic outlook has historically not had an impact on our overall business."}, {"role": "assistant", "content": "Yes. And just to amplify what Nicole said and to add a little bit more color as well. We're not tied to the number of units produced, right? So, if you cut back on production for whatever reason, your R&D efforts still continue, because you're building for the long term. And if you look at all of the industries that we serve, there are major transformations that are taking place in each of the industries and the long-term competitiveness of organizations is at stake. So if you're in the automotive industry, for example, electrification is front and center, autonomy is front and center. And stepping back from any of these activities will result in a long-term degradation of their business and no one wants to go to it. And so, what we're seeing and what we saw in the past, we saw this when we had this -- when Lehman went out of business back in the day, we saw that R&D was the last that was cut and we saw that it was the first thing that was restored. And the lesson that was learned after that and there were reports and the there were -- there was a lot of post-mortem done after that. But the lessons that we've learned is that the organizations that continue to invest in R&D were the ones that came out of that downturn and were successful afterwards. And so you see when we talk to customers, our value proposition is not just about accelerating R&D as I described. But our value proposition as Nicole said is also about being able to help cost. And we have well estab chapter inverse we can talk about how we can reduce warranty costs, how we can make engineers more efficient. We can talk about how we can reduce the amount of raw materials that have been used for experimentation purposes. They move away from physical prototyping. So that is a very hard ROI that we can make and we can make that case. Now I've spent -- I've talked to our sales leaders around the world. I've talked to customers around the world."}, {"role": "assistant", "content": "And I'm only getting -- I'm getting strong support for our -- for the guidance that we've given you. We're seeing the markets -- the customers are committed. We're seeing that the nature of the technology that we provide is critical and we see our negotiations and discussions with customers kind of going as we expect. We call it as we see it. We're not trying to come up with sort of speculation of what the markets might look like. We just call it as we see it. We can give you a perspective on where our customers are how they're buying and all of that is reflected within -- all that is reflected within our within the way that we're guiding. So we feel great about the guidance we've given you. We feel great about the second half of the year. We feel great about Q2. And as Nicole has said several times on this call, there is an underlying dynamic of our -- the renewals of our business. And for those of you who have been following our company for multiple years that underlying dynamic is exactly something that we've seen year after year after year. And we've always had quarters which are stronger in quarters which are relatively weaker in that context of the overall full year and so we manage to the full year. And that's important for us and we feel really good about where we are right now."}, {"role": "user", "content": "Super helpful. Really appreciate the thoughts and response."}]}, {"messages": [{"role": "system", "content": "This concludes our question-and-answer session. I would like to turn the conference back over to management for closing remarks."}, {"role": "assistant", "content": "I'm excited about our outstanding start to 2023. I would like to thank the one ANSYS team around the world for our ongoing success. Our superior technology, our broad-based business momentum and our strong customer relationships give us even greater confidence in our ability to execute against long-term goals. Thank you for joining us this morning. I hope you all have a great day."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions] My first question is from Jeremy Tonet with JPMorgan. Please proceed with your question."}, {"role": "user", "content": "Hi, this is Robin Shillock on for Jeremy. With one-week left in the Missouri legislative session, any updates on the right of first refusal legislation that you've been supporting and additionally, has this or any other recent Missouri legislative developments influence your outlook for MISO or transmission opportunities in the state."}, {"role": "user", "content": "Yeah, look, you're right, we've got just a little bit of time left, the legislative session. This is Marty Lyons, by the way and on May 12th at six PM and. We have been supportive of right of first refusal legislation that's been moving along in the legislature and so you've probably been following House Bill 992 and Senate Bill 568. We certainly support the legislative efforts there. Both bills have been heard incommittees and we'll see whether there's any action on those bills as we approach the end-of-the session, so we again continue to believe that right of first refusal legislation is a positive and certainly would allow transmission infrastructure to be built more rapidly in our state and at cost competitive level. So we're very supportive of that. We'll see whether it gets through, it's hard to predict. Any piece of legislation, whether it will get through, given the various priorities to legislature has."}, {"role": "user", "content": "But in terms of the latter part of your question, whether that's influencing our thoughts on any of our path forward. I would say no, as we look-ahead, we continue to invest in a reliable clean-energy transition, meaning both reliable energy delivery infrastructure, renewable energy, as well as transmission and so we'll continue to pursue those things. We do think things like right of first refusal are important to make sure that that infrastructure build out can happen efficiently and effectively and maintain a good reliable system. But we'll keep forging forward. So thanks for your question."}, {"role": "user", "content": "Great, thank you."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] One moment while we poll for questions. Mr. Lyons there are no further questions at this time, I'd like to turn the floor back over to you for closing comments."}, {"role": "user", "content": "Okay, well thank you all for joining us today. As you heard in our prepared remarks, we've had a strong start to 2023 and we remain focused on continuing to deliver for the remainder of the year. So we invite you to join our Annual Shareholder Meeting, which is coming up here on May 11th and we look-forward to seeing many of you at the AGA Financial Forum in a couple of weeks. With that, thank you and everybody have a great day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] First question comes from the line of Michael Griffin with Citi. Please go-ahead."}, {"role": "user", "content": "Thanks. It's actually Nick Joseph here with Michael. Just maybe on the Santerre portfolio. You talked about maximizing value and NOI over time. Just hoping you could quantify the opportunities that you see with the portfolio and how operationally you can get there?"}, {"role": "user", "content": "Good morning. It's Debbie. Well, I think what you will see is the biggest part of the portfolio is really the MOBs, that have also been the most stable but are at probably 75% to 80% occupancy now. And so once we really put those under Pete and his team's expert oversight. We think there's upside there. On the SHOP, we would expect those assets, which are mostly for large-scale communities to benefit from the multiyear recovery and also the application of OI, again, over time. And then on the triple net health care, they've obviously been affected by COVID. They're mostly SNFs, and we would expect to see those trends that you are seeing in the SNF business improve over time."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Nick Yulico with Scotiabank. Please go-ahead."}, {"role": "user", "content": "Thanks, good morning, everyone. Maybe a question for Bob. I know last quarter and in the March presentation, you talked about a sequential somewhat flat FFO in the first quarter, I think, around $0.71, you did I guess, $0.74, you had that $0.01 triple net catch up, but it looks like it was about another $0.02 of additional benefit there. Just hoping to understand a little bit more what that outperformance was driven by?"}, {"role": "user", "content": "Sure, Nick. Well said. So $0.74, I would definitely highlight the penny on the triple net catch-up brand. So that's $0.02 of outperformance really across the property portfolio. It was general strength relatively across the board. And hence, the 8% same-store growth. So it was broad-based strength, which we're feeling good about."}]}, {"messages": [{"role": "system", "content": "Your next question will come from the line of Jim Kammert with Evercore. Please go-ahead."}, {"role": "user", "content": "Good morning, Thinking about the progression for the SHOP NOI recovery, $300 million plus. Is that still fair to say that's a three- to four-year type objective? And what capital might be needed to achieve that in terms of a little bit higher occupancy and margin, if any? Just trying to think about the flow-through of that NOI potential."}, {"role": "user", "content": "It's Justin. Well, first of all, we're really encouraged by what we consider to be this early strong performance. It should be a multiyear recovery. As Debbie mentioned, the supply-demand characteristics are extremely favorable. The execution into this has been strong thus far. So we'd expect this to continue for a period of time, and we have a lot of upside. We're only 77% occupied in the U.S. We've taken actions to make sure we're well positioned to grow operationally and supported by the Ventas OI approach, and we've made capex investments. I've mentioned that there's been about 100 -- that are really completing like right now, and so that will start benefiting us now and in the foreseeable future."}, {"role": "user", "content": "We do have more planned over time to help reposition and that's going to be mostly focused in this pool that I mentioned, which is the transition group. We have a very well-invested very strong performing legacy group that has really strong market position, which will also contribute to the growth and would require much less capex investment. So I don't think it's a really big number. I think we're spending about $1 million per community. We have 100 that have already completed, and there's more to come, and we'll talk about that in upcoming quarters."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of Mike Mueller with JPMorgan. Please go-ahead."}, {"role": "user", "content": "Yeah, hi. I was curious, do you anticipate keeping everything tied to the Santerre portfolio, particularly the SNF investments?"}, {"role": "user", "content": "This is Debbie. Thanks for the question. I would say that we're really focused on maximizing the value in the NOI of all the assets, including that portfolio. As I mentioned, the vast majority of that are SNFs, they were affected by COVID, but I will tell you that they have -- SNFs are having some positive trends. A lot of those SNFs are in states with good Medicaid reimbursement increases that are generally considered attractive states. But I'll also tell you, we haven't been shy in the past about selling nursing homes. So, you can draw your own conclusions there."}]}, {"messages": [{"role": "system", "content": "Thanks. Your next question comes from the line of Connor Siversky with Wells Fargo. Please go-ahead."}, {"role": "user", "content": "Good morning out there. Thanks for having me on the call. Quickly on the MOBs and the Santerre portfolio. There's a note in the deck referencing the Lillie Bridge playbook. Could you provide any indication or expectation as to how much capex could go into these assets? And then what you expect the occupancy ramp to look like?"}, {"role": "user", "content": "Sure, Connor. Thanks. This is Pete. We're -- we find the medical office building portfolio within Santerre to be interesting. There is a 75% overlap with the MOB, NOI in similar MSAs to ours. 75% affiliated with health systems. And we've got a 67% overlap. We like the fact they're on campus. We like the average age and the wealth is about the same as ours. But as you indicated, I mean, occupancy is an opportunity. It's 77%. Right now and also something that's relatively low and seems like an opportunity to us is an annual escalator average of 2.2%. So we think there's opportunity. Now both of those occupancy and escalators take time. You have to roll through the leases as they go. And so I think it's a multiyear opportunity for us but there is significant upside in this portfolio."}, {"role": "user", "content": "And Pete, maybe you could just address kind of the pyramid of how you've attacked our portfolio to generate those industry-leading kind of margins and retention and so on. There is a playbook of a pyramid."}, {"role": "user", "content": "Yes, absolutely. Yes. We view it as a pyramid. And do you have the right assets, and we feel like most of this portfolio is good for us. We need to be sure that the buildings are competitive in the marketplace. We need to be sure that the tenants are excited to be there, so we need to have high tenant satisfaction and strong relationships with the systems. We need to have a center of leasing excellence, and we need to run these buildings efficiently. And that's a little British playbook. We've improved performance dramatically. In the core portfolio over the last four or five years, and we expect to do the same with Santerre."}, {"role": "user", "content": "Okay. And then one quick follow-up, if I may. Justin had mentioned that the yields on senior housing assets are pretty sticky in the current environment. So as you're addressing this select acquisition pipeline, I mean, could we expect to see more MOBs within that pool?"}, {"role": "user", "content": "Yes, sure. So there's -- we're interested in high-quality, high-performing relationship-oriented transactions as our first priority. That can definitely include MOBs we would expect see Class A senior housing as part of that as well. We are interested in pursuing high-growth assets as well. We anticipate there will be a market for that around senior housing in the upcoming quarters. So we're casting a wide net in terms of managing our pipeline, but being more narrowly focused in the near term and using our wide variety of sources of capital to pursue the higher-quality assets."}, {"role": "user", "content": "Okay, thank you for the time."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Steven Valiquette with Barclays. Please go-ahead."}, {"role": "user", "content": "Yeah, great, thanks, good morning. So just quickly on page 10 of the 1Q supplement. You showed the same-store trailing 5-quarter comparison for the SHOP portfolio, which is helpful. And when looking at the to 1Q -- 2Q trend last year. Sequentially, you had about 70 bps sequential occupancy improvement last year for 1Q to 2Q. So when kind of thinking about the sequential trends from 1Q to 2Q for this year. Just curious if you think that 70 bps is a good proxy for sequential occupancy gains for that same-store pool this year? And also, are there any notable differences in those sequential trends that you expect in the U.S. versus Canada, thinking about that."}, {"role": "user", "content": "Yes. Sure. Good question. So we're really pleased that we gave full year guidance this year, and we're not getting into the descriptions around our performance expectations in each quarter. Last year, in terms of occupancy growth, it's pretty solid. It was even more in the prior year. I did mention in my prepared remarks that we have an aggressive occupancy ramp that we're expecting in support of our performance expectations, the key selling season starts now. So -- and we're well positioned, we think, to play within that. So we'll see how that plays out."}, {"role": "user", "content": "Okay. Just on the second part of that question, just conceptually between U.S. and Canada, anything worth calling out there one way or the other on thinking about it? Or is there nothing that sticks out at the moment?"}, {"role": "user", "content": "Yes. Canada has an absolute much higher occupancy at 94% although they're still growing. And so they do experience a key selling season similar to the U.S., but they're working off of a much higher base."}, {"role": "user", "content": "Got it, okay, all right, thanks."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Michael Carroll with RBC Capital Markets. Please go-ahead."}, {"role": "user", "content": "Yes, thanks,Justin, I wanted to follow up on the 100 capex projects that you mentioned over the past few quarters within the SHOP portfolio. I'm not sure if you highlighted the yields on those deals? And do you take those projects out of same store, I guess, if not, is there an earnings drag coming in through the portfolio right now as you're doing those renovations?"}, {"role": "user", "content": "Great question. We are not reporting the yields. We did give examples. Some of our early examples of communities. There's a few that are highlighted in the earnings deck. Obviously, we picked some of the better ones where we have leads that are up 150% versus prior year, and our NOI is up 400% year-over-year. And these communities that are relatively low NOI with a lot of upside benefiting from the operational turnaround and the capital investments. We're pleased to see the early results in communities like these."}, {"role": "user", "content": "We expect that this is not necessarily a near-term driver of value creation. We think it's also more of a longer-term driver. When we look to invest into communities with this type of capex. We're looking at least for a double-digit return. Usually, it's like 10% to 15% return on that capital investment. That's -- there's a lot of moving parts to determine what the actual outcome was when you're measuring that. And to the other part of the question, these are in our same-store pool, and they do not come offline. So you'll see the full benefit of this execution in the same-store pool."}, {"role": "user", "content": "As they're not particularly disruptive to the community."}, {"role": "user", "content": "They've been carefully kind of specked out show us to minimize current disruption in cash flows and occupancy."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Juan Sanabria with BMO Capital Markets. Please go-ahead."}, {"role": "user", "content": "Hi, good morning. Just wanted a congratulations on the 20th anniversary. Thank you."}, {"role": "user", "content": "I was here for 24 plus."}, {"role": "user", "content": "Just wanted to ask a couple of questions on Santerre. So excuse the kind of multipart question, but I guess, what is the expected leverage impact? And is that inclusive of keeping the SNF, which sounds like they may be sold? And on the SNF, can you give us a sense of the total number of units or the rent coverage there? And just the last one, if you don't mind. Is the seniors housing or SHOP piece, is that traditional seniors housing or CCRCs because they sounded like they were chunkier assets?"}, {"role": "user", "content": "So I'm going to get Bob to answer the first, and that's on a status quo basis."}, {"role": "user", "content": "Status quo day one leverage is about 30 basis points impact, Juan."}, {"role": "user", "content": "And then in terms of the senior housing, I would say, as I mentioned, the vast majority of the NOI is coming from these large-scale communities, which are all rental based and they're in good markets. And so those are -- some people call them rental CCRCs, other people call them senior housing communities. It's a nomenclature. But they're very large communities with high replacement costs in good markets, with a pre-existing operator that we have. And so that's the answer to that question. Then on the SNF, there's about 5,000 beds in the health care triple-net portfolio and -- in terms of coverage, we want to -- we'll do that at the appropriate time once we feel confident in the reported operating results and at the appropriate time, consistent with our policies."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Tayo Okusanya with Credit Suisse. Please go-ahead."}, {"role": "user", "content": "Yes, good morning all. Life Sciences, I'm just kind of curious, again, during the quarter, with the same-store numbers, kind of large increases in same-store opex, some occupancy pressures as well. Just kind of talk us through some of kind of what happened specifically during the quarter. I think it's a portfolio where I think in the past few quarters have got occupancy losses. So just trying to understand exactly what's happening and what one can expect going forward?"}, {"role": "user", "content": "Sure. Thanks, Tayo. This is Pete. Good to hear from you. So look, from an operating perspective, in the same-store pool, there was a decline of 1%. Bob had described that because of the holdover rent in the first quarter last year. It's adjusted for 3.2%. There's another adjustment that you should be aware of and that affected the opex, which also affects the NOI. Last year, we -- in the first quarter, we had a TIF credit, a large TIF credit, which is accounted for as a contra expense. And so as a result, as opposed to an 8.8% opex growth, it was 5.6%. If you look at it from a true organic perspective, which is below inflation."}, {"role": "user", "content": "So I'm happy with that opex number. And then if you run it through NOI, once again, organically, not thinking about the holdover rent, not thinking about the TIF onetime TIF credit, Same-store NOI growth was 5%. And I'm pretty happy with 5% NOI growth in this environment for Life Sciences. But I'm actually even more happy about is really our leasing momentum right now. Leasing in the first quarter of '23 was well over twice what it was in first quarter of '22, substantially ahead of fourth quarter '22 as well."}, {"role": "user", "content": "And what's interesting about our leasing pipeline is it is 60% institutional. And it's really because our focus is on the university-based Life Sciences markets. So they're dominated typically by government entities, universities, health systems, so on and so forth. And so they don't move very quickly, but they do move and is kind of regardless of inflation either way or life industry conditions. And so we feel very good about our pipeline, and we think it bodes well for the future."}, {"role": "user", "content": "Got you. And when do all these one-timers normalize out so we can get to kind of true underlying strength, and also any commentary about occupancy as well would be helpful just kind of given some of the occupancy declines in the past few quarters?"}, {"role": "user", "content": "Yes. Without those two prior year items, it would be 5% same-store cash NOI growth."}, {"role": "user", "content": "Yes. And we have had some office tenants decide either not to renew their lease or downsize. As we said in previous calls, it's an opportunity in some cases for us to transition to lab space, and we're seeing good momentum in those lab conversions. So we're optimistic about that."}]}, {"messages": [{"role": "system", "content": "Thank you. Your next question comes from the line of Ronald Kamdem with Morgan Stanley. Please go-ahead."}, {"role": "user", "content": "Hey, Just a quick one. Looking through the presentation, just the two things that jumped out. One was the pricing power slide. I think you guys have 11% plus rent increases. I think last quarter, you added 10%. So number one, I might sell to take that, that pricing is actually accelerating going into the selling season? And then number two, if I may, if I look at the NOI opportunity slide, you're talking about a potential long-term target now of $1 billion in NOI. I think previously, that number was $900 million. Maybe can you just walk us through what's driving that delta?"}, {"role": "user", "content": "Yes. Bob, do you want to take the chart question?"}, {"role": "user", "content": "Sure. Yes. We chose to simplify the methodology, honestly, to determine what the potential is after a lot of questions around what the assumptions are and basically just say, look, pre-COVID, occupancy was 88% and margins where NOI margins were 30% on the portfolio at that time. And hence, to get to that level, what's the NOI opportunity, and that's the $300 million. And on the portfolio today, that equates to $1 billion of NOI. And so it's really both simplification and aligning with some fear disclosure, frankly, that drives the change."}, {"role": "user", "content": "And so that's the recovery opportunity as we think about the unprecedented kind of organic growth that could be in front of us, to get back to that level. And then as I mentioned, the conditions on the ground right now are more favorable than they were at a time prior to 2014 when occupancies go into the low 90s. And so that's the -- that's kind of the dream scenario if we can do that and the conditions do exist on the supply-demand side to potentially overshoot the pre-COVID targets."}, {"role": "user", "content": "Great. And what about..."}, {"role": "user", "content": "Pricing?"}, {"role": "user", "content": "Yes, I can jump in, Justin. So on the pricing, you mentioned the slide we're showing that the contributors we have rent increases over 11%. And by the way, we have over half of our residents that will have contributed to those rent increases now at this stage. So that's great. care pricing up 9% year-over-year and the street rates up. So I mentioned RevPOR is up 6.8%. We have all of these positive contributors to that. There's a little nuances. For instance, in care pricing. Last year, there was a big spike in agency and therefore, a move to accelerate the growth in care pricing. In response to that, we're comparing to that number on a year-over-year basis."}, {"role": "user", "content": "And so it's just normalized a bit. Street rates, these are very strong. They're also contributing to our positive re-leasing spreads that we've had in the first quarter where our new move-ins are paying more than people moving out on the same unit basis, which is great. We would also point out that we continue to expect to see that improve over time. As Debbie mentioned, there's a really strong supply/demand backdrop. And one thing that should happen in time is those street rate growth rates should start to match closer to the in-house rent increases, maybe in some cases, even getting ahead. We're just not there yet. There's still a lag. It's definitely growing. The market is supporting the higher pricing at the street rate level, and we would expect that over time to become even better."}]}, {"messages": [{"role": "system", "content": "Our next question comes from the line of Vikram Malhotra with Mizuho. Please go-ahead."}, {"role": "user", "content": "Hi, This is George [Phonetic] on for Vikram. Could you provide more color on capex for the remaining of the year? And any anecdotes of benefits to senior housing ramp from it?"}, {"role": "user", "content": "Sure. So I'll focus on redev capex because that's really the emphasis of our SHOP investment that Justin was highlighting. We expect $230 million this year of redev spend. That's really -- not only the completion of the projects, which really started last year and are completing for the key selling season but also the pipeline of opportunities behind that we see, and that adds up to $230 million. And as a use of cash in our view, is one of the highest return opportunities that we have. So we're going to invest behind those assets."}]}, {"messages": [{"role": "system", "content": "Your next question comes from the line of John Pawlowski with Green Street. Please go-ahead."}, {"role": "user", "content": "Good morning, thanks for the time. Justin, just curious what type of growth rates are you seeing your housing operators expecting this year on wage increases for the full-time employees?"}, {"role": "user", "content": "Yes, sure. So we've -- first of all, expenses are exactly on track to where we expected a 5% growth. Within that, the labor is the biggest piece is 60% of the expenses. We're pleased to see that the agency cost has come down. That's down to 3.3% of total labor, which is the lowest it's been. So you have that happening. And then as you -- the net hiring has been improving and you're bringing in new people, you're onboarding, you're paying for the onboarding, so there's an offset that you see."}, {"role": "user", "content": "And when I said that, there could be opportunity for improvement. Really what I'm speaking about is the opportunity for agency to continue to trend down, if it does, and then getting past the period where you have this onboarding costs. And so, we'll see how that plays out. We certainly haven't changed any guidance or anything like that. And so far, we're right on track with the 5% overall."}, {"role": "user", "content": "Okay. But on a per FTE, I'm just trying to get a sense for kind of comp per occupied bed moving forward? What's kind of the structural per FTE wage growth your operators are seeing this year?"}, {"role": "user", "content": "Yes. It's higher than the 5%. So that's consistent with what we're seeing in the macro environment as you look at wage inflation, which is improving, but is improving relatively slowly. And so the benefit that we're seeing overall in labor is that the year-over-year growth rates are moderating considerably in the aggregate our ability to predict them has been very good, I would say."}, {"role": "user", "content": "And within that agency is coming out at a good pace and we're getting that installed base, which is very positive, but we're assuming there is reasonable wage unit inflation in that installed base. But we're still coming out ahead, and that's the key point. And as Justin said, your care is better in your culture and your communities better as you get a higher installed base. So I hope that answers your question. Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Your final question comes from the line of Austin Wurschmidt with KeyBanc Capital Markets. Please go-ahead."