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Hewlett Packard Enterprise Company (NYSE:HPE) Q3 2023 Earnings Call Transcript August 29, 2023 Hewlett Packard Enterprise Company beats earnings expectations. Reported EPS is $0.49, expectations were $0.46. Operator: Good afternoon, and welcome to the Third Quarter Fiscal 2023 Hewlett Packard Enterprise Earnings Conference Call. My name is Gary, and I’ll be your conference moderator for […] Hewlett Packard Enterprise Company (NYSE:HPE) Q3 2023 Earnings Call Transcript August 29, 2023 Hewlett Packard Enterprise Company beats earnings expectations. Reported EPS is $0.49, expectations were $0.46. Operator: Good afternoon, and welcome to the Third Quarter Fiscal 2023 Hewlett Packard Enterprise Earnings Conference Call. My name is Gary, and I’ll be your conference moderator for today’s call. At this time, all participants will be in listen-only mode. We will be facilitating a question-and-answer session towards the end of the conference. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today’s call, Mr. Jeff Kvaal, Head of Investor Relations. Please go ahead. Jeff Kvaal: Good afternoon, everyone. I’d like to welcome you to our fiscal 2023 third quarter earnings conference call with Antonio Neri, HPE’s President and Chief Executive Officer; and Jeremy Cox, HPE’s Interim Chief Financial Officer. Before handing the call to Antonio, let me remind you that this call is being webcast. A replay of the webcast will be available shortly after the call concludes. We have posted the press release and the slide presentation accompanying the release on our HPE Investor Relations webpage. Elements of the financial information referenced on this call are forward-looking and are based on our best view of the world and our businesses as we see them today. HPE assumes no obligation and does not intend to update such forward-looking statements. manaemedia / Shutterstock.com We also note that the financial information discussed on the call reflects estimates based on the information available at this time and could differ materially from the amounts ultimately reported in HPE’s quarterly report on Form 10-Q for the fiscal quarter ending July 31, 2023. For more detailed information, please see the disclaimers on the earnings materials relating to forward-looking statements that involve risks, uncertainties and assumptions. Please refer to HPE’s filings with the SEC for a discussion of these risks. For financial information, we have expressed on a non-GAAP basis. We have provided reconciliations to the comparable GAAP information on our website. Please refer to the tables and slide presentation accompanying today’s earnings release on our website for details. Throughout this conference call, all revenue growth rates, unless otherwise noted, are presented on a year-over-year basis and adjusted to exclude the impact of currency. Finally, after Antonio provides his remarks, Jeremy will reference our earnings presentation throughout his prepared comments. Now with that, let me turn it to you, Antonio. Antonio Neri: All right. Thank you, Jeff, and good afternoon. Thank you, everyone, for joining today. HPE delivered another solid quarter. We again increased our revenue, gross margin and earnings per share year-over-year and delivered strong free cash flow. Our results are being driven by our intentional ongoing mix shift to higher growth, higher margin parts of our portfolio that are critical priorities to customers. Our success in shifting the portfolio delivered a 120 basis points year-over-year non-GAAP gross margin expansion, driven by exceptional performance in areas like the Intelligent Edge, where revenue has set its fifth consecutive record quarter, and HPE GreenLake, which continue to accelerate our strategic pivot, generating higher recurring revenue and gross profit across our four product segments, driven by the increased mix of high margin software and services. In Q3, our Intelligent Edge business contributed 20% of our total company revenue. It is now the largest source of HPE’s operating profit at 49% of our total segment operating profit. Our HPE GreenLake hybrid cloud platform is accelerating our other service pivots, delivering an annualized revenue run rate, or ARR, of $1.3 billion, a 48% increase year-over-year. Our strategic shift towards edge, hybrid cloud and AI delivered through our HPE GreenLake cloud platform is working, and we are delivering on our financial commitments. Because of our momentum and strong execution throughout this fiscal year, and once again, we are raising our full year