}, {"role": "user", "content": "Great, thank you. Just wanted to hit on the SHOP occupancy again. I'm curious, I know you guys had expected some seasonality, but did the level of sequential occupancy decrease in 1Q surprised you at all given how strong the leading indicators were to start the year? And then I'm just curious if there were any move-outs concentrated with any segment or region of the portfolio or pushback related to rent increases that drove some of that?"}, {"role": "user", "content": "Sure. So first of all, the first quarter occupancy was exactly as expected. We had predicted that we'd have typical seasonality. We did. So we're right on track in that regard. To your comment, leads have been very strong. Move-ins in the first quarter were higher than the prior year and higher than 2019. There's been move out. Some of that I mentioned on the last earnings call were driven their financially-driven move-outs, which is typical, particularly when rents were pushed as high as they were this year. So no surprises whatsoever in terms of the execution so far, and we'll look forward to seeing how the key selling season plays out."}, {"role": "user", "content": "Great. Thanks, Justin."}, {"role": "user", "content": "With that, I'll turn the conference back over to management for any closing remarks."}, {"role": "user", "content": "Thank you, operator. And I want to say thank you very much to all of the participants for your interest in and support of our company. We're really happy to deliver an excellent quarter on your behalf. We look forward to seeing you in person in June."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And our first question comes from Jim Duffy from Stifel. Your line is now open."}, {"role": "user", "content": "Thank you. Good morning, everyone. Welcome, Stephanie. I want to start on brand and product in the U.S. Stephanie, you referenced inconsistencies in the U.S. market, how do you fix the inconsistencies in real wake and engagement? I'm curious is the wholesale distribution appropriate, and we appreciate you lot more product depth in the best categories. Do you need to abdicate some of the good product offering representation to elevate the brand and reawaken engagement?"}, {"role": "user", "content": "Well, thank you, Jim, and I'm happy to be with all of you today. As it relates to the product inconsistency challenge or the inconsistency challenge overall. First of all, you're right, it's not something that can happen overnight, but we are already starting to move on this. One of the first things that we're doing is positioning some of our existing products in a more premium way. We do have some products in that better or best part of the pyramid. And we're repositioning those products right away through better storytelling and better merchandising primarily through our own stores and on our website. So that's really step one and what we can do in the near term. From a broader perspective, it really does get to building out the better and best part of the product pyramid what I am most excited about in terms of driving consistency and driving growth is what we're going to do with Sportstyle. As I mentioned in my prepared remarks, that triples the size of Under Armour's total addressable market to $300 billion. A big part of Sportstyle is going to be footwear and women, not exclusively, but those are big areas of growth for us, and there again, it's going to be a 2-step process. It's not going to be done overnight. Phase 1, we'll start with that repositioning of our existing products. I mean we have some great stuff to be more specific around unstoppable joggers or Fleece graphic tees, the summit, knit, sweat shirts to name just a couple of things. So we're going to -- we have some great stuff we're going to merchandise and market in a different way, as I mentioned. But Phase two is, again, where you're going to see new products that are consistently delivered, and it's also not just about the products, it's about the marketing and where we distribute them. So we've got a lot of new efforts underway about how we're going to market in a different way and particularly to new consumers. And then on the distribution front, it's -- we are going to continue to, of course, work with our existing wholesale partners. But I think we're going to open up new doors of distribution too in the mall, new department stores, etc.. And of course, our own channels will always be a focus. But to just step back and summarize the answer to your question around consistency is it's really going to be a two-step Phase one, Phase two approach."}, {"role": "user", "content": "Okay. Great. And then you have big ambitions for product newness and increasing the frequency of newness. I'm curious, are there KPI targets to benchmark Q2, or do you have any specific objectives for penetration of new products as a percent of the mix?"}, {"role": "user", "content": "Yes. So we are great question. We are putting together KPIs and metrics around the percentage of products and that better and best bucket, their growth trajectory, we'll continue to do voice of the customer work to understand how consumers are relating to that better and best part of the pyramid and of course, talking to our customers. So we are putting together that scorecard of KPIs as we march forward. I've been here 2.5 months, so we're just getting started and pulling that together, but we're hard at work at it. So Kevin, anything to add from your lens?"}, {"role": "user", "content": "Yes. Thank you, Stephanie. And before I answer that, Jim, let me just say what -- how great it's been having Stephanie here. In 70 days, she has gotten completely at a level of depth of the company. That's pretty remarkable, to be honest with you, and bringing a world-class executive experience, and that's not something shared by me. I think if you polled our team, it would be universal across the brand. And so welcome, Stephanie. And so what you're hearing is -- what you see is what you get, very exciting for us. I think as one of the things we're Stephanie has asked me to lean in, in my role is on the product side of the business. And as you know, Jim, innovation has always mattered at Under Armour SlipSpeed is a great example about of something fresh and new coming out most recently, but we also have great innovations like our 7-pocket pants and our new Meridian line that we have out in full force. A steady cadence of new product is probably the right way to think about it. And one thing that I use the example of SlipSpeed, we launched it on October 31 of last year on Halloween with a soft launch. We then came back on Valentine's Day. I think making those holidays famous for the consumer to start expecting innovation and newness from Under Armour is one of the things you'll see. But that, of course, is echoed by a consistent cadence of product coming out that, as we say, like to blow consumers' minds. We've been around long enough to actually have legacy products as well. So in addition to new innovation coming from our teams, you're also going to see some of these reinventions of previous Under Armour greatest hits, as I mentioned in some of my comments that we've had."}, {"role": "user", "content": "From footwear, which I think what Stephanie emphasizes us moving from a footwear culture to a real sneaker culture here at Under Armour is critical and that will come through with things like performance-wise, where this brand actually won the New York City Marathon last year with Sharon Lokedi. all the way to Stephen Curry, what he's doing on court. And don't forget about Joel Embiid, who just won the MVP as well. And so our shoes absolutely play, but there's an emphasis for us of getting ourselves beyond the courts, fields and pitches and into the two and from situations, especially being credible enough to work in that tunnel walk type of scenario. And then from an apparel standpoint, we think we've got the ability to leverage a great, great force of Under Armour being sort of the chalk when it comes to apparel innovation and what we're doing to blow consumers' minds there. So we feel like we've got a great opportunity. And as Stephanie mentioned, we're also working with a few outside experts as well in both apparel and footwear to make sure that we're leaving no stone unturned with the ability for us to own what we own, which is things like the T-shirt that people expect from us as well as looking at colab opportunities and with a real focus on things that matter or relevant to the UA brand."}, {"role": "user", "content": "Thank you, Stephanie. We look-forward your influence on the business. Thanks."}, {"role": "user", "content": "Thank you,."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Simeon Siegel from BMO Capital Markets. Your line is now open."}, {"role": "user", "content": "Thank you, everyone, good morning and welcome, Stephanie, look forward to meeting you in person soon. So your excitement for growth from here is really coming across, it's nice to year. Recognizing that Under Armour has always been about growth. Can you just elaborate a little bit more? And apologies if some of this gets repetitive, but it'd be interesting to hear what gives you comfort and the opportunity for growth now, maybe why it's different than the past? And then how you're thinking about the balance of growth versus the focus on improving profit dollars into '24 as you talk about the turnaround there and then into '25 as well and beyond."}, {"role": "user", "content": "Sure, of course. What gives me so much confidence about our opportunity to grow the company significantly is the strong base we have in performance. I mean, it's -- I've been really lucky in my first 2.5 months to meet with some of our athletes and coaches and athletic directors, people like Justin Jefferson and coach Freeman from Notre Dame. I knew it before I came here, but it's even more apparent to me that athletes absolutely love Under Armour. They believe in the performance of our products. So we're coming from that place of strength as we lean into things like Sportstyle, which again triples our total addressable market. So that gets me excited. I went through the key elements of our strategy, which are really all about product, marketing and distribution at the end of the day and doing that in different ways, better product, marketing in different ways, distribution, growing the doors we're in from a wholesale perspective, being a better partner to our existing wholesale accounts, improving our own retail stores, improving our website, but why -- the devil is always in the details when you're running a company. And to me, why I know we can pull this off is three things. And I mentioned this in my prepared remarks, but let me explain a little bit more, it's about focused execution and accountability. When I got here, there was a long, long list of projects and efforts that the company was trying to tackle. And a lot of what you've heard today, I recognize some of it isn't new. But what we've done is we've really narrowed down the list of projects and efforts for the next three years, so we can be laser-focused. Focus like leads to results. The second thing is about execution. It's all about making sure that we're breaking down silos across teams, the product teams, the marketing teams, the teams out in the regions running our business day in, day out. So I'm spending a lot of time and effort on how we work together as a team to drive the business. And then third, accountability,"}, {"role": "user", "content": "I am holding myself, my executive team, the entire team accountable for business results. and it's all about results at the end of the day. I very much recognize the time for action is now. We need to deliver, and that's what I'm holding myself and the team accountable to. So it's not always the most glamorous part, but it's is the tactical things that have you pull off a strategy at the end of the day, focus, execution and accountability, and as we do that, we are laser-focused on driving the top line, but equally focused on driving bottom line and profitable growth. So I'm spending a lot of time understanding where the profit comes from an Under Armour and diving in deep to understand that side of the business, too. So at the end of the day, it's about driving profitable growth, and that is how we'll be measuring ourselves not only in fiscal year '24, of course, but in '25 and beyond where we think our efforts will really start to take off."}, {"role": "user", "content": "That's great. And maybe just following up on that and maybe for you or for Dave. Just thinking about the composition of the moving pieces embedded in the gross margin guide for the full year? Any way to help think through those puts and takes?"}, {"role": "user", "content": "Yes. I mean there's a couple of things that are going on there. Absolutely, we're excited about some of the tailwinds that we're seeing on the freight cost side, whether it be the ocean carrier rates that have normalized a lot, but also just a lot less utilization of air freight now that supply chain is more caught up and we're in a better spot there as well. But on the flip side, we're also being real relative to what's out in the market. There's some fairly heavy inventory levels out there, not just in North America, but a little bit in other parts of the world as well. And we want to make sure that we're planned to be able to move through that. And so that includes a little bit more sales to off-price channel, even though we're going to keep it within that 3% to 4% range of revenue. It also means that we will utilize our outlets more for even a higher percentage of excess product, which has a little bit of an impact on gross margin as well. So there's a couple of different things that are really going on there that kind of come into play. But what I'm more excited about, and Stephanie alluded to this a little bit, is stepping into fiscal '25. We do believe that the inventory situations out there are going to be much, much more normalized as we get into the back half of our fiscal year and certainly into fiscal '25. And we're doing a lot of different initiatives right now on our overall product costing structure, which we believe are going to have some real nice benefits in fiscal '25 and beyond as well."}, {"role": "user", "content": "Great, thanks so much guys. That's not the year end. Well, look, Board meetings happening. Thank you."}, {"role": "user", "content": "Likewise. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Jay Sole from UBS. Your line is now open"}, {"role": "user", "content": "Great, thank you so much. A couple of questions. Is it possible to sort of to give us like a high-level vision of sort of what your financial objectives are? I mean how big do you think Under Armour can be in terms of sales? What kind of operating profit margin should it have in your vision? And then maybe, Dave, for you, just on China, can you just talk about how the China business progressed in the quarter, and what you're expecting for China growth and fiscal '24. And at the same time, on the inventory, you mentioned some pack and hold. Can you just tell us how much pack and hold you're holding when you plan to sell that inventory? And how much confidence you have that inventory is going to stay fresh until the time you sell it?"}, {"role": "user", "content": "Sure. Well, I'll start, and then I'll flip it to Dave. But on your question about growth, I'm not ready to put a figure out there quite yet, but I am absolutely confident that we can grow this company significantly over the years ahead. Just a couple of statistics that I think about in that context, when our footwear business is only $1.5 billion today, that's great, but it's only 25%. So that's an area of exponential growth. I mentioned the women's business, relatively small. That's another area of exponential growth. So again, we have a lot of work to do over the coming weeks and months to flesh out the details of our plan in terms of our medium- to long-term growth targets, including our profit targets, which would incorporate our growth. The way we're thinking about gross margin. But again, not prepared to call the number today but absolutely prepared to call that we have significant growth ahead of us in the years ahead. But Dave, I'll flip it over to you for the questions on China, etc.."}, {"role": "user", "content": "Yes. So China, again, I don't -- we couldn't be more proud of how the team navigated through fiscal '23. I mean if you think about the impacts from COVID early on in and then the lockdowns and then fighting our way back out of that. So really strong Q4 quarter for China and for APAC as an overall region. So very proud of the team there. Q4 did get a little extra benefit there from comping bigger COVID challenges the year prior and a little bit of a rebound coming out of the lockdown. So we're not anticipating that level of growth for APAC in fiscal '24, but definitely a very healthy growth rate for us, and we believe that we're well positioned to keep driving. And that's an opportunity that's going to continue to be there for long term. I mean, we are still so small. So the opportunity to continue to expand doors expand even more relative to better and best product. There's just a lot of different options that we're going to continue to pursue out there. And relative to inventory, yes, we finished with a fairly high growth rate of inventory. But our inventory turns were still at about a three as we ended fiscal '23, which isn't a bad spot and inventory for us right now is very healthy. There's not a lot of aged inventory at all. And in the pack and hold comment, we're sitting on probably about $175 million worth of inventory that we specifically are packing away and holding that we know we have demand for in fiscal '24 as opposed to kind of blowing it out at really low prices in the back half of fiscal '23. So that's a decision that we made, and we're comfortable with it based on being able to utilize our outlet stores to a bigger capacity in fiscal '23. And so for us, we see inventory across the market being a little bit higher kind of in this Q1 and Q2 of our fiscal year, Q3 normalizing a little bit. And then by Q4, really in a good spot, and we're expecting actually to be down probably in the 13% to 14% range year-over-year inventory by the time we get to the end of our fiscal year. So that, again, should set us up very well to be able to run in a pretty clean way for fiscal '25."}, {"role": "user", "content": "Got it, thank you so much. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Bob Drbul from Guggenheim. Your line is now open."}, {"role": "user", "content": "Stephanie, welcome. Best of luck. I just had a question for you, and then I have a follow-up for Kevin, a few still there. Besides the Chief Commercial Officer, can you just talk about any hiring priorities that you're focused on hiring targets, the needs in terms of the team that you really see besides the Chief Commercial Officer?"}, {"role": "user", "content": "Sure. Absolutely. And good morning, Bob. Great to be with you. So the number one job we're looking for right now or one of two is the chief commercial office job, consumer officer, pardon me. And where we've got a great slate of candidates lined up and hope to have that filled in the coming months. Another position that we are -- have out for search is a Chief Communications Officer. As I've mentioned, marketing and communications is going to be both together or going to be a critical part of how we tell our story to our athletes, our consumers and to you or other stakeholders. So those are two jobs that I'm currently looking for on my leadership team. And then I'm digging in deep to figure out the rest. Again, I've only been here 2.5 months. So I'm one of the reasons I'm so excited to have all of these direct reports to me in the interim, meaning I mentioned this in my prepared remarks, the head of brand marketing, sports marketing digital data and analytics is in this area, having an all report directly to me allows me to roll up my sleeves and get into the details and figure out what additional talents and capabilities we need, in particular in that area is just one example. And then the last point I'd make on talent because it's such an absolutely critical question that you've asked is we're also supplementing with bringing in outside talent to work with us on collaborations and things of that nature. So it's early days for me in terms of getting my arms around our needs in this space, but it is a very, very big area of focus for me, for sure."}, {"role": "user", "content": "Great. And Kevin, just an MVP question for you, if I could. The warriors are down 3:1, I think, and I just wonder if you feel like that can bring these guys back."}, {"role": "user", "content": "Yes. We're actually making Stephen a new superpower T-shirt to wear underneath of this uniform right now as well as dropping some of that into a sneaker too. I mean, it's cool between -- we now have two MVPs and the Rose between Joel and Stephen, watching both of them play. It's extraordinary. And so I think we're all waiting for those heroics again, with the things you can't believe will happen, but it should be pretty exciting, so both the Waters and the 76ers [Phonetic] fans, we're with you."}, {"role": "user", "content": "Thank you. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Brian Nagel from Oppenheimer. Your line is now open."}, {"role": "user", "content": "Now. Stephanie, welcome. The first question I have is we're learning now to you about the new operating plan, the PTH 3. And obviously, we have your guidance. You talked about maybe in the response to the last question, some of the new hires you're looking for. But as we think about this and the repositioning, if you will, of the business, is there -- do you expect much investment there? Is there a need to continue to enhance sort of say, the core? Or is it more of a process type change more process type change in Under Armour?"}, {"role": "user", "content": "Well, I think we need both over time, both investment and then anything is always about people, process and systems, right? And so there is a talent element to what we're going to be pulling off with PTH 3. There is a system and process piece of it, and that will require investment over time. As Dave mentioned in his prepared remarks, we're laser-focused on expense control and simplifying and optimizing our cost structure. And as we do that and particularly in the short term, what it's going to allow us to do is redeploy resources against our top priorities, which links back to my plan on focus. So keeping our costs very much in line with where they should be. But I do think a lot of the things that we're going to do over the years ahead will require investment. I mean I'll use a real-life example. We have a lot of work to do on our website and our app. I have a real vision for where we're going to take our website and our app. We've made some progress, improve things like site speed and product spec pages, more kind of the way the site works from a more tactical standpoint, but I have a much bigger vision of where we can take it. And it should be the -- one of the most premium ways we can bring our brand to the world. So things like investing in our digital assets will be a focus for us. So again, there's many more examples, but that's the one that comes to mind right away. But again, it is about -- it's about talent, it's about investment in systems and it's about process."}, {"role": "user", "content": "And Brian, this is Dave. I would maybe just tack on a little bit there, just relative to cost structure and investments, I think we've proven that we've done a lot of work to be able to be more nimble from how we spend and where we invest and the leverage that we showed in fiscal '23. And you can see with the outlook for fiscal '24 that we're actually not showing really much leverage for fiscal '24. And that's primarily because of a few reasons. We do need to invest in a few of these areas, that Stephanie mentioned. And absolutely, we're going to be pressuring certain areas. And with that nimbleness, we're able to do so better than we have before. But we're also going to be pouring more into the areas that Stephanie mentioned or PTH three initiatives. So that's really one of the aspects that goes into the outlook that we've provided."}, {"role": "user", "content": "That's very helpful. And then a follow-up, just with regard to inventories, so as we're hearing, again, a big component of this that the PTH three plant is a new product, better product. So is there really thought then with inventory still being elevated to more aggressively clearing out the product you have now in the near term before this new product is introduced?"}, {"role": "user", "content": "Yes, to a degree, Brian. I mean we started that in Q4. You saw us overdrive on revenue and at the detriment of gross margin because we took some of those opportunities in Q4. And as you think about our outlook for gross margin for fiscal '24, especially the first half, it has some of that expectation built in there as well. So -- but at the end of the day, I think as a reminder, even though our inventory growth rate seems fairly high, it's off of a very lean base. And therefore, when you look at the actual composition of our inventory right now, it is very healthy. There's not very much old or inactive SKUs. So our ability to be able to move through that fairly well and stay in that 3% to 4% mix range of off-price to normal sales, we feel very comfortable with that. So again, we will work through, and we'll get into an even better place than we are now. But we're very confident in the process and the tools we have laid out to be able to do that and then really be able to run into fiscal '25 with higher growth and also with kind of a smarter inventory build."}, {"role": "user", "content": "I appreciate it. Thank you."}, {"role": "user", "content": "Thank you. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Laurent Vasilescu with BNB Barbas. Your line is now open."}, {"role": "user", "content": "Good morning, thank you very much for taking my question and thank you, Stephanie. For opening remarks. Dave, I wanted to ask about your comments regarding first quarter revenues down low- to mid-singles, noting the challenged U.S. marketplace. Can you maybe parse out a little bit more how much North America should be down for the first quarter? And then I think you mentioned for the overall revenues, sequential improvement for each quarter as the year progresses. Should we assume -- I know it's early on, but should we assume 2Q is the inflection point or is it going to be more 2H-waived?"}, {"role": "user", "content": "Yes. I guess a couple of things there. Yes, Q1 is going to be our most pressured revenue quarter. And when we think about that, that is going to be driven primarily by North America and primarily by wholesale within North America. And a lot of that has to do with a fairly cautious order book coming in from wholesale partners based on the levels of inventory that they were carrying towards the back half of our fiscal '23 and as we go into this year. So that's a big piece that's at play. We do see that or anticipate that, that is going to start to work its way out as we get further into our Q2 and then even more so by Q3. So we do see that Q1 is going to be the most challenged quarter for North America and as the biggest region, therefore, the most challenged quarter for global Under Armour. And then we do see Q2 being the turning point back to growth, and we're excited to be able to keep driving forward from there. I think also, you'll see that with some of the pressures with wholesale buildup of inventory, you're going to see our direct-to-consumer outperform a little bit versus wholesale as we go through this year as well, which is something that we're completely fine with. We control the brand very well there, great display of all the different products and breadth and a place that we can start to shine relative to more and more curation around Sportstyle as we move forward."}, {"role": "user", "content": "That's very helpful, David. And then maybe as a follow-up, I think you called out for international to grow mid-single-digit rate for this year. APAC is about 40% of your international business. Obviously, China is reopening, can you just maybe unpack a little bit more why international is sequentially slow? And then just a quick follow-up as well. capex spend is meaningfully up for this year $250 million to $270 million. Is that driven by the new HQ? Or you also anticipating new store growth for this year?"}, {"role": "user", "content": "Yes. I think when we think about APAC, again, excited about what the team was able to drive through in fiscal '23. Keep in mind, Q4 of fiscal '23 for APAC, had some over-index benefits from comping the China COVID bigger issues a year prior, but also kind of the rebound out of the lockdowns in Q4. So we wouldn't necessarily expect that level of growth to continue into fiscal '24, but definitely healthy growth, especially in China, but really in all parts, Southern APAC, South Korea, etc.. For us, though, we do look at the overall picture there. And there are still some heavy levels of inventory there as well. There's a lot of brands that have been closing doors. There's a lot of brands that have been really pushing through a lot of excess inventory more so than we have. And so we've got to be a little bit careful with what that looks like and how that impacts Under Armour. So obviously, we hope that we can be able to overdrive that, but we think we're planning prudently in this outlook. But when you think about capex, you are right. There is a larger increase in capex in fiscal '24 planned. Some of that is store growth around the world on an operated store growth. Some of that is also investing in e-com as Stephanie had mentioned, whether it be in the loyalty program, whether it be in further site speed, etc.. But then, yes, there is a portion of that, that is the build-out of our headquarters, our new headquarters here in Baltimore, which is just going to be a magnificent place to show the brand and feel the energy of Under Armour with the track and field and the new teammate headquarter building. So that is a piece of it. However, we still plan and will manage capex within that 3% to 5% range of revenue, even including the headquarter build-out. So I think we're doing a great job of prioritizing there. We're certainly not holding back on driving into the revenue-generating aspects even on the IT front as we're investing in end-to-end planning. We're investing in retail POS, PLM system, transportation management, so a lot of great things that will continue to enable us more so in fiscal '25 as they're actually live and really working to our benefit. So a lot of exciting things that we're jumping into there."}, {"role": "user", "content": "Very helpful. Dave, thanks for all the color. And thank you."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Matthew Boss from JPMorgan. And this is our last question. Again, this is our last question from Matthew Boss."}, {"role": "user", "content": "Great, thanks. So Stephanie, you cited fiscal '24 as a year of building the brand. And then fiscal '25 is the opportunity to return to growth in North America. So maybe two questions. How do you view overall health of the brand today? And then as you've sized up the opportunities, what provides confidence in sustainable North American growth from here, or what is the material change in structure that you're really putting in place?"}, {"role": "user", "content": "So I'll start with the first part, what is the health of the brand today. I think as we noted in our prepared remarks and Kevin in some of his answers, we are very, very strong in the performance space, very strong there. And we have a very solid base business in the good part of the product pyramid where we're not as strong and where the brand needs to get healthier is in the better and best part of the product pyramid. And we also need to consistently execute across marketing and distribution. And I use the word in consistency, the way -- some of the challenges that Under Armour has faced very purposely because there are places where we really have done some great things. Heat gear, cold gear, compression would be an example. And more recently, Kevin talked about SlipSpeed. And when we execute well across the four Ps, product, price, place and promotion like we did with SlipSpeed, we win. So I'd say the health of the brand is strong from a performance perspective, but needs to get healthier and grow in the better and best part of the product pyramid. And then the second part of your question was about my confidence that we can grow in fiscal year '25. And again, I have tremendous confidence that we can grow in fiscal year end '25 because we have all the basics, all the core basics and building blocks for growth in place. We have this strong base in terms of performance. I'd much rather be a performance brand leaning into Sportstyle than the other way around, right, to be a Sportstyle or dare I say, athleisure brand trying to get into performance. It's 2.5 decades of hard work to get that credibility on the performance side. So I have tremendous confidence. Again, I'd go back to the relatively low numbers we have in footwear and women's as two examples of where we can really see exponential growth. And then a lot of it is putting the additional building blocks in place as it relates to talent, Dave just articulated some of the investments we're making on the systems side. I'm very bullish on our future in 2024 fiscal year 2024 is going to be the year where we get the building blocks in place even further."}]}, {"messages": [{"role": "system", "content": "And I am showing no further questions."}, {"role": "user", "content": "Great. Thank you, everyone."}]}, {"messages": [{"role": "system", "content": "Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from Lisa Ellis with MoffettNathanson. Please proceed with your question."}, {"role": "user", "content": "Terrific. Thanks for taking my question. Good nice uptick here on the bookings side. I just wanted to talk about this dynamic a little bit. I mean, you understand it a little bit more. Is it something that has been a little bit of a struggle with Cognizant over the last few years? You're showing 9%, I think, bookings growth year-on-year, but that was a book-to-bill of like 1.3x, which is -- implies a bit of a disconnect in sort of how bookings translate to revenues."}, {"role": "user", "content": "Can you just talk a little bit -- I know you mentioned you're refilling the backlog and you're expecting to come in later in the year. Can you just help us a little bit again with how we should think about that dynamic, the translation of bookings into revenue and the timing and maybe what's going on with the backlog or with the underlying base of revenue? Thank you."}, {"role": "assistant", "content": "Thank you, Lisa. I'm going to -- this is Ravi here. I'm going to start off and then ask Jan to add. We recorded very strong bookings, 28% year-on-year and 12-month trailing bookings of $25.6 billion. And you're right, book-to-bill ratio is at 1.3x. I think the way to see it is it has multiple factors associated with it. First and foremost, how much of it is renewable? How much of it is new? How much of it is expansion?"}, {"role": "assistant", "content": "While we don't give those numbers out, we had healthy expansion and new business in comparison to the past. We had four large deals more than total contract value of $100 million. Just to give you an order of magnitude. Last year, same quarter, we did not have any large deals. Large deals come with a little bit of -- it comes with a runway where a lot of it is at the end of the cycle or rather at the back of the cycle."}, {"role": "assistant", "content": "Short deals, small deals come with immediate short-fuse demand, which gives you revenue on the short run. Large deals give you revenue on the medium to long run, while in the short run, they take a little time to ramp up. So in summary, how this translates to revenue in the short and the medium, and the long run is dependent on what percentage of it is large deals, what percentage of it is small deals."}, {"role": "assistant", "content": "You would appreciate small deals are actually a little softer for us because we've -- we know that the discretionary spend is softening in an economic environment we are in. So the large deals gives us the opportunity to accrue revenues at the back end of this year and the next year while we build the pipe for the future. Our pipeline is looking strong as well."}, {"role": "assistant", "content": "Yeah. Lisa, the 9% trailing 12 months bookings growth is really entirely driven by the very strong bookings growth in the quarter. In this quarter, as you know, we had three quarters of flat bookings that contributed to this overall trailing 12-month result. And so the revenue growth, in this case, will be picking up. We expect a model in our revenue guidance, some revenue impact from these larger deals picking and starting and ramping up in the second quarter -- in the second half of this fiscal year and then have a full year impact next year."}, {"role": "assistant", "content": "So for the second quarter, impacting our guidance is also the anticipation that we see softness in the small-scale bookings. So the second quarter, in a sense, it's kind of a transition quarter, I would say, because we have the high bookings growth, hopefully, continued momentum in bookings as we go through the year."}, {"role": "assistant", "content": "But we do have a short-term revenue impact from the decline of these shorter and smaller deals that are impacted by the economy, by discretionary spend. So that's kind of how I think best to understand the relationship between bookings and revenue growth."}, {"role": "user", "content": "Thank you. And then maybe for my follow-up, Ravi, this one is for you. I know you mentioned you've been out talking to 100-plus clients and have now been at Cognizant for three and a half months or so. Can you just articulate, when you're talking out there with clients, how you see Cognizant, like, really uniquely differentiated in the market when you're -- with what you're hearing back from them, what you're hearing from associates, etc.?"}, {"role": "assistant", "content": "Thank you, Lisa. I've met more than 100 clients in my first 100 days across all geographies, and traveled extensively to meet them and my associates. I would say, just to keep the high-level observations, I think our clients love the confluence of technology and industry demand which Cognizant really comes with."}, {"role": "assistant", "content": "Cognizant, if you go back to the history of Cognizant, it was bought at a time when there was a tail end of the ride to cable, and it was born to be application outsourcing wave, which was starting off. And Cognizant built the capability on a confluence of industry and domain. And industry and domain, the confluence is very important now than ever before because we all know that we are living in a golden era of technology where the core of every business in every industry is transitioning to a technology-led core or a technology must core."}, {"role": "assistant", "content": "So I would say we have to progressively make sure that the confluence of technology and industry, we actually demonstrate the differentiation in every industry we represent."}, {"role": "assistant", "content": "Our biggest exposure is healthcare, life sciences, financial services, which is where I think we have really doubled down on this confluence and we now have to progressively build in every other industry."}, {"role": "assistant", "content": "The second piece, I would say, is client-centricity. I think over the years, Cognizant's growth has actually come from mining accounts with the breadth of capability Cognizant brings. And of course, the entrepreneurs are spirit of our teams. These are the three things which stood out for me. And in fact, some clients actually who have worked with us for very long, actually said we are fans of Cognizant. I mentioned that in my initial remarks."}, {"role": "assistant", "content": "And that was -- that really stuck to me that these are clients who want us to move with them, who want us to challenge them and who want us to co-create along with them for their technology future, if I may. So there can never be a better time for the confluence of technology and industry, and I think we are so well positioned for that."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Bryan Bergin with TD Cowen. Please proceed with your question."}, {"role": "user", "content": "Hi, good afternoon. Thank you. My first one is a margin, and I guess, a NexGen program clarification. And sorry if I missed this, but can you give us a sense of what the run rate cost reduction or the net savings you expect to achieve by the end of 2024? And I'm trying to understand if the 20 to 40 bps of '24 operating margin is incremental to what you would normally had planned for? Or if that's kind of the total level of operating margin expansion, which would align with prior targets?"}, {"role": "assistant", "content": "Yeah. Bryan, there's many moving parts here. So let me talk first about the overall program of $400 million of restructuring charges, of which $200 million comes from severance and $200 million comes from real estate. We provided really only an expected run rate savings rate to materialize in '25 at the full range of $100 million for the real estate component. We offer that savings opportunity because we feel it's hard from the outside to calculate of how restructuring charges in the real estate space translate actually into full run rate savings."}, {"role": "assistant", "content": "So that's kind of what we wanted to help you with the impact of the $200 million component for real estate with that. A portion of that, a meaningful portion of that will be achieved in '24, and then the full run rate in '25."}, {"role": "assistant", "content": "On the severance, we haven't given you a net impact or a gross impact. Number one, I think you can fairly easily calculate by the number of employees affected in the severance volume that we anticipate and make an assumption about the cost savings that we would see. There are many factors, and you'd see this reflected in a relatively wide range of margin that we gave for the year is wage inflation, there's an uncertain pricing environment, and other things that we will have to manage through. So we haven't given more detail about the $200 million severance charge at this point in time."}, {"role": "assistant", "content": "For '24, the 20 to 40 basis points of margin expansion would be off the exit rate in '23, and that would be our current outlook to '24. It should signal from our point of view, our confidence that the full run rate of this program will help us to not only offset large deal pressure that we're going to see for this first year business cases of the larger deals plus the wage inflation or other elements for '24."}, {"role": "assistant", "content": "So it's a little unusual that we give that early in expectation on the margin. But we felt, given that the program is fairly sizable and only a portion of it is going to be realized in '23, it will be helpful for you to know that we are confident about return to margin expansion in '24."}, {"role": "assistant", "content": "Just adding one additional thing out here. I think these are two structural shifts in our cost as well. We listed costs in a hybrid environment as well as the structural shift in our personnel cost, which is a part of our SG&A. I think it is an important part of this program. It's a structural shift."}, {"role": "assistant", "content": "Yeah, we should mention that we did, I think, in our script that we are focusing on nonbillable and corporate functions. So these are intended to actually lower our SG&A rate basically."}, {"role": "user", "content": "Okay. I appreciate that. That's helpful. And then a follow-up, Ravi, on the large deal front, I guess, maybe the Salesforce. Can you talk about what you're doing specifically in these large deal pursuits and maybe your initial assessment of the Salesforce and the incentive structure? I'm curious what you may have put in place here early on in 1Q to give you some quick wins."}, {"role": "assistant", "content": "Yeah. So we're very excited about the large deal momentum. This is initial momentum based on the bookings this quarter as well as a good pipeline. I would say there are two swim lanes to this. One is a swim lane on transformational deals, which I think, in some ways, now a little slowdown with the current economic environment."}, {"role": "assistant", "content": "There is a second swim lane on cost takeout. Cost takeout, specifically in industries, which went through a higher growth rate in the last few years, but are starting to go back to the post -- pre-pandemic growth rates. They're starting to see that there is a significant opportunity to take out cost, and they're using vendor consolidation or cost takeout as a way to construct a large deal. I see more of them now."}, {"role": "assistant", "content": "And I would say both the swim lanes are equally important as the economy takes an upturn, you're going to see more transformational digital work coming the other way."}, {"role": "assistant", "content": "So I would really say both -- these are the two big categories of large deals. And the industries where we see more of it are the ones where there was a swing of growth during the upward trajectory of growth in the last few years where that growth has started to taper down. The timing wise, also the labor market is a little soft end. So this is a good time for all our clients to start to get efficiencies and cost takeout and use a partner like Cognizant to support it."}, {"role": "assistant", "content": "So we see more of them now than before. And of course, it's also reflective that our clients have the confidence to -- for us to execute to those deals."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Ashwin Shirvaikar with Citi. Please proceed with your question."}, {"role": "assistant", "content": "Hey, Ashwin, you may be on mute."}, {"role": "user", "content": "Hey, sorry. I didn't recognize it was my name being called, sorry. Hi, Ravi. Hi, Jan. Good to hear from you. Clearly, you guys have both been very busy. I appreciate the well-thought-out commentary. I guess I wanted to ask, first, about the cadence that you expect. Obviously, you've given Q2 outlook. Is there more of a ratable improvement from that rate to get to the full year? Or is it more of a -- I don't want to call it a 4Q hockey stick, but is it a sharper improvement to the positive for 4Q? And then a similar question on margins, if you can talk about cadence."}, {"role": "assistant", "content": "Yeah. I mean, you see our revenue guidance for the second quarter is largely in line with our revenue guidance in the first quarter. And so we do not anticipate a really material contribution of the large deals that we signed until the third and fourth quarter of this year. So we do anticipate revenue growth acceleration throughout -- the fiscal year throughout the quarters. And I think we're giving you a fair revenue guidance for the second quarter."}, {"role": "assistant", "content": "We still see basically pressure on some discretionary projects and smaller deals, as I mentioned in my comments before. So I think the revenue guidance is kind of where we really solidly think we're going to be at."}, {"role": "assistant", "content": "The margin guidance is a very important question, Ashwin. Keep in mind, we do implement for the vast majority. We have implemented in April a merit increase. And the second quarter will, therefore, be different from our historic profile of margin that we have shown in the past year. So our second quarter, I think, warrants a good look of what happens when we implement that merit increase, which happened historically in our fourth quarter."}, {"role": "assistant", "content": "And so think of it as a normal merit increase and the margin pressure that we will get from it. And that's going to be some material impact for us in the second quarter. That's why I'm mentioning it. And if you do the math of our comparable merit increase in the fourth quarter and exclude the onetime components of the fourth quarter that we had, you'll see that in the fourth quarter, we recorded about a 100 basis points impact of that merit increase on our margins. And fair to assume that things wouldn't be that different in the second quarter, maybe actually probably slightly a little bit more pressure because the economy is changing a little bit. But that's kind of the framework. That's why I want to point that out."}, {"role": "assistant", "content": "So -- and then the people action of our NexGen program, we're going to start to execute in the second quarter, but given of how we're going to be executing, of course, the third quarter and the fourth quarter will be reflecting the impact of a big portion of [speech overlap] good portion of that program."}, {"role": "assistant", "content": "And Ashwin, if you -- just to jog your memory on this, we actually did one in October, a merit cycle, and we're doing one more in April. So these are two merit cycles. In fact, three merit cycles in 18 months. It's good for our associates. It starts to reflect on our attrition numbers starting to drop. And you've already seen that it's an investment for the future, but it equally has pressure on our margins."}, {"role": "user", "content": "Understood. I guess the first part of that question was on revenue cadence if you could address that? But then I also want to ask you, your headcount did go down sequentially. When do you expect that to stabilize and start to grow, I guess, in anticipation of revenue growth in the future? And what part do you think increased automation applying AI to yourselves might play as you think of headcount in the future?"}, {"role": "assistant", "content": "Ashwin, that's a great question actually. One of the things, as I mentioned, my priority is to get commercial momentum, large deals, reduce our attrition, and be an employer of choice. The third piece I spoke about is simplification of our operations. The NexGen program is an important program to delayer our organization and to simplify our operations. Equally, one of the things we want to bring a huge cadence on, I think in the last 12 months or so, we had some -- we had a very good initiative around pricing in the market. And that's a way to actually keep your margins intact."}, {"role": "assistant", "content": "One of the focus areas for me moving forward is increased utilization, higher offshoring, better pyramid ratios, better leverage of Gen C program. And the fourth is what you just mentioned, which is embrace of automation in everything we do."}, {"role": "assistant", "content": "In fact, just a few weeks ago, I launched a platform called Neuro IT Operations, where we want to go relentless on a client automation to ourselves, both on technology as well as IT operations and of course, on the process side."}, {"role": "assistant", "content": "So we do think this is going to be a little bit of a structural shift in the way we see our operating model, where we look at an uplift of margins, not just through pricing but also through operational efficiencies and the leverage of automation."}, {"role": "assistant", "content": "Automation is a moving scale. When everybody moves on that scale, you then start to share those benefits with your clients. And when you start to share those benefits with your clients, you have to reinnovate so that you can actually be ahead of the curve and keep it for yourself. So it's kind of a cycle you have to keep working on."}, {"role": "assistant", "content": "And when everybody -- when you start to share with your clients, when there is a new baseline, you have to rebaseline it with more innovation. So I would say we are now -- we've got into that rhythm. So we are very excited about how we could be competitive to our deals, which we are starting to see, and how we could also on the downstream price deals to win and deliver them to margins using automation as a lever."}, {"role": "assistant", "content": "So it's an important shift in the way we are seeing our operating model. And it's an evolving scale because of the fact that technology in that space is evolving so fast, including the leverage of Generative AI to increase developer productivity, which is the new thing we are working on."}, {"role": "user", "content": "Thank you very much."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Surinder Thind with Jefferies. Please proceed with your question."}, {"role": "user", "content": "Thank you. Following up on the last question. Ravi, can you maybe talk about the level of productivity gains in terms of potentially automation and the level of disruption here? And what I'm getting to here is, is there the potential for a step function change? And if there's a step function change, how does that impact the revenue model as you look over the long term, right? I assume you won't be able to generate the same level of revenues for a given level of service."}, {"role": "assistant", "content": "It's an interesting question because it all depends on how much you want to leverage the productivity you generate out of these tools and instrumentation and platforms into your deals and use that to win more and share it with your clients. And how much you could actually constantly innovate beyond the time when you start to win the deals to when you start to execute the deals."}, {"role": "assistant", "content": "So it's a very difficult one because it's a moving scale because nobody spoke about Generative AI in 2022. Everybody is speaking about it because just the scale at which it's come to disrupt various businesses in the world, including ours, right? So I would say it's a hard one to put a quantifiable impact on revenue and on margins."}, {"role": "assistant", "content": "It is a moving scale. We have to be constantly ahead of the curve. And again, constantly ahead of the curve not to execute programs, but also equally to win business because these are the same productivity baselines we actually take it to our proposals. So sometimes, we wonder as the baselines constantly change, whether it will translate that back to your bottom line, or it will translate that back to better win ratio."}, {"role": "assistant", "content": "So you have to keep that balance so that you have growth. And equally, you are able to generate that growth in a profitable way by not just leveraging the traditional levers of higher utilization, higher offshoring, better roll mix, but also using technology as a lever to do this."}, {"role": "assistant", "content": "So I know I've given you a high-level answer, but it's very hard to simulate and put a revenue model attached to it because it is just such a fast-moving curve. I actually think we are well equipped to capitalize on the advances in the space and we are well equipped to generate the value for our clients, and we're well equipped to actually evolve our business model, which is potentially going to go from people to a people-plus-machines model, if I may, or a people-plus-AI or AI-amplified-human model, which I've been very fascinated about."}, {"role": "user", "content": "Thank you. That's it for me."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Bryan Keane with Deutsche Bank. Please proceed with your question."}, {"role": "user", "content": "Yeah, hi. I just had a question on the overall IT services environment. Just thinking in your conversations you had with the 100 or so clients, Ravi. Are people expecting the environment to stay similar in their IT spending budgets? Or do you think people will put further pressure on budgets and IT spend as we go forward through this year?"}, {"role": "assistant", "content": "Yeah, it's a great question, actually. I will kind of pivot this in a little different direction. If you are working on traditional technologies or classical technologies, as I call it, which is enabling a business, the pressure on IT budgets is going to be very high because a lot of it is cost driven. If you're building a CRM system, if you're building an HR system, a supply chain system. I think the pressure of IT budgets with the economic uncertainty is going to be very -- it's going to be tight. That's how I see it."}, {"role": "assistant", "content": "If you're leveraging technology to disrupt the core of a business, as an example, if you're doing the connected car initiative of an automotive company, I don't think budgets will come on the way because it's a disruption of the business model. Equally, the capability you need is going to be deep as well, which means you have to build different swim lanes in your operating model so that you could cater to classical technologies on one side, but equally cater to deep expertise needed for disrupting the core of businesses."}, {"role": "assistant", "content": "This is a swim lane which did not exist before because most businesses enable the businesses using technology now, technologies emerged into businesses, which I think will have more flexibility on budgets because the paranoia about the core changing means you could become irrelevant if you don't make the change, and therefore, you allocate more for securing your future as a business."}, {"role": "assistant", "content": "Some industries are doing it more paranoid because there is more change in the core products and services, and some are actually not as worried about this issue. I would say, depending on where you are, this would -- you would find IT budgets to be under stress or you're able to find IT budgets not to be under stress."}, {"role": "assistant", "content": "The second piece, I would say, we all have to think about is our universe is not as much just tech spend of enterprises. Our universe is operations spend of enterprises because technology is so deeply emerged into operations. So if you put that lens in, operations, which have to be automated for better experience, for lower cost, for higher -- for high-touch services, you could potentially immerse in technology, outsource and immerse in technology for companies like Cognizant to benefit out of it."}, {"role": "assistant", "content": "So if I see that as the universe, that's a very different universe. In fact, just to give you a case in point, there are companies which have accumulated cost equivalent to the growth rate during the pandemic. And when they go back to the pre-pandemic year, those growth rates start to taper down. They have to take their operations cost down. So they could either do it by automating it, or they could do it by outsourcing and off-shoring it. So it can --you can have a benefit there."}, {"role": "assistant", "content": "So I would say these are three different things to look at. Even today, there is a consolidation of providers, cost takeout, which is actually winning in the terms, as I call it, where customers don't spend more, but there is a swap of the portfolio between one provider to another provider, which means one wins and one loses. So it's kind of -- if I just look at straight IT spend in classical technologies, you have a different answer for core [Phonetic], you would have a different answer. And of course, if you're consolidating providers, it's a win for one and a loss for somebody else."}, {"role": "user", "content": "Okay, great. Yeah, thanks for the color."}]}, {"messages": [{"role": "system", "content": "Thank you. At this time, I would like to turn the floor back over to management for closing comments."}, {"role": "user", "content": "Great. Thank you, everyone, for joining. We look forward to catching up with you next quarter."}]}, {"messages": [{"role": "system", "content": "Thank you. [Operator Instructions]. And our first question today will come from Luke Sergott of Barclays. Your line is open sir."}, {"role": "user", "content": "Great, thanks. Good morning, everybody. So I want to start off on the academic and government strength that you guys saw in the quarter particularly in China, you guys called that out, but it was strong across every region. So, did you guys see any push outs in there from - from the 4Q. Just talk about what -what you are seeing there is that kind of goes forward. So, this isn't just a one time thing."}, {"role": "assistant", "content": "Sure. Thanks, Luke, and good morning. Look, it's a great start to the year with about 45% growth and this is largely due to the elevated global funding that we're seeing - seeing - seeing across - across the globe and the strong demand for our high rise mass spec portfolio. This growth was of course led by China, which grew over 80% versus previous year and of course we saw the same thing happening, not to that same extent in magnitude, but in the US, in India and in Europe all had a - had a nice growth well into the double digit territory. So, academic and government, as you know is a segment that's rather lumpy, so I would rather not extrapolate Q1 to the rest of the year. So we assume that we will see the second half that will become more normalized and the full year will be more in the low double digit to teen range given such a strong start to the year."}, {"role": "user", "content": "Okay, great and then when you guys talked about the - on the guide down part being from biotech customers and part being from large pharma kind of pushing out their spending, can you help size what those actually were and contributed to the guidance cut for the year."}, {"role": "assistant", "content": "So Luke, look I mean, if just to sort of take a step back, the full year guide - for the full year guide we have assumed 3% to 5% in constant currency, right. And on a 2-year stacked basis, this is still high single digits. We like to - we think like the first quarter the spending at Chinese CDMO customers and the pre-commercial biotech customers remained constrained for the balance of the year and to remind you on the - on the China upside we've grown the CDMO presence over the last two years, we've actually tripled that business, right. So, it's gone - it's gone dramatically up. So we think like the first quarter, the spending in the Chinese CDMO customers and the pre-commercial biotech customers will remain sort of muted. On the other hand, we're assuming that the large pharma customers with delayed orders for instruments will come in the second half of the year. And here over the last two weeks, I've personally spoken to several large customers, both in the US and Europe to understand the situation and the funding remains very much intact and the [Indecipherable] were simply delayed, so we're expecting those to come largely in the second half of the year. So then the 3% to 5% guide would then imply that for the full year, China will grow in the low single digits versus our previous assumption of high single digits. Pharma will also remain in the low single digit category with combined pressure from China, CDMO and pre-commercial biotech. And instruments for the year will grow flat to low single digits and recurring revenues in the high single digits, right. So I hope that gives you a flavor for the drivers of the full year guide and how we stepped it down. Amol, do you want to comment - comment on the quantitative aspects?"}, {"role": "user", "content": "No. I think you covered it well, yeah."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question will come from Vijay Kumar of Evercore ISI. Your line is open."}, {"role": "user", "content": "Hey guys, thanks for taking my question. Udit, back to some of your comments here. What is Waters exposure to this emerging biopharma, was that down in 50%, any directional sense and what the business did and in - in this Wyatt, I understand they have exposure to large pharma. Is there any risk here on Wyatt's - what is Wyatt's exposure to emerging biopharma?"}, {"role": "assistant", "content": "So let me - so Vijay, thank you for the question. First on the biotech exposure, our biotech customers broadly speaking constitute between 10% to 15% of our pharma business and with more heavier weighting in the US and China, where the biotech industry is even more developed. Pre-commercial biotech, which is where we saw the slowdown is a subset of this and it's roughly half of it, right. So if you do the math, that's roughly 5% to 7% of our pharma business, right, and largely focused on the US and in China. So during Q1, pre-commercial biotech companies of course got extremely cautious and virtually halted the instrument purchases, especially later in March. We're starting to see some relaxation but we've assumed that this situation will persist for the balance of the year. So and over the long - and over the long term I don't need to remind you the biotech industry plays an extremely important role in the innovation that we see across healthcare and they remain our very-very strong customers. Now to your question on Wyatt, roughly 80% of the Wyatt business is focused on -on biologics - on biologics applications. Wyatt has historically been very strong in academic and government and for biologics applications for characterizing large molecules like cell and gene therapy and proteins and monoclonal antibodies. We expect this business for the balance of the year once the close happens to remain in the low double digit category and as Amol said this would add roughly 2.5% to our incremental revenue for Waters for the rest of the year. So we expect this to continue to remain extremely strong for the balance of the year."}, {"role": "user", "content": "Understand and then Amol, one for you. The second quarter EPS guidance implies I think the operating margins in 2Q to be roughly similar to Q1. [Indecipherable] trace of the annual EPS guidance, it looks like back half has to be like low 30s operating margins, that's a massive step up, I think 500 basis points or 600 basis points from doing the math correctly. What is driving the second half margin expansion versus first half, is there any synergies being baked in from this Wyatt transaction or perhaps is Waters contemplating any restructuring actions."}, {"role": "user", "content": "So there a couple of things Vijay that play into the second half of the year, right. One is the volume in the second half is typically higher than the first half and that produces some degree of volume leverage and our gross margin profile in the second half is slightly better than that in the first half. Two, we also benefit from exchange rate in the second half. Remember in the first-half, FX is still a headwind in the second half FX is a tailwind. And three, given the revise sort of the demand outlook we plan to proactively manage our costs and intend to keep our operating expenses relatively flat in the second half versus the first half and if we are able to do that, then it allows us to produce the kind of margin expansion and EPS that we've guided from the second half."}]}, {"messages": [{"role": "system", "content": "The next question will come from Daniel Brennan of TD Cowen. Your line is open."}, {"role": "user", "content": "Great, thanks. Thanks, guys, for the question. Maybe the first one, just on the guide, just wondering, was there a discussion maybe to cut beyond the 3 to 5, just wondering, you kind of ripping the band aid off here, given some of the factors you pointed to, but do you feel that guide provides still healthy cushion given all the uncertainties you flagging, it's still as you pointed out, you did, it's still kind of in high single digit to your stack, which is above your long-term LLP and you do have these factors and your banking on a recovery in the back half of the year for large pharma."}, {"role": "assistant", "content": "Yeah, so - so, Dan, thank you for the question. Look, I mean, we spend a lot of time clinically dissecting what happened in Q1, and why it came below our - below our expectations with a 3% or so growth, right, and the reasons that I outlined the slowdown in Chinese CDMO customers - slowdown on purchasing of Chinese CDMO customers who largely serve US - US and European pharma customers, we think that will persist for the balance of the year. We think the pre-commercial Biotech spending will remain muted and that is that's what we've assumed even though we see some signs of that improving, we've assumed that - that remains muted. And then thirdly, we expect the deferral of purchases of instruments in large pharma customers to come back and we looked at it super carefully and I personally spoke to some large pharma customers, they have the budget, they have the funding, it simply was caution to delay the purchases and now with a very strong revitalized portfolio, we feel very good about being able to compete for - for orders across the instrument portfolio. So you put it all - you put it altogether, you basically see that the instruments are - instrument growth will be flat or low single digit at most for the full year. Recurring revenues, which have gone from strength to strength is over 50% of our business, gets into the high single digit category. Pharma, which has been our sort of strongest grower in many - for many-many years, we also assume in aggregate will be back to low single digit. And China, again a strong growth driver, will end up flat to low single digits. So I think we've been we've been rather cautious about our guidance and we've taken all the factors into account. And as you said, I mean, the full year stack looks very good, just given the strength we've built from a commercial perspective, and the strong innovative portfolio that we have put forth in the market and with the close of Wyatt that should add a little bit of more - little bit more momentum."}, {"role": "user", "content": "Great, thanks Udit. And maybe sort of follow-up just on instruments. So flat to low single, that's kind of high single digit stack against what you guys did, you've obviously had tremendous growth there. Can you just unpack that a little bit, it sounds like a mass spec doing terrific. Could you just give us a flavor for the relative contribution between NASDAQ and LC and if you want to give us any regional, I don't know how far down the whole you want to go, but just give us a sense of what's incorporated into that low single. Thank you."}, {"role": "assistant", "content": "The instrument sales for this quarter declined roughly 4%, right. And as you rightly pointed out, this is on the base - on the back of a 26% growth in 1Q22, right, so pretty strong comp. Now mass spec grew high-teens so strength to strength and on a multiyear basis, it's a high-teen growth. DA grew double-digits, while LC declined in teens. Now to your question on LC or deeper question on LC, the sales were impacted disproportionately by the decline that we saw in the purchase by pharma customers and these are - these are Chinese CDMO serving US and European customers as I mentioned the pre-commercial Biotech and also the delayed orders that I talked about for large pharma so disproportionately impacting LC. Now just to put this all in a bit of perspective and you've seen an instrument business we will always see fluctuations but what is important to remember is that over the long-term our instrument business has grown in a 4% to 5% range with a gross margin of roughly 60%, right, it's a pretty attractive area to be in."}, {"role": "assistant", "content": "We during this time looked at our instrument growth rates for the last 20 years, starting 2004, we basically looked at every year and you come away with just two very simple insights. First the average growth hovers around 4% to 5%. Second, there is a fluctuation around this mean which generally gets exaggerated around economic slowdowns, like in 2008 and 2009, 2011 and 2012, but the volume always returns within one to two quarters. So whenever there is a delay, especially in the case of LC, which is over 70% of replacement business. This fluctuation always subsides and you return to your average of about 4% to 5%. So we're pretty positive and we feel very confident about the deferred business is coming back, especially now, given our terrific commercial execution that you pointed out, and our renewed portfolio, especially in the small molecule LC segment where Arc HPLC now is augmented by Alliance iS. We should see the instrument growth returning back to normal before long as for the full year than we basically assume still a flat to low single digit instrument growth in aggregate and recurring revenues at the high single digit range. Wherein the second half of the year, you'll start to see trends that are more like pre-COVID times, right. So I hope that gives you a bit of flavor on - on what the assumptions are and how you probably have thought about it."}]}, {"messages": [{"role": "system", "content": "The next question will come from Matt Sykes of Goldman Sachs. Your line is open."}, {"role": "user", "content": "Hi, good morning. Thanks for taking my questions. So maybe just to dig a little bit more on the large pharma side, it's quite clear, your expectations for the second half recovery and this is a delay. I'm just wondering just given some of the news we've seen from some of the larger pharma about rationalizing their R&D spend, has there been any kind of re-prioritizing those R&D budgets, whether it's inflation reduction act prompting them to move into large molecule or anything like that, are you truly see this is sort of a temporary delay in terms of ordering."}, {"role": "assistant", "content": "So Matt, great question, right. And so, I personally then decided to speak to several of the large pharma customers both in the US and in Europe, and basically we find that the budgets are still very much intact. Like many companies like us as well we are being more cautious with - with capital spend, and we are taking longer to approve capital spend and that's what's happened in large pharma as well. So there is no talk of not doing replacements or not - not adding instrument fleets that they had planned altogether. Second, what I'll remind you is that our business is more heavily weighted towards the QA/QC segment, which is more proportional to manufacturing volumes, right, and so R&D spend if it comes under pressure does not impact especially our LC business which is more weighted towards QC and especially on the small molecule sites, so really no - no real indicator there that - that would - that would slow down. And finally, Matt feel extremely good about our commercial execution that has demonstrated what we've been able to do over the last 2 to 2.5 years. Where we have really grown rather nicely with all the instrument replacement initiatives, also on the consumable side, which remains extremely strong and consumables I'll remind you is an indicator of pharma activity, right. If that is glowing high single digits, what you find is that significant activity still occurring with the pharmaceutical customers. So we believe it's just a matter of time that the instrument - the instrument orders that were delayed in large pharma will come back. So we have a lot of corroborating evidence that suggests that this is coming back, but we've been rather cautious - even though we see some indicators of it coming back already we've been rather cautious to assume that most of the spend will come in the second half of the year."}, {"role": "user", "content": "Great, thanks. That's very helpful color. And then just my follow-up would just be on the industrial end market, you've done a really good job in the past of kind of decomposed into sub-segments there and you talked about strength in batteries and PFAs, but maybe could you talk a little bit more about the sub-segments where you're seeing some maybe softness and where you're seeing continued strength."}, {"role": "assistant", "content": "Yeah. Yeah, so I mean, just taking a step-back, Matt, the Industrial segment on Waters has dramatically changed over the last 15 years or so, right. I mean, basically it's now constituted heavily of food and environmental and the TA business has 40% of it is in the more resilient segments like batteries, also serving some parts on life science right out of TA. Now to just decompose the results for the quarter, the industrial business grew roughly 3%, it was led by TA again, which grew almost 10% and PFAs testing, which we've talked about several times in our previous discussions, which continues to grow really-really rapidly. And in TA, roughly 40% of the business is now in the more resilient segments with batteries really continuing to grow nicely. So when I double click on TA, I mean it has the same sort of dynamics that the Waters division does, right. So, we've really increased our focus on commercial execution, new products, especially the ones relevant for high growth areas for thermal analysis and rheology and we just talked about our new battery calorimeter that sets a new standard in testing batteries and their efficiency and effectiveness, it's just been launched. So we feel very good about where the TA business stands going forward. So if I just put all of that together for the full year we're assuming a mid single digit growth in our industrial - in our industrial business led by the strength that we continue to see in TA and PFAs testing."}]}, {"messages": [{"role": "system", "content": "The next question will come from Derek Brown of Bank of America Merrill Lynch. Your line is open."}, {"role": "user", "content": "Hi, good morning, everyone."}, {"role": "assistant", "content": "Morning, Derek."}, {"role": "user", "content": "Hey Udit. I have a question for you. I mean, I've been covering Waters for a long time, and we've seen some of the spending patterns before and historically farmers have delayed their budget releases in Q1, thinks pickup in 2Q but otherwise [Indecipherable], if we're going back to sort of like historical seasonality, 3Q then is always a crapshoot in terms of what spending is because you won't have any real visibility until - until September. So I'm just - I'm just sort of why are we not back to somebody sort of seasonal patterns and then in - and everything essentially end up right on the fourth-quarter and like this. I'm just very curious. Are we - is there anything more different going on here than just return to normal seasonality."}, {"role": "assistant", "content": "It's a fantastic question, Derek, and expected you to ask something that relates to the history of Waters in general. Look, you're totally right. We think the second half of the year will start to approximate what we've seen in the past, right. That's why if you just look at the growth rate on the second half of the year, it's between 4% and 7%. Instruments now starting to traverse into the low to mid single digits and consumables, well-above our historical averages traversing at the high single digit, right. So, it does start to look like historical patterns. And if you just now look at the specifics, right, as I said - we basically said, look, the CDMO spending in China, the pre-commercial biotech is not coming back. Now, you can call that super conservative or not up to you, but we just said, look, that's not coming back for the balance of the year. That's what we want to assume for now. But pharma, we have said, based on the visibility we have with those customers and I personally spoken to several of them as well to just gain confidence, we're already starting to see the orders release now, it's anyone's guess If it comes in Q2, Q3 or Q4, but again we've been cautious and said, look, it will come in Q3 and Q4 rather than in Q2, right. So I think that's the dynamics, but it does return, the second half of the year starts looking awfully like pre-COVID times and then when you do the full-year math, right, you look at Waters, I mean, you'll see us on a stack 2 year 4-year stack basis traversing high single digits and Amol already talked to you about the margins, the margins are 330.5%. That's a pretty good business right high single digit 30.5% margin. So we expect to be able to overcome these challenges for the balance of the year and, I mean, this is the best visibility that - that we had at that point in time given the conditions."}, {"role": "user", "content": "Yeah. I mean, absolutely. I mean, just sort of looking at it historically gone through a couple of years like double digit growth in the business and then it goes to mid singles and it comes back double digits and then it goes there, it goes to these processes, so I mean it seems like the trajectory as was the exit 23 would be back to that 3% to 5% growth in instrumentation business, than whatever your augment is on the consumables business, right. So 7% to 8% that way, so that's probably the best way we think about next year. I think, I mean, I can't give you [Indecipherable] next year, but just to give you sort of broad strokes at this point we think that our instrument business is super healthy right, though is it 3% or is it 5%, I cannot judge but it's a good starting point. We think our consumables business has been traversing on a stacked and a double stack meaning two to - two and four years stack basis on high single digits now. It seems a bit higher than previous - previous growth rates. Now we've augmented our business with Wyatt which would add more to the growth rate, right. So, that's a low double digit grower and exposed more to biologics. And you put it all together, I mean instruments are mid single digit, recurring revenues are high single digit, you sort of end-up at a weighted average which is mid to high single digits, right, that's what we are seeing and remember, we said 5% to 7% growth in the midterm starting to and with more move towards high-growth adjacencies that growth even expands and we are able to maintain our margins because we are rather careful about how we invest in the business and it's about a 30ish percent or 30.5% margin, right. So you start to see the algorithm come back, but with a bit more - a bit more strength given what we've done on the commercial side and how been adding - adding, adding strength on the consumables, placement through e-commerce, service attachment rates which are higher than ever and then new product - the new product portfolio, which is completely revitalize. So we think it will be a - it will be in there or thereabouts, but probably a little bit better given commercial - commercial success given innovation and the fact that we have Wyatt which is the faster-growing businesses in the - in the segment."}]}, {"messages": [{"role": "system", "content": "The next question will come from Joshua Waldman of Cleveland Research. Your line is open."}, {"role": "user", "content": "Hey guys, thanks for taking my questions. A couple for you. Udit I guess, just another follow-up on your comments on large pharma. I think you said you have orders or quotes in hand at this point. I guess, just curious if you could comment on the magnitude of these orders and then maybe what customers are telling you with respect to a year-over-year growth in their budget and then I guess reference - in reference to the full year guide if the opportunities do convert that it sounds like you're starting to see. Do you think there's upside to the guide and then on the flip side, if - i f they don't, do you think you have to trim the guide going through the year."}, {"role": "assistant", "content": "So maybe I'll start with the very end and then work - work towards the front on the pharma customers. Look Josh, we've done a very clinical analysis on the drivers of what's happened in Q1, right, and we have been super transparent about where they've come from, right, the Chinese CDMOs, the emerging - the pre-commercial biotech and those, those two, we don't expect to see coming back for the balance of the year, even if there are indications that starts to relax towards the later part of the year. On the pharma spend, we have a significant amount of corroborating evidence that from the field, from my personal conversations, from looking at the data, especially in - in what we're seeing on a commercial - from a commercial perspective, and I'll remind you that, that we are - we are still very much QA/QC focused company. So the commercial volumes continue - to continue to rise as they are in pharma and new products keep coming through, we expect to see that spend - spend continue in the way that it has. So we feel reasonably comfortable that - that spending will come back for the balance of the year. Again, how it's distributed in Q2, Q3, Q4, it's not straightforward but we are assuming that it's in the second half of the year. And that brings us to the full year guide, which is 3% to 5% or 2-year stacked growth rate of high single digits. So, I hope that gives you color on - on how we are thinking about the full year and where we see strengths and where we are sort of analyzed it and said, look, we are not bringing this back into the equation."}, {"role": "user", "content": "Got it, then we [Indecipherable] wondering if you could comment on how prices tracking year-to-date versus your expectations. I think you previously said 200 basis points this year, is that still the right way to think about it or does the softer demand environment here in the near term put pressure on that."}, {"role": "user", "content": "I mean at this point Josh price is reducing little above 200 basis points based on dynamics we are seeing in the market our teams are doing an excellent job of holding onto that. And that's what we're thinking for the rest of the year."}, {"role": "assistant", "content": "Yeah, and Josh, to build-on the price comment. We expect that the strength that we've built in execution of implementing pricing changes will stay with us. Second, our portfolio, which is really reinvigorated across the board, right. So we've talked enough about the mass spec business in the Boston, Xevo TQ Absolute, the G3 Qtof which now helps customers transfer their methods much better from development into QA/QC or to the BioAccord. We've talked about the impact of our MaxPeak Premier columns, so innovation across the board and now more recently with LC with the Alliance iS and also in DA for battery applications, we see innovation across the board and this customers do want these products, they meet very significant unmet needs and they're willing to pay a premium to access these products. So the commercial strength that we've built over the last two years plus revitalized portfolio makes us confident that we can continue to pass on price in a very significant way."}]}, {"messages": [{"role": "system", "content": "The next question will come from Rachel Vatnsdal of JPMorgan. Your line is open."}, {"role": "user", "content": "Great, thanks for taking the question. And so one here on instrument declined 3% during the quarter, you made a comment of how the dynamics really sort of late on in the quarter. So can you walk us through what was the exit-rate for instruments and then how orders look during April-May timeframe and then as a follow-up, you mentioned that instruments are expected to be flat or low single digits for the year. So what's embedded in that guidance for instrument growth during TQ."}, {"role": "assistant", "content": "Sure, Rachel. Thanks for your question. Look, instrument sales declined by 4% for this quarter, right, and on the back of the 26% in 1Q22, mass spec as I mentioned earlier grew high teens and TA grew double digits, while LC is the one that declined in teens and for your question on how these were and where this came from, I mean, it's the same drivers that I mentioned earlier they were impacted disproportionately by the decline in the Chinese CDMO customers were serving US and European pharma companies, pre-commercial biotech and some delayed orders in large pharma. And as we - we think about the full year, we feel quite confident that the deferred business is going to come back, given what I mentioned in response to the previous questions and also the fact that we have an excellent commercial organization and the new portfolio that basically allows us to place these instruments. For the full year - for the full year, we are assuming a flat to low single digit growth in instruments and of course high single digits for consumables and you'll start to see Derek's question earlier, the second half of the year look awfully like pre-COVID - pre-COVID times. I hope that gives you clarity."}, {"role": "user", "content": "Yeah, and then just a follow-up here on - on biological analytical characterization. Can you talk about what the adoption of that portfolio with BioAccord and then also how Wyatt adoption rate has trended in recent months and talked about the opportunity here for bioanalytical characterization is that - adoption rates will increase over time, but just given that characterization is that required for bioprocessing right now, is there a risk that could be an area where pharma really start to rationalize spending and that could pressure new customer wins and then ultimately looking back to you for growth rates and BioAccord and Wyatt this year. Thank you."}, {"role": "assistant", "content": "So, Rachel, thanks for that question. Look I mean about 40% to 50% of the pharma pipeline is now biologics. A good portion of that is cell and gene therapy molecules which are curative not just - not just treatments. These are fantastic drugs and we're doing all we can to help our customers take these to the market. Unfortunately the characterization techniques for these have not moved at the pace that they should have historically. Now we have the tools like LCMS, like LCUE, like light scattering and like our MaxPeak Premier columns that will allow our customers to characterize these molecules much better to move them faster through the pipeline and reduce costs dramatically. So we see that demand really-really picking-up, right. So, when we did the analysis we said, look, this is about a 1.8 billion market that is growing well into the double digits, now with the addition of Wyatt we now have a world-class portfolio with the simplest LCMS instrument in BioAccord that has very good adoption for raw material testing, for in-process characterization of [Indecipherable] lines and now rapidly moving into - into QA/QC and I had given some examples of that also in the past. Second, LCUV remains a characterization technique that many of our customers use to release biologics. And thirdly, now with Wyatt multiannual light scattering that we now intend to attach to our SEC - SEC columns as well as our LCs, we think this has very-very good prospects going forward. And when you talk about Wyatt, Wyatt has historically grown in the 20% range and our assumption is as we look at the balance of the year and the rest and after the deal is closed we - our assumption is still that it's a low single - low double digit grower with a 40% margin for the foreseeable future. So we feel very good about this area and biologics in general and bio and the business that we're building in bioanalytical characterization."}]}, {"messages": [{"role": "system", "content": "The next question comes from Patrick Donnelly of Citi. Your line is open."}, {"role": "user", "content": "Good morning, I am Lizzie on for Patrick. Thanks for taking my question. So, I guess first on pre-commercial biotech, can you talk a little bit about how that trended throughout the quarter to the weakness mostly stemmed later on in the quarter in February and March, or was it kind of you know even throughout and then I have one follow-up. Thanks."}, {"role": "assistant", "content": "Sure, look, I mean, this - this really came in the month of March, right. I mean our pre-commercial biotech, as I've said before, is roughly 5% to 7% of our overall pharma business and largely focused in the US and in China, now to double click on the US, these companies are mostly in the Cambridge and San Diego, San Francisco area, right, and we saw really their spending almost halt in March given the financial crisis that many of the companies were going through, some of that has started to relieve but we saw that - that segment really slow-down quite dramatically in the month of March and then that has - and that has persisted into, we are assuming that, that is persisting into Q2, especially for that particular segment."}]}, {"messages": [{"role": "system", "content": "And that was our final question for today. I'll turn it back over to the speakers for closing remarks."}, {"role": "assistant", "content": "Sure thank you very much for your participation and questions today and on behalf of the entire management team at Waters I would like to thank you for your continued support and interest in the company. Thank you and have a wonderful day."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And our first question will come from Shar Pourreza from Guggenheim. Your line is open."}, {"role": "user", "content": "Hey guys. Just a couple of quick ones here. Just on -- are you including any outcomes in Texas legislation as we've seen build advances, any of this in your '23 or '24 numbers? And I guess, how quickly would you seek to adjust the plans and filings to reflect any changes from legislators, especially items that reduce ROE lag or implement a resiliency planning framework, etc?"}, {"role": "assistant", "content": "Thank you, Shar. Our approach has been to basically put together a 2023 update as well as a 2024 plan. It contemplates a number of outcomes. And I would say, independent of those outcomes in Texas, we would stick to the same plan we have on The Street now."}, {"role": "user", "content": "Got it. But so the Texas legislation is not in the numbers, I just wanted to confirm that."}, {"role": "assistant", "content": "Our current expectation, and we're going to -- we don't want to front-run the legislature, is that we do get some constructive outcomes. And we expect that the DCRF benefit, if it were to pass, is within the range and currently in the plan."}, {"role": "user", "content": "Okay. Got it. And then just on the growth rate, as you guys start reaching COD on ECA and reaching full earnings run rates over '25 and '26 and Port Arthur in '27, 9% rate base growth in your five-year plan and contributions from FID projects, cost of capital trips, I guess, you seem to have a lot more tailwinds than tail risks in that 6% to 8%. I guess, what are we missing? Are there other drags we should be thinking about?"}, {"role": "assistant", "content": "Yes, it's a great question. One of the things we've talked about internally is you would expect your earnings growth over time to pretty much track your capital growth over time. So that's one of the reasons we have a lot of confidence in that 6% to 8% range. But I would actually take the opportunity, Shar, to make two other comments here. First, one of the things we oftentimes tell our investors are that our past financial results should be a good indicator of our future performance. I think you and I have had this conversation before. But over the past 10- and 20-year periods, we've consistently been able to grow our earnings per share at rates and the rates of roughly 7% to 8%."}, {"role": "assistant", "content": "And even more recently, in the five-year period, you'll recall that we've been able to grow our earnings per share at an annual growth rate of just over 10%. So to your point, when you start looking forward, we have reaffirmed our 6% to 8% EPS growth rate. And I've always wanted to be very clear. It's not a quarter-by-quarter or year-over-year type of forecast. We're really truly focused, as you point out, on growing the business over the long term and particularly through the end of the decade. So from my perspective as the CEO, I think the takeaway from today's call is that our announcement of a $40 billion capital plan makes us even more confident in our long-term forecast. And I would tell you through the end of the decade, given all the opportunities that are in front of us, and you outlined many of them, I would be disappointed if we didn't exceed the high end of that range."}, {"role": "user", "content": "Perfect. That's what I was trying to get at. Very clear cut, and congrats on the execution seriously."}, {"role": "assistant", "content": "Thanks, Shar. We appreciate it."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question comes from Steve Fleishman from Wolfe Research. Your line is open."}, {"role": "user", "content": "Yes, a couple of questions. So just could you talk to your funding plan for the higher capex? And I guess, specifically, it looks like in the appendix that there's some additional shares in the '24 guide. Could you just talk to what's driving that and the like?"}, {"role": "assistant", "content": "Sure, I'd be glad to. We've got Trevor with us. And maybe, Trevor, you could take a step back and give us an overview of the financing plan."}, {"role": "user", "content": "Yes, sure, Jeff. I'd be happy to. So Steve, if you take back and you look over the last five years, we really have taken steps to strengthen our balance sheet and our credit metrics. And we did include kind of a summary in the appendix of the slide deck of each of the businesses on their credit carrying a stable outlook. But as part of that process, we've also developed an efficient loading order when you look at seeing how we source the lowest cost of capital to fund these businesses. So first, we've taken concrete steps to simplify the business and then to sell non-core assets. And then we've recycled that into new investments. And that process really occurs on a routine basis."}, {"role": "user", "content": "Secondly, we do evaluate debt and equity at the project level. And Steve, a good example of that would be what we recently did at Port Arthur with that announcement, where we just circled over about $10 billion of third-party debt and equity. And then third, we've also had success in efficiently raising capital at our operating companies. And there, you saw us do that with KKR and ADIA by bringing them into the capital structure of SI, which has allowed us to raise over $5 billion. And then finally, we can always raise debt and equity at the parent level if we determine that's in the best interest of our shareholders. And so bottom line is we're always focused on financing growth that is most beneficial to our shareholders. And we're pretty excited about this capital plan that's in front of us."}, {"role": "user", "content": "Okay. No, that's really helpful. But just specifically to the '24, the share count goes up. Is that some kind of plan for just like an ATM or something or..."}, {"role": "user", "content": "No, I think that's just some of the shares that are -- we've got in the plan for employee benefit plans and other things like that, so..."}, {"role": "user", "content": "Okay. Got it. All right. That's very helpful. And then on Port Arthur, within the 2027, is it -- I mean, I know you're -- it's not like your stake is 25% and the like. But just is it -- is that first trained in for the whole year? Or does it not come until later in the year, so it's really not showing up in the last year of the plan yet?"}, {"role": "assistant", "content": "Yes, the way you thought about it, Steve, is train one comes online in 2027 with train two coming online in 2028. It would be -- it would not have a material impact on the 2027 number."}, {"role": "user", "content": "Right. So we're still seeing this growth without really seeing the [Indecipherable] at Port Arthur?"}, {"role": "assistant", "content": "That's correct. And the way to think about that would be -- you're absolutely correct. And the way to think about that would be the full run rate for Phase one of Port Arthur would be in 2029."}, {"role": "user", "content": "Got it. Okay, that's helpful. Thank you, I think I'm good."}]}, {"messages": [{"role": "system", "content": "Thank you. Our next question will come from Julien Dumoulin-Smith from Bank of America. Your line is open."}, {"role": "user", "content": "Hey good morning team. Look, let me just pick up on this earnings growth outlook here. And obviously, you guys gave us a '24 refresh here, nicely done. Should we expect growth in '25 to be maybe higher than the 6% to 8% range, given that, as you say, maybe 6% to 8% was a little less than '24? How do you think about the perhaps potential lumpiness of certain growth years? Or should we expect improvement to be maybe later-dated with LNG contributions, if you can expand on that?"}, {"role": "assistant", "content": "Yes, appreciate it. One of the comments I was making earlier was that we don't think about it in terms of quarters or years necessarily. The big issue that's needed to respond to you in 2025 is two things. It will be largely driven the outcome of our rate cases in California. And as you know, a lot of people don't put out guidance when they mailed a rate case or have a rate case pending. We've included a reasonable set of expectations for 2024. But that outcome, Julien, will have a big impact on 2025. And the second thing I'd call your attention to is we're still forecasting kind of a half year convention for ECA Phase one with ECA expected to COD in the summer of that year."}, {"role": "user", "content": "Right. Yes, a lot of different moving pieces in the plan. Actually, if you can elaborate a little bit, you commented a little cryptically on Cameron, on perhaps reevaluating the timeline a little bit. Can you talk a little bit about what you're seeing on the inflationary front, labor, etc, to be able to get some of these LNG projects done? Maybe a little bit of an updated timeline as you think to optimize that. And then related, I know there's been some challenges with the DOE here on extending timelines. Perhaps not entirely related, but I'm curious if you have any opinions on that related to the Cameron."}, {"role": "assistant", "content": "Sure. Let me start with the policy shift, I think, that you're talking about. And I'll come back to the timing of some LNG projects and your inflationary question. So I'll take your second question first. You'll recall, Julien, that last year, the United States made a series of announcements with the EU and the United Kingdom about our country's support for their economic and energy security. We found that to be very constructive. And more recently, that was updated at the G7 meeting, where the U.S. came forward and affirmed the importance of global LNG for energy security and climate goals."}, {"role": "assistant", "content": "So I think the DOE was constructive in putting out both of those statements on behalf of the United States. We're certainly continuing to track the statements they've made here more recently. But our initial assessment is it highlights the significant value of derisked projects that are under construction or actively moving forward, like ECA Phase one and Port Arthur. And it probably discourages projects that are not materially progressing. So based on our experience in the sector, the market and the regulators tend to coalesce around projects that have a higher likelihood of being successful."}, {"role": "assistant", "content": "And we continue to have confidence that our projects, in particular, are well positioned relative to that standard. On the issue of timelines, there's no question that interest expense and inflation and supply chain issues are impacting the whole industry. You would likewise expect that to be happening on the LNG side. But right now, we don't see any movement in terms of how we're thinking about future COD dates in some of our projects. But I thought it might be helpful to Justin to do two things. Maybe provide just a short update for Julien's benefit on Cameron expansion but also talk about the excitement you're seeing around interest in Port Arthur Phase two."}, {"role": "user", "content": "Yes. Thanks, Jeff. Let me start with Cameron Phase two. So Julien, I think importantly, we and the partners continue to advance the project. And there's a lot of excitement around this expansion at Cameron. As we noted, we received FERC's approval of our amendment and now have a fully permitted project. On the offtake side, we expect the Cameron partners will take their share. And as we've said before, we will share -- sell our share of volumes on a back-to-back basis. The competitive FEED process does continue to advance. I think the way I would clarify is that if we and the partners see the opportunity to, most importantly, accelerate the expected start of commercial operations and thus the cash flows, while at the same time, reducing project risk and cost, we're willing to spend a little bit more time upfront and we would be willing to extend the competitive FEED process."}, {"role": "user", "content": "I guess, on an overall basis, my statement would be we continue to advance it. It's a priority project. And I'd say we and the partners are very committed to bring this forth. We think it's a great project. I would say in terms of Port Arthur Phase two, we've already had a successful start. We talked about the FID. And I would say, building on that success, we're seeing strong interest in Phase two expansion, which will create significant scale in the Gulf Coast. So we're continuing to work on marketing. We're continuing to work on permitting and construction. And then once those three are wrapped up and we have commercial arrangements, we'll move forward to the financing phase. But lots of excitement around Port Arthur Phase two and basically I would say the business in general."}, {"role": "assistant", "content": "I would add to it as well, I made this comment we were talking about the policy issues from Washington. When you see projects like Phase one going forward, Julien, it's really been helpful to coalesce interest for Phase two. So I think the thing that's really interesting is we're really drawing a lot of market interest for Phase two at this time."}, {"role": "user", "content": "Excellent guys. Thank you."}, {"role": "assistant", "content": "Thank you for joining."}]}, {"messages": [{"role": "system", "content": "Our next question will come from Durgesh Chopra from Evercore ISI."}, {"role": "assistant", "content": "Good morning Durgesh."}, {"role": "user", "content": "Hey good morning Jeff, thanks for giving me time. Just I have one quick clarification, hopefully. Trevor, just on the equity front, the plan through 2026, the former plan, you were very clear that there's no equity through 2026. And I appreciate you went through the different sources of financing in responding to Steve's question. Is that still the case through 2027 that is no equity? Or could we see equity at the Sempra consolidated level as you sort of advance through your capital plan? If you could just clarify that for us."}, {"role": "assistant", "content": "Yes. And Durgesh, I'll be glad to take that. I mean, Trevor spoke to this issue of kind of the loading order we use to source lowest cost of capital. And the way I think about it, Durgesh, is in the equity markets, right, you have some companies that are really strong as income-based equity stories, some are growth stories. I think what we've tried to do is stake out a position in the utility space as being one of the leading growth and income stories. So when you think about all the options today with higher rates and the more competitive corporate yields, I think we're well positioned to continue to attract investor interest around our story today. We've just raised our capital plan $5 billion."}, {"role": "assistant", "content": "We've got a track record of being very, very efficient in our financing. You're referencing prior years, where our plan was smaller. And there was no scenario where we thought we were going to issue equity. And I think what we're telling you now is, we've got a very robust plan. And we're going to go through the same loading order that Trevor described and solve for what we might need in 2027 or 2025 because it's dynamic, right? You've got issues changing in Texas in the legislation. You've got a dynamic situation now, where Phase two of Port Arthur and Cameron expansion is not currently in the capital plan. But right now, as we see it, we've got a really good plan to execute on. And we've got a track record of sourcing the lowest cost of capital. And we're doing this through the lens of what drives the most values to our owners. I think that's the best way to respond to your question."}, {"role": "user", "content": "That makes a ton of sense, thank you. I appreciate that clarification."}]}, {"messages": [{"role": "system", "content": "Thank you. And we have time for one more question. Our last question will come from Jeremy Tonet from JPMorgan Securities. Your line is now open."}, {"role": "user", "content": "Good morning, thanks for squeezing me in. Just wanted to kind of pivot towards the zero solution -- net-zero solutions, as you talked about before, from SIP. And wondering what updated thoughts you have on that side post passage of the IRA, if Louisiana gets primacy in Class VI wells for CCS, just wondering if you could update us there as far as potential customer interest in these services."}, {"role": "assistant", "content": "Yes. Two things I'll mention, and I'll pass it to Justin to provide some overview of some of the projects we're looking at relating to the net-zero solutions business. One is something that I think is oftentimes overlooked is one of the most important bills that Biden administration passed earlier was the infrastructure bill, which really earmarks $8 billion or $9 billion for the formation of hydrogen hubs. We've talked about that in Trevor's prepared remarks. That's something that's got a lot of excitement both in Texas and also here in California. And our utilities are a big part of promoting particularly, the L.A. Basin, as an opportunity for hydrogen hubs. So I think that's something outside of the SI business, where you're going to expect to see leadership from Sempra's utilities."}, {"role": "assistant", "content": "Relative to SI on the IRA bill, there are a number of things there that are helpful. Number one, it's really going to incent both solar and wind to come on to the system. That calls for more expansion of what we talked about in growth at Oncor as they look to basically meet the needs of extending transmission and distribution in their service territory. But it also does a lot to help us in terms of our underground storage plans for carbon sequestration and also some of the hydrogen and green fuel opportunities that we're looking at in Sempra infrastructure. And maybe, Justin, you could talk about some of the progress that you're making on the development side"}, {"role": "user", "content": "Yes, will do. Jeremy, let me start by talking a little bit about Hackberry carbon storage. So as Jeff mentioned, we are actively pursuing solutions to enable net-zero GHG emission goals for energy and industrial facilities, including our own LNG facilities. The foundational initiative really is Hackberry. This is located in Hackberry, Louisiana. And it's in development. And it was intended to basically permanently sequester carbon dioxide from the Cameron LNG joint venture and potentially other industrial facilities in Southwest Louisiana and Southwest Texas. As you mentioned, we have filed an application with EPA for Class VI. Louisiana is working with EPA about primacy. And we have announced a participation agreement with our Cameron LNG partners."}, {"role": "user", "content": "And look, IRA is important. The $50 per ton to $85 per ton will support this project. We're also looking at potentially developing carbon sequestration and capture around the Port Arthur facility. So we think there's opportunities to not just reduce carbon output of our own facilities but potentially expand that to some of those other industrial facilities in the region. On hydrogen hub, and I'll be brief, so we're looking at a lot of early-stage efforts. We are participating in three separate hubs that have been encouraged and have filed applications with the DOE. One is around the Port of Corpus Christi, another in the Gulf and others in Texas and Louisiana. So we are looking for opportunities to support hydrogen as one of the many clean molecules that we think will fuel the future."}, {"role": "user", "content": "Got it. That's very helpful. And just kind of..."}, {"role": "assistant", "content": "Go ahead."}, {"role": "user", "content": "Unless you had anything else to add there, I was just going to pivot to another question."}, {"role": "assistant", "content": "No, please go ahead to the next question."}, {"role": "user", "content": "And I was just pipping towards California here, how might efforts around income-based electric charges influence your affordability work in California? And is there anything unique about SDG&E's service story here that we should be thinking about relative to the other California IOUs?"}, {"role": "assistant", "content": "I don't think so. I mean, obviously, we currently have the lowest bills in the state relative to the other two investor-owned utilities. Part of that is we benefit from more moderate climate. But we've got kind of a three-part program that we're currently pursuing. And I would just -- I'm going to pass it to Kevin to address this in a second. He's our Group President for California. But one thing I would tell you that I think is important to remember, we're most successful when our customers are succeeding. And I will tell you that affordability is top of mind for our management team."}, {"role": "assistant", "content": "This has been a tough two- or three-year period, where we've seen the cost of living increase. Inflation doesn't just impact the businesses, it impacts consumers. So part of our social compact with our local community is we need to demonstrate every day how hard we're working to maintain low cost and that we're going to bat for them and looking for new and better ways to improve the affordability of our services. I think we're pretty excited about some of the programs we have underway. There's a lot more work to be done. But Kevin, perhaps you could summarize kind of the three-pronged attack that we have on affordability."}, {"role": "user", "content": "Yes. Thank you for that, Jeff. Yes, it's definitely a three-pronged attack, really focused around cost control, obtaining funding from parties other than our customers and rate reform. You mentioned the fixed charge effort, Jeremy. On the O&M front, we need to continue to be laser-focused on controlling costs and improving efficiency by streamlining and automating various business processes to gain efficiencies. And this includes digitizing everything. A good example of how our culture of embracing technology translates to savings for our customers would be in the wildfire mitigation area, where our industry-leading program directly translates to significantly lower insurance premiums."}, {"role": "user", "content": "A second focus would be around sourcing funds from outside our customers, like programs under the infrastructure bill. Trevor mentioned some of this in his remarks. We can seek funds outside of our customers, like the infrastructure bill, investment tax credits and other sources of federal funding and advocating for use of securitization as a tool to spread the cost of certain programs over more years. And the third area of focus would be pushing for meaningful rate reform to make our customer bills more predictable, affordable and equitable. Examples of this would be advocating for the fixed charge for which there is an open proceeding currently at the CPUC and removing the public purpose program charges from our bills and into the state's general fund. So we always need to be laser-focused on affordability. And we have a number of work streams currently underway."}, {"role": "assistant", "content": "Yes, the only thing I would add, too, Jeremy, is I think this affordability issue, particularly around this fixed charge that you referenced, what the state really wants to get to is a transition toward higher levels of electrification, particularly in the transportation space. And by moving to a fixed charge, it has the benefit of lowering the rate for electricity. And it makes it more competitive against the fuels that you see in transportation. So I think you've got several things taking place there, where we have a variety of programs which are intended to limit cost to consumers but also make electricity more competitive. And Sempra here in California and in Texas is strongly supporting electrification."}, {"role": "user", "content": "Got it. That's very helpful, thank you."}]}, {"messages": [{"role": "system", "content": "That concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Jeff Martin for any additional closing remarks."}, {"role": "assistant", "content": "Sure. I'd just like to close by thanking everyone for joining today. I know we've got a lot of feedback through a lot of other competing calls this morning. So we appreciate everyone taking the time to join our call. Per custom, if there are any follow-up items, please take the time to reach out to our Investor Relations team with any additional questions. So this concludes our call."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] And our first question today comes from Ben Bienvenu from Stephens Incorporated. Please go ahead with your question."}, {"role": "user", "content": "Hey, thanks. Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "So my first question is a two part question on the chicken segment. So first part of the question, in the quarter results obviously were weak and considerably weaker than we saw I think in the broader market. Could you talk to a few of the things that might have contributed to company-specific weakness in the segment? And then as you look going forward, you talked about [Indecipherable] margin being flat in 3Q breakeven and then ramping into 4Q. What all is incorporated into the assumption? Is it what we've seen already in terms of improvement in quality fundamentals? Do you need to take further actions around closing underperforming facilities or reducing inventory? And maybe just help us understand what's embedded in that expectation going forward."}, {"role": "assistant", "content": "Okay, Ben, this is Donnie. I'll start off and then for the chicken portion of this, I'll flip it over to Wes and let him add some detail to this. But I would say this quarter was not a surprise to us. We knew Q2 was going to be challenging and it was. I've talked about the fact that I've never seen this highly unusual situation where beef, pork and chicken were all experiencing challenges at the same time, Many of these are macro in nature. But in chicken -- specifically, in chicken, we have seen operational improvements and market recovery. While slower-than-expected, it will recover and of all of our businesses that are challenged right now, chicken will recover first."}, {"role": "assistant", "content": "In the quarter, we had of our $166 million loss, $90 million of that came from three main areas. There was about a third of it in mark-to-market. Inventory adjustments, SKU rationalization accounted for about a third of it and start up costs associated with the mix change and improvement from bone and to boneless plus a few asset impairments. So I would then go on to say chicken remains a top priority for me. We have the number one brand in chicken. Our model doesn't give us the highs and the lows of the commodity markets. That doesn't mean that we're not impacted by that and variable pricing models that we have in place. There are lags that go with that."}, {"role": "assistant", "content": "About two years ago, I laid out for you the plan that we had with our chicken business and we're following it. We're growing our volume and improving our mix. We sold what we harvested and we reduced inventory by 20%. And I would tell you that we are relentless on operational execution. We continue to invest in automation and digital capabilities and we will and do compete with the very best in the industry. We're winning in every area in which we play. We have market leadership in every category. Customers and consumers are key priorities for us and it's clear we're having success with them."}, {"role": "assistant", "content": "We've just recently announced that we moved up into the top 10 for Kantar for the first time ever for the most recent power rankings. We expect to win with consumers behind the number one brand in chicken and win with our customers by being their go to supplier. And I have confidence in the team that we have in our chicken business. We have the right strategy and are doing the right things for growth. We continue to implement this strategy and focus on the things that we can control and we will build up on this strong foundation that we have in place."}, {"role": "assistant", "content": "Now with that, let me stop, Ben, and let me flip it to Wes Morris who leads that chicken business and that team and let him add some additional color."}, {"role": "user", "content": "Good morning, Ben, and thanks for the question. No question, Q2 was tough for us and for the industry as a whole. The combination of grains and markets, some of the key parts being down as much as 50% and then the ongoing export opportunities. Simply said, versus year ago up growing 11%, price up 2% and then the $135 million change in derivatives. We did something nobody else though in the industry has done growing net sales 8.4%, volume 6.4% and improving our capacity 4%."}, {"role": "user", "content": "Based on published data, we competed actually better-than-average company in the industry and we kept investing at the same time. Donnie referenced to $90 million. I'd ask you to think of two-thirds of that as investments in our business going forward. The SKU rationalization and inventory adjustments along with packaging and ingredients makes us both more efficient and more consumer-centric at the same time."}, {"role": "user", "content": "So let me talk about four key areas that my team is focused on and give you some insight into what we got done in the quarter. Four key areas of people, service, growth and performance, our plans for staff for the entire quarter, our teams delivered the volume we needed to win with customers and consumers and we sold everything we processed plus another 100 million pounds. So demand for our products were good in Q2. Our service levels increased 20 points year-over-year. We're back to historical levels of service."}, {"role": "user", "content": "We executed very well at the holidays at Super Bowl and March Madness gaining share in both foodservice and retail. We continued to invest in Danville fully cooked, a location which will come on this fall. We're now filling over 99% of what we call our core eight retail products and so winning with consumers and customers at the same time. Donnie referenced the two plants we converted in the quarter from bone-in to boneless. And then we announced the closure of two facilities, which will improve our efficiency while increasing our volume and we've seen operational improvements every week in the last quarter and in April. So we're well-positioned to win with customers, consumers and drive out cost at the same time going forward."}, {"role": "assistant", "content": "And Ben, I wanted to just pick up on a couple of specific parts of your question there. I think, first off, you asked are there further actions that we're contemplating and just to address that directly, we're always looking at the footprint, but everything that we're doing is focused on growing our business today. And I would note that with the two announcements we made earlier in the quarter, we're still growing the business. You mentioned inventory too, part of working through kind of some of the changing market conditions doesn't mean continuing to pull down inventory and so that will influence the outlook, but you noted correctly from the earlier remarks on kind of the breakeven and improving through the back half of the year is what we would expect us be to in poultry."}, {"role": "user", "content": "Okay. Thanks to all. That's helpful color. Maybe shifting gears a little bit to the prepared foods segment. That's been a bright spot certainly for the first half of the fiscal year. The guidance for the balance of the year implied some margin moderation and I know you guys are focused on picking up some foodservice business that you lost and I think curious from lower margins. Is that key to what's embedded in the operating margin guidance for the balance of the year and what are the potential sources of upside or downside to that expectation?"}, {"role": "assistant", "content": "Got it. Let me let me pick up on that. We are pleased with the overall performance in the first half of the year and I can see that we're making progress with both of our brands and our operations to improve margins. You're seeing that in the results. You're also by the way you're seeing it in absolute dollars because I think if you looked at the first half this year versus last year, we're up about 10%. So all of that is good news. When you're looking forward the shape of our year on a quarterly basis, we'll look similar to last year in the sense that we expect a stronger first half than the second half and this is because of two things."}, {"role": "assistant", "content": "First, because of normal seasonality in the business and second because we expect to have some higher brand investments beyond our retail brands in the back half. That's important. Those brands are doing well. They have strong engagement with customers and I want to make sure that we have continued investment to reinforce that. There is more work to do in foodservice. And in that space, the customer decision and contract cycles are longer. So it takes a little bit to win back that business, but we have a strong platform. We have good products and I'm confident we're going to start to see the benefits of that improvement in the future."}, {"role": "user", "content": "Okay. Thanks so much. Best of luck."}, {"role": "assistant", "content": "Thank you, Ben."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Adam Samuelson from Goldman Sachs. Please go ahead with your question."}, {"role": "user", "content": "Yes. Thank you. Good morning, everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Maybe my first question just in beef and taking kind of the revised outlook and would seem to imply the business is operating kind of breakeven or a loss for the next couple of quarters. And I just want to make sure I'm thinking about that properly in the context of kind of industry packer margins which while certainly off their highs are not negative. And just how do we then think about the implications of that into fiscal '24 and '25 candidly? And if cattle availability is just going to get worse progressively over the next couple of years given kind of what we know about the cattle herd right now?"}, {"role": "assistant", "content": "Okay, Adam, let me -- I'll start-off and then I will pass it to Brady of some greater detail around that. But as expected indeed that there was tightness in cattle by -- we saw increased hog cost and a softer export market. Probably the thing that is most interesting there and unfortunately I'm not going to be able to give you the answer to this, but it's around cow and helper retention. We do have better faster growing conditions. If you look at Central Texas up to Nebraska, there still needs to be some more. We saw cow harvest towards the end of the quarter began to decline, some indication of the closure of the liquidation cycle. If you look [Indecipherable] feed numbers, we're not in a rebuild phase just yet. More attention -- more retention is needed on the efforts before we're ready to signal that the rebuild has begun."}, {"role": "assistant", "content": "So with that, Brady, you add some additional color if you would."}, {"role": "user", "content": "Thanks, Donnie and thanks, Adam, for the question. I think there's a few specific call-outs relative to standard industry gross margin calculations that we need to take into account during this specific timeframe here in '23. And number one is while we still see export demand being relatively strong from a quarter-over quarter perspective and versus prior periods, the opportunity for us to arbitrage our exports opportunities versus domestic with some cut out runs that have occurred in specific products has actually diminished our opportunity to capture some of those results from a tightening perspective."}, {"role": "user", "content": "Number two is we've seen some pull back on drop credit values and again versus the previous cattle cycle, we saw drop values are strong. However, from a quarter-over quarter perspective, again, we saw some pull back as well certainly impacts some of the calculations relative to gross margin. And number three from a branded versus choice perspective, we've seen a pull back and USDA data indicates that the spread between branded and choice actually decreased $4.03 a 100 weight quarter-over quarter from a sequential standpoint. So those are certainly some of the factors that are in our mind as we continue to look at the remainder of '23."}, {"role": "user", "content": "As we move into 2024 and beyond in addition to the comments that Donnie made relative to the cycle that we're in, there's reasons for both the challenges from a industry perspective relative to gross margin. There's also a reason for us to be optimistic. And number one, we will absolutely be relentless in terms of operational excellence and really it's about Tyson and our teams controlling what we can control. The markets will do their job over-time, but we have a world-class beef business and the expectation is we'll continue to perform at a very high level as we move through the cycle."}, {"role": "user", "content": "Number two is we have the opportunity to get closer to our customers and our consumers. We have capacity within our case ready and value-added business. We've been working diligently to fill that capacity and feel very good and comfortable in terms of the future of that business to get closer to the consumer as well. So while there are challenges ahead relative to the markets, I feel like we're in a very good position to weather those challenges as we move forward."}, {"role": "user", "content": "Okay. I appreciate that color. And maybe a follow up for John Randall. You guys don't give a specific EPS or EBITDA guidance. But if I kind of weld through the door via sales outlook and kind of middle the range on the different operating units, it would seem to imply that by the end of the fiscal year net debt to EBITDA could be at or above 4 times. Just wanted to get your perspective on given kind of your own earnings outlook kind of if that's actually correct and kind of your comfort level of operating at that place for a period of time particularly if beef isn't kind of quickly reversing."}, {"role": "assistant", "content": "Yeah. Thank you for that question and let me talk about the outlook and give little more clarity on that and then we'll talk about leverage. I'm glad you asked this question. So if you look at the return on sales guidance that we've given kind of on a segment-by-segment basis, it can take a few different stages. A point I want to make sure that our listeners takeaway today is that when we look at the total operating income number for the second half of the year, we expect that to be in aggregate similar to or maybe slightly down compared to the first half of the year."}, {"role": "assistant", "content": "So depending on the different movements in the various core proteins that's kind of the net of it. We want to make sure it lands from an outlook perspective. And as you suggested that does have implications for what our total leverage ratio is as we move into the fact half of the year. And what I can say is we're focused in the long run on that 2 times number. And I think just pointing to what we've done in the last couple of years, we were diligent and paying off $3 billion worth of debt. We've invested in the business from a growth standpoint. We've got new operations coming online in the retail branded chicken, bacon and a lot of growth outside the U.S. aligned with our strategy."}, {"role": "assistant", "content": "So I think while the timing on some of the capital expenditures, for example, kind of puts pressure on the operating cash flows, I think we're comfortable with where we are and feel good about the outlook. I think that we know there is volatility in our business. Rating agencies keep up with that. I mean, I can't speak for them this morning, but we're in constant communication providing them outlooks about the business. So overall, we feel good, but yeah, the leverage ratio will take us a little while."}, {"role": "user", "content": "I appreciate that color. I'll pass it on."}, {"role": "assistant", "content": "Thanks, Adam."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Andrew Strelzik from BMO. Please go ahead with your question."}, {"role": "user", "content": "Hey, good morning. Thanks for taking the questions. I guess, I wanted to start on the chicken side. And I'm curious kind of philosophically how you're thinking about growth and -- which is clearly the focus growing the volumes versus balancing that with kind of the medium-term margin outlook. Have you changed at all your expectations on the back half chicken volumes that you would expect to realize? And just kind of philosophically, how you think about that? Thanks."}, {"role": "user", "content": "Yeah, Andrew. Mr. Wes, thanks for the question. First and foremost, we got to stay focused on our business and our customer expectations. And so we will in fact improve our capacity utilization over time. I think it's important to understand that our supply plan is actually our demand plan that we start with the demand plan and work backwards. And as we see more demand for our products, we improve our capacity utilization. So hopefully that answers your question."}, {"role": "assistant", "content": "If I can add to that though, I think in the U.S. specifically how do we balance profitability versus the growth, and what I want to point out is that we've pulled down the total sales outlook for the business, but we're still projecting to grow from a volume standpoint. So I think the chicken call compared to a quarter ago is still up, slightly less than what we had initially projected just because of the demand that Wes referenced."}, {"role": "user", "content": "Got it. Okay, that's helpful. And if I could ask one also on productivity. Obviously have achieved the targets well ahead of your original expectations. How are you thinking about the productivity opportunity from here? I know there is a continuous improvement mindset. But any way to frame kind of how you think about magnitudes of opportunity around productivity? Thanks."}, {"role": "assistant", "content": "Well, thanks for that question. It's still as we said -- I mean, we are continually focused on being the absolute best from an operations perspective. We want to be the best company, the best brand, the best protein wherever we choose to play. And what we're doing very simply is executing those things through productivity, through efficiency to deliver that. Some of that requires adding volume, for example, in chicken. Some of that requires improved yields and labor utilization. It includes -- is also looking at the assets that you have and try to make sure that we modernized those and invest in those and get the right footprint not only today, but going forward. We'll do all those things and -- or continue doing all those things, but the whole efficiency, productivity is top of mind for everyone in this organization today."}, {"role": "user", "content": "Great. Thank you very much. I'll pass it on."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Alexia Howard from Bernstein. Please go ahead with your question."}, {"role": "user", "content": "Good morning, everyone."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Donnie, sticking with chicken, can I ask about the price at the market pricing dynamics? I know, obviously last quarter that was a challenge because there was an excess of chicken -- of fresh chicken flooding the markets over the holiday period. I get the point that, that sort of delayed into this quarter as well. Is there any visibility into how that might -- whether that might from up in the second half of the fiscal year or where are we in that cycle? And then I have a follow-on."}, {"role": "user", "content": "Yeah, sure, this is Wes. I'll answer that. We didn't see a lot of movement in January and February and we started to seeing a little more strength in March, which for us will flow through the next quarter. We have seen some fluent numbers that would indicate a little stronger markets in the back half of the year."}, {"role": "user", "content": "Great. Thank you. And then on top of prepared foods with the Kantar Power Ranking study, I'm just wondering what it was that's changed in your retailer relationship because that is a big move. So I mean to get into the top 10, there's a lot of larger more established CTG type companies that are not in the top 10. I'm just wondering what you think is changed over the last couple of years to have got you back. Thank you. And I'll pass it on."}, {"role": "assistant", "content": "Thank you, Alexia. Well, first, I would say it was on purpose. We talked about a very simple and [Indecipherable] ramp here is winning with our team members, creating a differentiated place to work, getting happy team members, having fully staffed operations was important and then winning with customers and consumers. We've invested a lot and continue to support customers and consumers with our brands, with innovation, with all of those things. We want to be the best or be their go to supplier in every part of our business. And then finally and this is kind of where the rubber meets the road, but the winning with executional excellence throughout this organization and it is -- that is the result -- what you're seeing in this survey is a result of the work that this team has done."}, {"role": "user", "content": "Thank you. And I'll pass it on."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Ken Goldman from JPMorgan. Please go ahead with your question."}, {"role": "user", "content": "Hey, thank you. I do appreciate Donnie your comments about the macro. Certainly, there's a lot of challenges that everyone is facing. I wanted to ask it looks to me like at least for this one quarter sort of the performance gap as measured by margin did widened a little bit between the industry and Tyson in both beef packing and in chicken. I'm just looking at some of your bigger competitors in chicken and I'm just looking at sort of hedgers edge and our own model for beef margins. So I know those aren't perfect comparisons, but I'm just trying to get a sense of A, is that how you guys see it as well or are my assumptions there wrong? And B, how quickly if there are right can we kind of reverse that and you can kind of get back to growing in line or having a margin in line with those kind of major segments?"}, {"role": "assistant", "content": "So Ken. I'll start off and then I will flip that to give a little more color from Wes around chicken and Brady on beef. But I did talk about the macro a lot and I got to tell you it pains me to talk about that because we've never been able to control macro or economic issues or market conditions. But what I can tell you is we are controlling what we can and we have a full court press on being the best we can be with operational excellence and winning new customers and consumers."}, {"role": "assistant", "content": "The other thing I would tell you, Ken, is that here at Tyson and as you know, I've been through a number of these cycles before, this company has in it's 90 year history has been through a number of them. But what we have done in the past and we're doing this time is we're accelerating in the bottom of the cycle and we always come out better and stronger. And I see no reason to believe that we won't do that this time as well. And let me flip it to Wes to add some chicken color."}, {"role": "user", "content": "Yeah, good morning, Ken. I think taking into consideration the timing how of our pricing flows through is different than others. We have a further lag. Number two, the $135 million year-over-year revenue change and then the $60 million of the $90 million talked about in efficiency investments, I believe we competed better than the average in the industry."}, {"role": "user", "content": "All right. Thank you for that. If I could, actually another quick question. The Williams sausage acquisition, I think we got a price today in the 10-Q of $200 million to $250 million. Could you give us a little bit of detail on what the expected revenues are, the last 12 month revenues and sort of why now is the right time to do a deal given some of the challenges you have in the balance sheet?"}, {"role": "user", "content": "Yeah, this is John. Let me say a couple of things on that. First off, let me just make a shout out and thanks to the Williams family who we've got this transaction with and we're grateful to them for entrusting 50 plus years of the family business to be part of the Tyson family. As it relates to the kind of contours of the transaction, let me answer the question why now. We're always being diligent and thoughtful about the M&A opportunities that we're pursuing and I think this was a transaction that we got across the finish line based on the characteristics of the branded portfolio and the return profile. So when we close that in the coming month, we're excited to bring that into the types of prepared foods business."}, {"role": "user", "content": "Yeah, Ken, let me just add a little bit here. It's Stewart. Look, this is a company with some great brands and some really great facilities. And two things are going to come out of this. First there are capabilities we're going to have because right now most of our self harvest goes through a single facility. This is going to provide some redundancy that makes sense for our business, particularly because Jimmy Dean is so important to the portfolio. And then second, when you look at the brands that are going to be complementary to our brands along with a DSD network that frankly we haven't had enough portfolio before. I think we're setting up for a very interesting deal here that is going to be a good addition to Tyson."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Peter Galbo from Bank of America. Please go ahead with your question."}, {"role": "user", "content": "Hey, good morning, everyone. Thanks for taking the question."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Maybe we can just start going back off of Ken's question particularly around beef. First, I think there's probably been some noise out there in the market that just shifts are being cut across kind of the entire beef network and some of that maybe is due to the lower kind of harvest levels. But if you can kind of comment there? And then, secondly, Brady, I'd just be curious for your perspectives with cattle prices basically at all time highs and speaking the cow, calf operators like what are the unit economics looking for them like in real-time? How does that kind of change their decision making process around retention or not? Because again, looking at the spreadsheet math, you think the price would be enough of an incentive, but obviously a lot of their cost structure is probably changed as well. So would appreciate any color there."}, {"role": "user", "content": "Well, thanks for the question, Peter. First of all, let me address both the question that Ken posed and you posed as well around beef. And I think there's a few important aspects of Q2 that we need to focus on. So first is relative to timing, Tyson has quarterly pricing that we use for several of our large customers. And so it's very specific primal areas where we've seen some inflation from a cut off perspective in those primals quarter-over quarter. We have a timing lag relative to those specific customers and agreements."}, {"role": "user", "content": "Second is we did see some hedging losses in the quarters that impacted performance. Third would be our volume. And so as you mentioned, we did see a decrease relative to volume and certainly, we saw that volume -- we lost some volume leverage relative to our cost structure in our assets. We're working diligently from an efficiency perspective and seeing some good improvements in that area as well to help offset that as we move forward. As I mentioned earlier, export demand has been softened."}, {"role": "user", "content": "The strength of the U.S. dollar and FX has had a impact on some export demand and specifically the substitution products that we see from a domestic portfolio. We're not seeing those large gains as we did in previous quarters that relative to drop value all go into play in terms of what our actual results are versus some of the index modeling that occurs as well. And relative to the cow, calf operator and how they look at the business, obviously, a lot has changed since the last cycle. Interest rates are up right now."}, {"role": "user", "content": "There is some incentives for the cow, calf operator to go ahead and market the heifer into a feed yard as opposed to retain just relative to the strength we're seeing from a feeder market as well. So we're still seeing some drought conditions from Central Texas up through Central Nebraska that's creating some challenges, but the good news is for the cow, calf operators that are working outside of that space, we've seen some remedy relative to the drought conditions and moisture here within the last several months that provides some optimism as well."}, {"role": "user", "content": "Great. That's very helpful. And Donnie I just wanted to go back to one of your comments. I think you did mentioned I think around chicken that you took some asset impairments in the quarter. I'm not sure that I saw those in the Q. But just maybe thinking on a longer-term basis, look, chicken has been a business where you've been quite acquisitive. I think the margin profile self admittedly has probably been a little bit weaker than you would have thought. Just as we kind of sit here today and go through the balance of the year, like how do we think about further impairment risk in that business, particularly as the margin improvement even coming out of this year isn't expected to be kind of at your long-term average?"}, {"role": "assistant", "content": "Thanks for that question. I'll touch on this at a high level. But in terms of your question, for the past few years, we've taken bold and aggressive steps to advance productivity and efficiency. We're constantly evaluating how we can be more efficient, push down decision making and remove duplication of work. Those are all top of mind today. But we have also we have done a number of things looking at our footprint, looking for what it would take to make less efficient assets and this will be across the portfolio, how do we need to make them efficient, how do we automate them, how do we redesign them or in some cases you could look at how would you sell it or how would you close it and we look at all those different options."}, {"role": "assistant", "content": "But I want to remind you that, that our strategy is all about growth, growth in our base or core protein businesses, growth in our branded portfolio and growth internationally where it makes sense. So making sure that you understand clearly that we are in a growth mode and at the same time trying to right-size our footprint and our production machines to deliver those products that customers and consumers love."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Ben Theurer from Barclays. Please go ahead with your question."}, {"role": "user", "content": "Yeah. Good morning, everyone and thanks for taking my question. Just wanted to come back to chicken and actually some of like historic context and ask about your performance particularly as it relates to hatch rates and hatch ability because it was interesting in the past, it seems like the performance itself was impacted by a very specific issues you were facing. We saw the industry relatively soft I would say in the last couple of weeks, but it feels like that your performance at least from a volume perspective has done better. So any comment you can share as to your own initiatives and improving that supply and then ultimately less need to buy outside? How do you feel about this? How was it in the last quarter and how do you feel about it going forward? That will be my first question. And I have a quick follow-up as well."}, {"role": "assistant", "content": "Okay. I will start off and then I'll flip it to Wes for a even greater level of detail. But I would remind you that couple of years ago, I outlined a roadmap for us to what I would call restore our chicken business to its rightful position. Those were my exact -- almost my exact words and we're still on that roadmap. We've had bumps along the way in the live production and the lifecycle. The animals that we had some issues with some of the breeding stock, particularly to males and that's been well chronicled."}, {"role": "assistant", "content": "Every player we had issues with hatch and we're very competitive as it relates to that today. We've made lots of improvement. We were buying if you recall a significant amount of product on the outside and paying a premium in the height of the market and we began to reduce our dependence on outside meet and wanted to utilize the assets that we have in place and get the fixed cost leverage by producing those live animals and then converting those into those products that our customers and consumers love."}, {"role": "assistant", "content": "And we've done all those things and we're still on this journey. And I would tell you that we got the right people in place to complete that mission, nothing there applied, but to continue down the road, great leadership, a great team in place now to do that. And. I am excited, I'm optimistic about the future of our chicken business and where it's going and even in this quarter losing $166 million, I'm still excited about the future of the number one brand in chicken and the opportunity that we still have before us. Wes?"}, {"role": "user", "content": "Yeah, thanks for the question, Ben. The whole industry has not seen the kind of hatch rates we saw four or five years ago. Ours in particular is down a few points from Q1, but not near the volatility that we're seeing in the industry as a whole. And so we have a more stable, predictable supply chain to include our hatch rate that makes it easier to manage going forward. As for outside buy, we'll continue to buy and grow as we have fluctuations in our demand, but much more imbalance than the nearest past."}, {"role": "user", "content": "Perfect. Thank you very much. And then just the second question just around capital allocation. Obviously, you've reduced the capex a little bit, but at the same time because of the loan you got a little higher interest, you did some share repurchases throughout the quarter. How should we think about for the balance of the year also in light of what Adam pointed out as leverage could go somewhere north of 4 times? How should we think about share purchases, dividends, further capex and ultimately M&A which is also something that kind of popped up during the quarter? So just to understand the priorities here. Thank you."}, {"role": "user", "content": "Yeah, sure thing and thanks for the question. Let me just talk about the priorities and then talk about where we are in the year and what the outlook is. So, first and foremost, we're always looking to invest in our business and I think it's important to recognize that the capex deployment wave that we're in right now is typically -- is higher than kind of our historical average. Over the long run, something more like $1.5 billion is what we would target on an annual capex number. So I think that as we go into the coming years, we'll trend in that direction."}, {"role": "user", "content": "And then we look at strategic M&A where we can. We've been pretty I think thoughtful in that approach. We're really pleased about the Williams deal and see it as a valuable part of investing in our business. And then on the returning cash to shareholders, we remain committed to the dividend and share repurchases. I think we'll continue to be conservative and look at something that's in line with historical norms. Obviously, there are a lot of different variables that go into that on a quarterly or annual basis that will make those choices."}, {"role": "user", "content": "But yeah, I think just where we are with the profitability outlook of the business, kind of the capex cycle and the borrowing, we're conscious of and aware that our leverage ratio will tick up. But again, we're kind of making choices and decisions around investments for the long-term of this business. So we're comfortable, although we don't like the tick up. We're comfortable with these cycles where leverage ratio is may be a little bit elevated compared to our long-term target."}, {"role": "user", "content": "Okay. Thanks for that, John."}]}, {"messages": [{"role": "system", "content": "And our next question comes from Michael Lavery from Piper Sandler. Please go ahead with your question."}, {"role": "user", "content": "Thank you. Good morning."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "I just wanted to come back to the idea of growth versus profitability and just how to think about balancing that, not just for one segment, but broadly. And I guess, just with so many of the headwinds you're pointing to broad -- in the macroenvironment and without really much change ahead in terms of it sounds like it's going to get better very soon. Does that impact how you think about maybe different priorities to improve profitability or just to make sure the margins come through better as much as you have seen things you can control or what's the right way to think about some of that in terms of just on the investment tradeoffs or ways to maybe improve the execution a little bit?"}, {"role": "assistant", "content": "Yeah, thanks for that question. And first thing I would tell you is that just to acknowledge the macroenvironment and what has been the fact that the magnitude and the duration of the challenges, they do continue. However. If you think about this company in particular, we've had a 90-year history of successfully managing macroeconomic cycles and we've always come out stronger. We have never been able to control those cycles and what we can do to control what we can control and there's a lot of opportunity there for us to be better. And we are obviously focused on that and across all businesses and functions. In terms of growth at any cost that's not what we're talking about here."}, {"role": "assistant", "content": "The growth that we have is in service to our customers and those consumers. And I think as Wes had mentioned this earlier that we always start with the demand plan and we work back to a supply plan. And so we wouldn't be growing chicken, beef or pork or prepared foods for that matter if we didn't have a demand plan that says that we have a consumer wanting this. And then the second part of that is we obviously have no intention of just growing for growth sake and -- but we always balance growth with profitability and I wouldn't expect this time to be any different than that, but we see this is -- this cycle is something we've seen before. And we've always accelerated out of these type cycles and we've -- in a growth pattern accelerating out of the curve, if you will, and that's what we're doing this time as well."}, {"role": "user", "content": "And I think if I can add on to what Donnie is saying just to emphasize growth and the focus on high quality growth, we've just completed a fifth consecutive quarter of record sales growth. The same is true for the chicken segment and the prepared foods segment and we're growing in the parts of those businesses that we see as attractive from a margin standpoint and of course in poultry as we talked about. Part of that has to do a little bit with just you getting the capacity utilizations and footprint back right. And then it's also worth pointing out that we got business outside the U.S. that is trending towards tripling in about five years. And so I think as we think about the long-term that becomes a no profit engine for us and we're excited about the investments we made there as well."}, {"role": "user", "content": "Okay. Thanks so much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "And ladies and gentlemen, with that, we'll be ending today's question-and-answer session. I'd like to turn the floor back over to Donnie King for any closing remarks."}, {"role": "assistant", "content": "Thank you. And as you've heard today, this is a challenging moment, but my optimism about the future has not changed. Our customers and consumers are behind us. We're winning with both. This is not an accident, but is a result of the hard work our team members do every day and thank them for it. As we continue to build a world-class organization positioned to take advantage of the opportunities in front of us, we remain confident that our strategy will deliver long-term growth and shareholder value. Thanks for your interest in Tyson Foods and we look forward to speaking soon."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our first question today goes to Shar Pourreza of Guggenheim Partners. Shar, please go ahead. Your line is open."}, {"role": "user", "content": "Good morning, guys."}, {"role": "assistant", "content": "Good morning, Shar."}, {"role": "assistant", "content": "Good morning."}, {"role": "user", "content": "Good morning. Just to confirm, the short-term cost cut measures Brian touched on, those are incremental to the $300 million figure that's out there. Are any of them potentially structural in nature? And I guess the key question is where do you -- I guess, where do you guys stand within the '23 EPS guidance range under that normal weather assumption for the rest of the year? Are you still kind of comfortable within the range at this juncture?"}, {"role": "assistant", "content": "The answer to that is yes, Shar. And let me talk about the various cost initiatives that are underway. The $300 million that we identified for last year, I would call largely structural. When we talk about 75% of this being achievable, it's because we're making fundamental changes in the way we're completing work, staffing work, prioritizing work, etc."}, {"role": "assistant", "content": "When we talk about the actions we're taking in response to weak weather, I would call those more tactical. This is deferral. This is reducing non critical work, third-party spend, expenses, those types of things that we have done so many times, as you know. And so the combination of all of these activities as well as the fact we enter any given year, expecting a range of outcomes and establishing contingencies that are planning in case something doesn't work out exactly as planned. We are confident in reaffirming the range of $5.55 to $5.75. And so we'll continue to update you as the year progresses, but [Technical Issues] in reaffirming at this point."}, {"role": "user", "content": "Okay. Perfect. And then just, Lynn, commercial -- obviously, the commercial sale being in late stages new language, and you obviously took another $175 million charge. This is obviously the second charge to date. Could we maybe just elaborate why the expectations and the sale have come off more I mean, what's driving the second revision of capital markets? Is it buyer interest? Just some sense there. And I guess, when can we see something announced? Is it 3Q? Is it closer to year-end? Thanks."}, {"role": "assistant", "content": "Yeah, sure. I appreciate the question. And we are continuing strong progress. We're in the late stages and expect to be able to provide more information shortly on where we are. Given the fact that we have placed the business into discontinued operations, we continue to evaluate whether we have the right recognition of net book value on the financial statements and did take an additional impairment charge representing further progression of the process."}, {"role": "assistant", "content": "I would say to you, though, that the estimated value that we see in this process remains within our planning assumptions. So there is nothing here that I would point to as a surprise for us as we move through the process. As we have continued the negotiations and marketing is complete, we're in discussions with select bidders. And we have made a decision to separate the process involving, for example, two projects that we are a minority owner of and concluded that the natural owner is the majority owner based on discussions and negotiations that progressed. So you should look at all of this as a demonstration that we're nearing the end of the process and we'll be anxious to announce and give you further feedback as soon as that's appropriate."}, {"role": "user", "content": "Okay. Perfect. I appreciate the extra color. Thanks, guys. Have a good morning."}, {"role": "assistant", "content": "Thank you"}, {"role": "assistant", "content": "Good morning."}]}, {"messages": [{"role": "system", "content": "Thank you. The next question goes to Julien Dumoulin-Smith of Bank of America. Julien, please go ahead. Your line is open."}, {"role": "user", "content": "Thank you guys very much. Appreciate it."}, {"role": "assistant", "content": "Hi, Julien."}, {"role": "user", "content": "Look Brian actually -- hey, good morning Lynn. Brian I wanted to go back to some of your comments, and you specifically said credit is at the forefront of many people's minds. In the last question, it was brought up about expectations evolving on the renewable sale here. Just want to be crystal clear about this, I mean, especially following the affirmation, barring any changes in capex here, which you obviously do in a fairly annual cadence, can you just elaborate a little bit on how you're thinking about the balance sheet. It seems like you got a target here to get back to 14%. You talked about the 50 basis points to 75 basis points. But very specifically here, your comfort level with the plan and the need to address any further equity or equity-like considerations to expedite getting to that long-term target?"}, {"role": "assistant", "content": "Thanks, Julien. And it's the right question, and it is top of mind for us and for investors. Just thinking about what was the pressure we felt in 2022? It was really focused on deferred fuel, right? We under collected nearly $4 billion of deferred fuel. We also had storm restoration costs of around $0.5 billion. So the balance sheet were $4.5 billion of cost that we didn't plan for as we moved into 2022."}, {"role": "assistant", "content": "We're starting to recover that deferred fuel at DEP and Duke Energy Florida, Duke Energy Carolinas will happen later this year, and we put a chart in the slides to show that balance come off over the next two years. And as we recover those deferred fuel balances, along with the proceeds of commercial renewables, we feel that the balance sheet is where it needs to be the target of 14% FFO to debt is the right target with the right cushion to deal with contingencies that come year in and year out and positions us for no equity through 2027."}, {"role": "user", "content": "Excellent. Thank you for hitting that clearly and good progress on the fuel. And then separately, perhaps Lynn, if you can comment here. I mean, obviously, a lot of different utility assets moving around potentially changing hands here. Would love to hear your thoughts more specifically there and as you think about the options. You've got obviously a full plate in some respects on a lot of novel angles, especially in the Carolinas here, but -- can you elaborate at least your latest thinking around perhaps evaluating further assets here?"}, {"role": "assistant", "content": "Julien, I would say our primary focus at Duke is executing what we think is one of the strongest organic growth plans around. As you look at the clean energy transition going on in the Carolinas, Indiana is beginning transition of generation as well with CPCNs coming yet this year. Florida is continuing to deliver strength with not only solar development but also good investment from the storm production plan."}, {"role": "assistant", "content": "So we feel like we've got just a robust capital plan moving forward and strong jurisdictions. So our primary focus is on organic growth. As you know, though, assets do become available from time to time, we will look at them if they make sense for us, but we'll do so in a disciplined way that maintains a focus on our balance sheet, maintains our focus on growth, retains a focus on constructive jurisdictions that recognize the right balance between utility health and customer value. And I'll just leave it there."}, {"role": "user", "content": "Excellent. And then if I could clarify earlier, just super quickly, with respect to the Indiana, obviously, you've got this IRP out there. Just curious, A, if that could change your capex intra-year and B, if you have any further thoughts about what that could look like here?"}, {"role": "assistant", "content": "It's a really good question, Julien, because we have continued to update the IRP in Indiana. Our core retirement profile remains largely the same, but we are seeing increase in renewables as a result of the IRA. And we're also seeing the impact of new planning assumptions and how we ought to be addressing that over time."}, {"role": "assistant", "content": "So we are on the verge of CPCN filings that will include both intermittent and non-intermittent resources, we will update the IRP again in 2024 and continue to evaluate whether we're moving at the right pace around the energy transition."}, {"role": "assistant", "content": "I would say as we get into the back part of the decade, there probably is more potential in Indiana around that transition, but we'd like to work through this process to get it started in a way that makes sense for customers in the state. So more to come on Indiana, really pleased with the progress we're making."}, {"role": "user", "content": "Excellent. Thank you, guys. Talk to you soon."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question goes to Steve Fleishman of Wolfe Research. Steve, please go ahead. Your line is open."}, {"role": "user", "content": "Hey, good morning. Thanks. Hi, Lynn."}, {"role": "assistant", "content": "Hi, Steve."}, {"role": "user", "content": "So just on the North Carolina settlement agreement, is there any other parties in the case, are they opposed to it? Or are they just not taking a position where is kind of the other parties, if at all?"}, {"role": "assistant", "content": "Steve, I would say we're really pleased with public staff and the industrial, two important parties in the case in Indiana. The Attorney General will be there as well as some of the consumer groups, environmental groups, etc. But we feel like the settlement is very strong with public staff and the industrials. We also have a settlement on the performance incentive mechanisms, allocation and transmission. There are a host of things included. So we believe it's a demonstration of strong progress. We're on the sand starting, I guess, May 4, that's last week and feel like we have a very strong case. So I can't speak to the other party -- yeah, on what they may think about what we put together, but I believe the strength of the settlement's public staff and Sigfois noteworthy."}, {"role": "user", "content": "Okay. Good. And then just in terms of thinking about a lot of the issue in North Carolina over the years was just dealing with lag in the multiyear plans kind of help hopefully deal with lag. Obviously, ROE cap structure still need to be finalized. But is it fair to say the parts that you agreed upon here are kind of the pieces that would address kind of lag -- regulatory lag in North Carolina in this settlement?"}, {"role": "assistant", "content": "I feel like it's a really key step in that direction, Steve, because for the first time, we have approval of forward capital in a way that gives us some confidence. And the construct of the legislation is such that we have an opportunity to adjust price as that capital was spent in a way that, as you know, is really new and new in the Carolinas and will reduce regulatory lag."}, {"role": "assistant", "content": "So I think starting back with the legislation, we've been making progress towards modernization and now with the settlement have approval of that capital or have a settlement around that capital, of course, commissioned to approve in a way that we feel like we're making strong progress."}, {"role": "user", "content": "Okay. Great. Thank you."}, {"role": "assistant", "content": "Thank you."}, {"role": "assistant", "content": "Thanks, Steve."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions] Our next question goes to David Arcaro of Morgan Stanley. David, please go ahead. Your line is open."}, {"role": "user", "content": "Hi. Thanks for taking my question."}, {"role": "assistant", "content": "Hi, David."}, {"role": "user", "content": "Good morning. Let's see, I wanted to check in just on the Florida 10-year site plan, I just wanted to confirm whether there could be upside to the capex outlook that you've got in that filed?"}, {"role": "assistant", "content": "David, I would say we're continuing with our progress of about 300 megawatts a year. And as we get deeper into the plan, I think we'll consider whether we're moving quickly enough. The multiyear rate plan for Florida runs through '25 -- '24, the team is signaling me here. So effective '25 will kind of reset that expectation in Florida, and we'll continue to look at whether we're delivering the right amount of capital and customer value as we go always focused on not only continuing to develop renewables at a pace, but also delivering value to customers along the way."}, {"role": "user", "content": "Okay. Got it. Thanks. And then also just wanted to follow up on the Carolinas settlement. I was just wondering what your current thoughts are about potentially achieving a settlement at the Duke Energy Carolinas rate case now that you've been successful in getting the partial settlement at progress?"}, {"role": "assistant", "content": "David, I think our posture is always to look for ways to achieve settlement. If you think about the calendar of -- or the procedural calendar of any rate case, typically, parties file their positions and then you have an opportunity to sit down and discuss. We will, of course, pursue that in the DEC case as we did in this one, and we'll keep you updated as the summer progresses."}, {"role": "user", "content": "Okay. Great. Thanks very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question goes to Bill Appicelli of UBS. Bill, please go ahead. Your line is open."}, {"role": "user", "content": "Hi. Good morning."}, {"role": "assistant", "content": "Hi."}, {"role": "user", "content": "Just was wondering if you could make some color around the sales -- good morning -- some additional color around the sales trends. I know you commented that when you have the extreme weather can distort the weather normalization trends. But maybe just some more color around why you feel better about the trend you saw in March and April?"}, {"role": "assistant", "content": "Brian, do you want to --"}, {"role": "assistant", "content": "Definitely take that, Bill. Thanks for the question. And I want to remind you that Q1 of 2022 was a robust quarter. We had 6% year-over-year growth that quarter. Strength in all sectors as we were coming out of the COVID rebound, that was the peak point. And so we're comparing to a high watermark and volume trends normalize to our expectations over the course of 2022."}, {"role": "assistant", "content": "And when we looked at this year with extreme weather in January and February, as I mentioned, it's really hard to pinpoint what the true weather-normalized volumes are in those situations. And when we analyzed March and April results, weather was close to normal in both those months and the volume trends were on track with our expectations for the year. So we do feel like this is bracketed into January and February, as far as the weakness. And we feel confident that our 0.5% load growth in 2023 and the long-term outlook around 0.5% is right for us because of the customer growth we're seeing at 1.7% as well as the industrial expansions and economic development activity in our regions."}, {"role": "user", "content": "Okay. Great. And then just one other quick follow-up. On the corporate and other, there was an $0.08 pickup year-over-year. I know you cited some investment gains. Can you just provide some color around that?"}, {"role": "assistant", "content": "Yes. Bill, we have investments in Benefit Trust and other types of investments like that are captive insurer. And market returns go up and down. We obviously had a strong first quarter. S&P was up around 8%, and that was reflected in the market returns in that section."}, {"role": "user", "content": "Okay. Great. Thank you so much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Thank you. We have no further questions. I will now hand back to Lynn Good, Chair, President and CEO, for any closing comments."}, {"role": "assistant", "content": "Well, thank you, and thanks to all of you who joined today and for your interest and investment in Duke. We're available for follow-on questions after this call and look forward to talking soon. Thanks so much."}]}, {"messages": [{"role": "system", "content": "[Operator Instructions]. The first question comes from Adam Thalhimer with Thompson, Davis. Your line is open."}, {"role": "user", "content": "Guys, amazing quarter. Was there anything -- maybe it's a question for Jim, but was there anything that specifically helped Q1 aggregates margins? And how are you thinking about aggregates margins as we move into the middle of the year?"}, {"role": "user", "content": "Yes. The main answer to the question is ASP growth. That carried a lot of the weight, and it was just obviously a phenomenal performance this year. So that really is the answer. And of course, that's going to carry through into the subsequent quarters as well. That sticks, as you know. So no real changes or unusual items on the cost side but ASO did the [Indecipherable] work. Plus, as you know, we advanced pricing increases from April one into January one successfully this year, and that had a big impact as well."}, {"role": "assistant", "content": "Adam, one thing I'll add to that too to keep in mind, what we've said on pricing so far this year does not take into account the midyears that we think we're going to have in place this year. You heard me speak to them in the prepared remarks, we think we see more mid-years. And we think we see higher midyears coming in this year than we thought we saw even in February. And so I think there are a couple of different components as we think about the margins going forward."}, {"role": "user", "content": "Thanks guys. Keep up the great work."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Kathryn Thompson with Thompson Research Group. Your line is now open."}, {"role": "user", "content": "Hi. Thank you for taking my question today. And I appreciate the color that you gave previously on pricing. And tagging into that and just a bigger picture question. When we look at -- for big trends that are impacting the U.S. reshoring, near shoring, population shift, increasing environmental focus and then government support through IIJA, the Inflation Reduction Act and the CHIPS Act. When you look at those four factors, how does Martin Marietta win in this? And what does that mean for pricing realistically in the mid- to long term? Thank you."}, {"role": "assistant", "content": "Kathryn, thanks for your question. To your question, as we think about pricing and we think about markets, I think several things. One, Kathryn, what you said I agree with. I sum up much of what you said in these words, so I think we're looking at what can be a manufacturing renaissance in the United States. The fact is we as a nation has to get back to building things. And what we're going to see is a nice combination of public spending relative to infrastructure or I should say, investment. We're going to see a lot more manufacturing in the United States, whether it's CHIPS or otherwise. And we're already seeing a nice burgeoning growth in energy. So let's take those three things and then step back away from it and think about the where. And I think that's where Martin Marietta is going to be uniquely positioned to win, as you said, going through this because as we think about the position that we've built in the Eastern United States along the I-5, I-95, I-40 corridor, where we are in the central U.S. along the I-35 corridor in Texas, which remember that corridor in Texas all by itself has more people than the Commonwealth of Pennsylvania."}, {"role": "assistant", "content": "If you look at the slowest -- I mean, excuse me, the smallest mega region, but fastest growing up and down the I-25 corridor in Colorado, again, we have a very attractive position up and down I-25 where a lot of people are coming in. And now we have to position up and down the I-4 corridor in California as well. So I do think the commercial aspect of what we're doing now and the commercial aspect of what we're doing going forward will be very attractive. But I think the way that we have very intentionally built out this business in mega regions in the United States trading out of areas that were slower growth into areas that are faster growth and will be that way for the long term is going to make the difference. Similarly, keep in mind, we positioned ourselves in states that are in very good shape from a DOT perspective, and we think that matters a lot. So if we're looking at public spend, which we think it's likely to be the single biggest driver of our business over the next several years, keep in mind, 1/3 of the $110 billion in the IIJA that are going to roads and bridges, a full 1/3 of that is going to our top 10 states. So we talk about housing a lot of times just generally, and it's all about location. I would tell you this business, too, is about location. And that location will drive volumes and that location will also drive the pricing. So Kathryn, I hope that gives you a good snapshot of how we look at it."}, {"role": "user", "content": "Thank you very much."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Trey Grooms with Stephens. Your line is open."}, {"role": "user", "content": "Hi good morning everyone. Hope you Happy to respond to that. Thank you, Trey. Yes, it was interesting when the termination of that transaction with CalPortland was announced, we actually had a good bit of incoming, and that was not a surprise to us. So we've heard from a number of parties expressing interest in that asset as you saw from our release today. We've also transacted and sold the import cement business in California at Stockton. So again, consistent with our view of what is strategic cement, strategic cement for us is that wonderful cement business that you've heard about in Texas. We will continue to move forward with the process relative to Tehachapi. We feel confident that we will get very attractive value for that. And we feel confident we will transact on that this year. So that's the way we're looking at that right now, Trey."}, {"role": "assistant", "content": "Yes, Trey, it is. So again, we've communicated with our customers in April that we're looking for a $10 a ton increase at half year. And again, that is not yet included in our guidance, which we're saying we're going to revisit more formally at half year."}, {"role": "user", "content": "Okay. Thanks for clearing that up. Ward, I wanted to ask about your Tehachapi cement plant since the FTC recently put that deal to the sidelines. And just would love to get some color from you on maybe your expectations for that asset going forward."}, {"role": "assistant", "content": "Happy to respond to that. Thank you, Trey. Yes, it was interesting when the termination of that transaction with CalPortland was announced, we actually had a good bit of incoming, and that was not a surprise to us. So we've heard from a number of parties expressing interest in that asset as you saw from our release today. We've also transacted and sold the import cement business in California at Stockton. So again, consistent with our view of what is strategic cement, strategic cement for us is that wonderful cement business that you've heard about in Texas. We will continue to move forward with the process relative to Tehachapi. We feel confident that we will get very attractive value for that. And we feel confident we will transact on that this year. So that's the way we're looking at that right now, Trey."}, {"role": "user", "content": "Got it. Thanks. Good luck in the quarter and and good luck going forward. Thank you."}, {"role": "assistant", "content": "Thank you, Trey."}]}, {"messages": [{"role": "system", "content": "The next question comes from Stanley Elliott with Stifel. Your line is open."}, {"role": "user", "content": "Hi. Good morning everyone. Congratulations on the strong start to the year. I guess, kind of sticking on the Texas cement market, it's certainly been a differentiator for you all. Maybe can you speak to some of the confidence or some of the conversations you're having around the second increase with pricing up, what, like 30% year-over-year? And then also kind of the health of the market and the ability to absorb the additional production on the PLC side. And then finally, maybe expectations around cost there?"}, {"role": "assistant", "content": "Stanley, thank you so much for the question. So if we really think about what we're looking at from a volume perspective in that state, it's probably going to be around 4.2 million tons this year. Keep in mind, the need for cement in Texas is far greater than the ability to produce it domestically is in Texas today. So number one, you start with that market fundamental, and that's a very attractive place to be. As you know, the largest portion of our cement business is in North Texas. It's led by our Midlothian plant. So as we indicated for the quarter, volumes were down 6.8% overall, largely due to weather. But if we're looking at North Texas, they were down about 1.6%. So again, biggest single piece of our business in Texas remains very robust. Relative to the pricing conversations that we're having with customers, they're aware of where we're going."}, {"role": "assistant", "content": "They're aware of the cost inputs that we continue to see in portions of our business, particularly relative to supplies, materials, those types of things. So as we're sitting here today, again, we've recognized the vast majority of the price increase that we put in place relative to January 1. We're anticipating success on the one that we're looking at on July one as well. And we think the overall position of the Texas market -- and keeping in mind a lot of the infrastructure in that state is concrete, most of the roads in Texas are concrete roads and about half of our cement finds its way to infrastructure. So I think when you take the way that state is literally built and where our positions are in Central and North Texas: number one, we feel confident in the durability of the business; and number two, we feel confident in what we're going to be able to do happier relative to pricing."}, {"role": "user", "content": "That's great guys. Thanks so much. Best of luck you"}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Jerry Revich with Goldman Sachs. Your line is open."}, {"role": "user", "content": "Yes hi. Good morning everyone. I wanted to ask, aggregates gross margins on a like-for-like basis, you were essentially flat sequentially versus normal seasonality that where you'd be normally down 12 points. And I'm just wondering, as we consider building off of this margin run rate into 2Q, applying normal seasonality would suggest moderate gross margins in the low to mid-40s, that's excluding delivery revenues in the second quarter. So I just want to make sure we don't get up over our skis and run rating the performance here. Anything we should keep in mind relative to that normal seasonality that just mathematically suggest excluding delivery revenues you'd be in aggregates gross margins in the low to mid-40s in 2Q?"}, {"role": "assistant", "content": "Jerry, thank you for the questions. So yes, let's be careful with the skis. So the short answer is we're going to see a very nice continued build in margins this year. But the normal build that you would see going from one to 2, that would be much larger than it is in most quarters. You won't see that same quantum leap this year. In large measure because as you pointed out, Q1 was so attractive. So do we intend to see and expect to see margin expansion going into Q2 and for the balance of the year. The answer is we do. But I would seriously urge you, don't go leaning into that same degree of percentages that you would have seen in years past. And keep in mind, Jerry, in many respects, we're seeing an EBITDA in Q1 that would have looked like our EBITDA for a full year in 2010. So again, we've built the business very intentionally to be more durable through cycles and through quarters. But given this outstanding performance in Q1, I expect really attractive performance this year. But yes, let's not get too far ahead of ourselves on those percentages. Jim, anything you want to add to that in particular?"}, {"role": "user", "content": "Yes. No. Just Jerry, as you think about sort of Q1, Q2, Q3, Q4, our 3- or 5-year average would show a bigger bump in the line spike in Q2 and Q3. I think for 2023, you should view a higher Q1 and a lower Q2 and Q3 vis-a-vis percent of total profits for the year. So 100% of the profits over the four quarters, more in Q1 this year than is typical. But take a little bit out of Q2 and Q3 as a percent of total."}, {"role": "user", "content": "Well done. And thanks."}]}, {"messages": [{"role": "system", "content": "The next question comes from Anthony Pettinari with Citigroup. Your line is open."}, {"role": "user", "content": "Hi. This is [Indecipherable] on for Anthony. Thanks for taking my question. If I think about some of the possible drivers of what seems like better than expected realization on your January hike, I think of it maybe like some combination of stronger backlog of demand, maybe some higher anticipated inflation in the industry or maybe some customer rationalization. So in terms of the pricing we saw in 1Q, what would you point to as maybe a bigger driver or maybe a combination of drivers? And then highlight any differences there may be between aggregates and cement?"}, {"role": "assistant", "content": "Thank you for the question. I think there are a number of different drivers. I think, number one, clearly, inflation just moved very rapidly last year. And what we've proven in this business through cycle after cycle is this is a very durable business. If inflation spikes, very, very quickly, we cannot keep up with the mediacy, but we will catch up with it. We will tend to pass it. And I think that's what you saw. So I think you saw a cumulative action of several different builds from price increases last year, number one; number two, we were very purposeful in moving a number of price increases from April one to January 1. That was impactful as well. Keep in mind, the one thing that we've called out that I do think is really important is we have not built midyears into what we're looking at right now, although we do believe midyears are coming. So I think those are the primary drivers."}, {"role": "assistant", "content": "I think, secondarily, is really where we've moved our business over time. So if we're looking at a very strong business in portions of the Southeast and Mid-Atlantic, a very strong business in Texas and an emerging business in California, I think all of those help us as we think about the commercial aspects of what we're doing and the fact that aggregates into relatively small percentage of the overall cost of construction. And I think those factors coalesce together to put us in a position that we can expand margins in a business where you have a depleting natural resource. And what we recognize is the stone in the ground is worth more tomorrow than it is today and mindful of how difficult that can be to replace. We want to make sure we're getting fair value for those products today."}, {"role": "user", "content": "Thank you. That's very helpful. I'll turn it over."}, {"role": "assistant", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Michael Feniger with Bank of America. Your line is open."}, {"role": "user", "content": "Thabk you for taking my question. Ward, you talked about how pricing lagged inflation last year in the beginning. Now your pricing is well ahead of inflation. Just -- how do we think about that spread of price versus cost inflation into 2024? Can that spread be outsized in '24 as you edge the year with double-digit price increases, the mid-year price increases come through and we start to see cost inflation start to roll over such as oil and diesel?"}, {"role": "assistant", "content": "Michael, thank you for the question. Number one, if we're looking at overall cost inflation today, it's probably running, let's call it, 7%. So that's not a bad way to think of it. If we're looking at some of the big movers last year, obviously, energy was a really big mover last year, not as much on a quarter-over-quarter basis. So if we're looking at energy up, let's call it, high single digits -- supplies and repairs are the ones that were actually up in -- supplies low teens, repairs low 20s on a percentage basis. At the same time, if we look at what we're doing relative to pricing, we think at this point, we are likely to stay ahead of that. We think we are likely to see margin expansion. And it's certainly our aim to see that throughout '23 and into '24. Again, back to the notion that we're relatively small cost of the overall construction, and we have a product that, by its very nature, is depleting. And despite the fact that because of good planning, we have very long-lived reserves in our operations today. And I think that's important to call out. But nonetheless, I don't think prudent planning on our part should serve as something that would be a detriment on us utilizing our positions to make sure we're getting expanded margins through the cycle for the rest of this year and into next year."}]}, {"messages": [{"role": "system", "content": "The next question comes from Timna Tanners with Wolfe Research. Your line is open."}, {"role": "user", "content": "Good morning. I have two high-level questions, if I could sneak them in. One is just given the nice beat in the first quarter EBITDA and the repeated confidence in mid-quarter midyear price hikes, why just steer to the high end of guidance? Is there something that's keeping you from changing the range? And then similarly on -- when you think about cash use, really nice share buybacks. Does that have any commentary on the M&A opportunities that you're seeing or is it just a combination of ways to use cash?"}, {"role": "assistant", "content": "Thank you for that. Relative to guidance, we just feel like January, February and March is really early to change guidance. Obviously, you can tell from my tone, you can tell from our prepared remarks that we have a lot of confidence in the year. Obviously, as we've said, it doesn't take into account mid-years. So our view is let's come back at half year, let's revisit guidance. Then we can do it, I think, with much more precision then. So our view is we'll just come back and do it then. Relative to the buybacks, I guess several things. Number one, we obviously had some degrees of dilution just through compensation. We like to address that on an annual basis. Clearly, we've gone in more deeply than that. In many respects, Timna, frankly, because we thought buying Martin Marietta made a lot of sense to us, given where the share price was. So from the perspective of just general uses of cash, that made sense to us."}, {"role": "assistant", "content": "It is not a reflection, let me be clear, on how we're looking at the M&A marketplace right now because what I can assure you is actually the dialogue that we have ongoing and the pipeline actually looks as good as I've ever seen it look. And I think there's some potential transactions that we can discuss later in the year that will largely be pure aggregates in nature, that will be attractive and that will be important. So one of the nice circumstances that we have is this business is cash generative of that we can look at multiple ways to return cash to shareholders and increase value. Share buybacks being one of them, a solid dividend that continues to go up is another way to do it and then NCDOT accretive acquisitions is a third. So that's how I would answer your questions very directly, Timna."}, {"role": "user", "content": "Helpful. Thank you very much."}]}, {"messages": [{"role": "system", "content": "The next question comes from David McGregor with Longbow Research. Your line is open."}, {"role": "user", "content": "Good morning everyone. Congratulations. This is really turning. I guess just if I could just build up to Timna's questions for a second, and then I had a principal question. But what is your capital allocation is the longer term because clearly, we're heading into a period, this isn't just 2023. You're heading into a multiyear period of expanding free cash flow. And so the question from a capital allocation standpoint is, is the principal use of that cash at this point to grow by acquisition? Or is there an opportunity to go in, extend your reserve life and expand organically? And just more of a longer-term view on how you put all of these returns to work. And then if I just give you my question now, I really want to just parse out the ASP growth. Obviously, an awfully strong performance, but how much of this is related to just volume growth in the East versus volume declines in the West this quarter? And as you talked about the timing of implementing pricing in January one this year versus April one last year, it would be great just if you could bridge those points to the reported number. It would be a big help."}, {"role": "assistant", "content": "Happy to do what I can, David. Thank you very much. Let's talk first about capital allocation. As we think about capital allocation, to your point, we've not changed our priorities. So our best use of capital is doing the right transaction in the right place. One of the things that we find so remarkable about this business, as we've gone out look in geographies where we would have an interest and looked in areas in which we believe we could also buy businesses, here's what I'll tell you, we found there were what we think are 200 million tons a year of businesses on a per annum basis that we could acquire. So think of it in these terms, David, that's another Martin Marietta that's out there. So if we're looking at modestly over 210 million tons of production or sales last year, there are businesses out there that are modestly bigger than that, that we think would be attractive to us in the geographies that we said we want to grow, number one; number two, if we think about the quarter that you just saw, and again, you're looking at something the same way that I do. And that is, we think we're entering a series of years here that will be very attractive, here's the way I would encourage you to think about the volume. I'm just going to talk a little bit about what was weather affected in the first quarter."}, {"role": "assistant", "content": "And as we look at weather effects in the first quarter, what I would tell you is, overall, if we're looking in the East, where actually the weather was relatively normal and dry, volumes there were up about 570,000 tons. If we look in the Southwest, again, our largest market by revenue, profitability and otherwise, actually, they had almost 2 times the rain that we saw in the prior year quarter. Similarly, if we look at Central -- and keep in mind, Central is never going to be a big contributor in Q1 with the possible exception of agg line because people tend to put that on their fields in the winter, they can do if it's cold, they can't do if it's wet, and Central had the wettest Q1 since 2010. And then the West had record rains. So East was up about 570,000. California was down almost one million tons, as I said in my prepared remarks. And the Southwest was down about 320,000. So was there -- were there degrees of movement there? Absolutely. Did it really swing the quarter dramatically? Not so much. But I think that does give you a sense of what was happening underlying weather and otherwise in the quarter. So I hope that helps you build that bridge."}, {"role": "user", "content": "Yes. Thank you. Congratulations."}]}, {"messages": [{"role": "system", "content": "The next question comes from Rohit Seth with Seaport Research. Your line is open."}, {"role": "user", "content": "Thanks for taking my question. Volumes seem to be holding up better than expected. Can you discuss your expectations for volumes by market? And maybe comment on what you're seeing today with shipments to the highway projects and what you're seeing with the ramp-up?"}, {"role": "assistant", "content": "I won't go so much into what we're seeing right now on volume in specific markets because we'll talk more about that in the quarter to come, but here's what I would say. If I go through and really think about our leading states -- and I'll do it this way. If I talk about infrastructure first, TxDOT learnings are expected to exceed $11.2 billion this year. I mean that's an enormous amount. And if we're looking even into next year, it's $11.7 billion. If we're looking in Colorado, which is an important state for us, the recently passed $5.3 billion 10-year infrastructure bill we think is going to have great tailwinds to it. Here in North Carolina, part of what we've seeing here, one, North Carolina has shifted sales tax revenue to the highway fund. So that's going to be an additional 2% this year, 4% in '24, 6% in '25. And in large measure, we're seeing infrastructure increases by $7 billion in North Carolina over the next decade. Obviously, North Carolina is hugely important to us."}, {"role": "assistant", "content": "In Georgia, despite the fact that they had suspended the gas tax proportions of last year, we're seeing $1.1 billion of surplus funds coming back into that. In Florida, record DOT spending, they've got a budget of $13 billion. Again, that's an all-time record. And in California, Governor Newsom has proposed an FY '24 [Indecipherable] trends budget of $20.7 billion. That's a 5.6% year-over-year increase. So that's on the federal side. Frankly, not taking into account what can come from Cornyn-Padilla and other things. If we're looking at nonres, and that's something that I think is just so important right now because as we look at those different markets in which we participate right now, Samsung and Texas, the Texas Instruments facility. Golden Pass, CPChem are all big projects. Equally, if we go to Colorado, High Point Logistics park near Aurora is something that's important. But in North Carolina, what we're seeing is Wolfspeed, Microsoft, Toyota, just a host of large industrial projects as well as port development in Georgia. We're seeing Rivian coming into social circle."}, {"role": "assistant", "content": "We're seeing the Hyundai plant in Savannah. So I think to your point, Rohit, if we're looking across volume, and saying, public, we believe, is growing into the second half. We think the second half is where that's really going to show off. We think nonres, as you heard in my commentary, 38% of our shipments, the heavy side of that is good. It looks like it's going to stay good. What we're seeing on those petrochem projects in South Texas and Louisiana is extraordinary right now. And here's the other piece of it that I think is interesting. I think for us, housing is probably at its [Indecipherable] right now. As we're thinking about housing, housing started slowing down last year. We're probably seeing the effects of that now. We were still 25% of our volume. And we think in the second half of this year, multifamily is going to start to be joined by single family with more activity. So again, as we think about the way the volume build is likely to go over the next few quarters, we think that's likely to be how it is. I still think this tends to be more of a second half year story than a first half year story. But Rohit, I hope that gives you the color that you were looking at largely on a state-by-state basis."}, {"role": "user", "content": "I mean it sounds like the pipeline is pretty strong. Just on the heavy side, is there any risk from the tightened credit conditions on heavy projects being delayed?"}, {"role": "assistant", "content": "It's hard to imagine on the heavy side, that's going to be an issue. It's interesting to me. Keep in mind, about 55% of our nonres is heavy, about 45% of its light. If we're looking at what we're seeing on heavy, we're seeing energy sector volumes up pretty notably. LNG is up over 300%. Renewables were up 82%. Wind energy -- we saw 300 permits pulled in Iowa for 2024. So again, if we're looking at these types of projects that I don't think tend to be uniquely finance-driven, I think we're in a pretty good place on that. I did call it out relative to certain portions of light that we think might slow down in the second half of the year. And frankly, it's been a little bit better so far than we would have thought that probably helps bridge to a degree what you're seeing relative to the overall goodness in the volumes in Q1."}, {"role": "user", "content": "Alright. Thank you. Great quarter."}]}, {"messages": [{"role": "system", "content": "The next question comes from Adrian Huerta with JPMorgan. Your line is open."}, {"role": "user", "content": "Thank you for taking my question. Given what we're seeing on cost inflation for aggregate volume around mid to high single digits and given what we have seen on pricing and even not including a second price increase, would you agree that gross profit per ton seems to be heading to north of $7 for this year?"}, {"role": "assistant", "content": "Yes. I'll certainly tell you gross profit per ton has a very nice track record to it. And I know if you go to the supplemental slides and you take a look at Slide 5, it gives you a good sense of what that CAGR looks like over a 3-year, 5-year and a 10-year period. And frankly, my sense is that's going to look better in the future than it's looked in the past. So look, you're seeing where it's come from FY 2013 when it was just modestly over $2 a ton to what we're looking at relative to expectations this year, north of $6. I think our ability to grow that metric is frankly, better than others. I think that's what you're likely to see from us. That's something that we're highly focused on. And look, I see where you're going with it. I'm not necessarily in a position to debate it with you. I think it's just a matter of what the time frame is going to look like, Adrian."}, {"role": "user", "content": "Thank you so much."}]}, {"messages": [{"role": "system", "content": "The next question comes from Dillon Cumming with Morgan Stanley. Your line is open."}, {"role": "user", "content": "Good morning. Thanks for the question. I'm sorry to fixate on pricing again. But I think, Ward, you mentioned in your prepared remarks that some of your confidence in the midyear price increase was tied to the fact that oil had inflated pretty significantly post OPEC cut. And again, unfair probably is given the volatility. But if you look at spot crude pricing, today, it's closer back to that point where it was in March. I think about freight rates, I think you're also down significantly year-over-year. When you take those two kind of cost items, are you still, I guess, confident in your ability to get those midyear price increases given the kind of contemplated cost deflation there? Or do you feel like it's not as much tied to what you've seen more recently?"}, {"role": "assistant", "content": "Yes. I am confident we're going to see the midyear price increases. Now let me be clear. I'm not saying we're going to get them in every market and at every place. But I think we're going to see them more widely than we thought back in February, I think they're going to be bigger than we thought in February. And I think you're right. I mean there's some components of energy that aren't moving with the same aggressiveness that we saw last year. At the same time, as I indicated before, if we're looking at our supplies up nearly 13%, if we're looking at repairs in some places up 21.5% ish, those are the types of inflation numbers that we're having to make sure that we can navigate in our business. And for us to do that, we're going to have to make sure we're getting some help on the top line as well."}, {"role": "assistant", "content": "And again, I think Dillon, it's so important to remember, as we said before, we're a very low percentage of the overall cost of construction. We're 10% of the cost of building a road, 2% of the cost of building a home and somewhere between those two percentages on our nonres project. So as a practical matter, we think this is going to be very durable. And again, despite the fact that if we look at today's attraction rate, on average, we probably have 70 years of reserves in Martin Marietta operations. Again, good planning should not put us in a point that we're going to be -- that will be punitive to ourselves on what we'll do commercially. So again, we've got great resilience around that. We'll talk more about that and the specifics at our call after Q2."}, {"role": "user", "content": "Very clear. Thank you."}]}, {"messages": [{"role": "system", "content": "The next question comes from Phil Ng with Jefferies. Your line is open."}, {"role": "user", "content": "Hi guys. Congrats on a very strong quarter. Ward, it was really helpful kind of highlighting all the great funding you have on the infrastructure side, particularly in your states. So the fundings there, there's no denying that. I guess what I wanted to get better color on is timing of projects? In the past, there could be some movement, right, in supply chain, labor stuff. How is that lining up so far in terms of your expectations and how that's progressing? And then separately, on the heavy side, you sound very bullish on that front. In the past, I would have thought it was more 50-50. I appreciate it's a little more aggregates intensive versus the light stuff. How do you see that kind of -- that mix shaping up in the coming years with all the funding you have, whether it's the CHIPS Act or the IRA Act?"}, {"role": "assistant", "content": "Sure. Thank you so much for that, Phil. So I'd say several things. Historically, what you've had about a 50-50 split between light and heavy on nonres, Historically, that is where we would have resided. You're exactly right. The last couple of years has trended more toward that 55, 45 break, and that's what we continue to see. I think it's likely to stay that way for a while in large measure. Because, frankly, Phil, the heavy projects are getting heavier. And what I mean by that is they're so aggregates-intensive. And now given the degree of manufacturing that's going to be coming with the CHIPS Act and with the IRA and otherwise, I think we're just going to see more of that, and I think that's going to drive heavy. And heavy, literally is just that, it's heavy. To your question on infrastructure, I get it. Look, I still think it's a half two issue. I'm still taken by the fact that when I look at our top 10 states, and I look at an overall average of their budgets up year-over-year, 11%. But then when I look at Florida up 38%, north Carolina up 11%, South Carolina up 28%, these are states that for us from an infrastructure perspective really can move the needle. And keep in mind, even the state like Iowa, is up 10%, and Iowa's state where we've got a very attractive position. So a number of these states have not had the historic spend and invest that we're going to see going forward."}, {"role": "assistant", "content": "I do think, again, it's a second half loaded issue. I don't think logistics are the issue going into this year than they have been in years past. Rail is functioning much better. Trucking is functioning much better. Contractors have hired more over the last 18 months than they were able to previously. So we think from a labor perspective, we're in a good space. We think from a DOT and best perspective, we're in a good place. And we think, again, from a logistics perspective, we're really very advantaged today. And again, I think our ability, for example, to get into some of the petrochemical projects in South Texas, utilizing BN, UP and as well as Kansas City Southern and Ship places us in a position that's really unparalleled today in an area that is likely to see just immense work. And again, even on the public side, keep in mind, if we're looking at highway contract awards over the last three years, those were growing at a CAGR of around 5.2%. If we look at where they are on an LTM at the end of March, it's up 16.2%. So again, almost 3 times what we've seen historically. So I think by any measure, if we look at infrastructure and we look at heavy nonres and then back to that break that you identified between them, I really am pretty enthusiastic about the way that looks from Martin Marietta right now."}, {"role": "user", "content": "Thank you."}]}, {"messages": [{"role": "system", "content": "Our next question comes from Michael Dudas with Vertical Research Partners. Your line is open."}, {"role": "user", "content": "Ward, just any thoughts on the performance of Magnesia Specialties? Any indications on maybe general economy you're seeing in that business? Any potential for upside this year and how the business looks moving forward given some of the -- we think some of the positive demand trends that we're seeing tangentially for the rest of your construction world."}, {"role": "assistant", "content": "Thank you for the question on agg. So several things: one, it's a very good business; two, I think it's an important differentiator for us; three, record quarterly revenues, again, the RAMP revenues were up 8.4%. The biggest single issues we had there, we saw higher contract services. We had a little bit more kiln downtime. And frankly, steel was running a little bit lower. It's now running at about let's call it, 74% year-to-date, it's been at about 70.1%. So based on some recent history, that's a little bit lower. The other thing that's different in that business, and we're in the process of remedying that. They have longer-term contracts with customers than we would typically see in aggregate that's taken a little bit more time to move those up as we have with aggregates pricing. So the short answer is, it's always ironic when we look at [MAG], and we feel like they didn't have the quarter that you would like to have seen. We're still looking at margins with the three in front of it. And my guess is as we go through time, we will see that business start moving margins back up to something that looks a lot closer to a four instead. So Michael, I hope that's responsive."}, {"role": "user", "content": "Thank you"}]}, {"messages": [{"role": "system", "content": "The last question comes from Garik Shmois with Loop Capital. Your line is open."}, {"role": "user", "content": "Thanks for taking me here. Congrats, of course, on the quarter. I wanted to ask on non-res one more time. Just on the light non-res side, it sounds like it's holding in better than expected thus far. I'm curious if you're seeing any change though in the bidding environment? I know you've indicated that you might expect a slowdown later this year, but have there been any recent signs whether in bidding or backlog, the -- that's going to be the case."}, {"role": "assistant", "content": "Number one, thank you for the question, Garik. Not so much really. It's really more anticipating where we think that's going to go. Maybe a very modest slowing. But again, -- those projects tend to move relatively quickly. The heavy non-res, you can see coming a long way away. You know that's coming. The light non-res, not as much. So if I told you we had good data on it. I'd be leaning in a little bit more than I should. But I think conversationally, what we're seeing in the world of banking and otherwise, it's just making us look at that with a little bit higher degree of caution. But again, overall, if we think about non-res and what's happening on the heavy side of it, it really does serve as a very powerful counterbalance."}]}, {"messages": [{"role": "system", "content": "I would now like to turn the call back to Ward Nye for closing remarks."}, {"role": "assistant", "content": "Again, thank you so much for joining today's earnings conference call. Martin Marietta's track record of success through various business cycles, proves the resiliency and durability of our aggregates led business model. We continue to strive for the safest operations and remain focused on executing our strategic plan while continuing to drive sustainable growth and value creation for all of our stakeholders in 2023 and beyond. We look forward to sharing our second quarter 2023 results with you in the summer. As always, we're available for any follow-up questions. Again, thank you for your time and continued support of Mart Marietta. Have a great day."}]}]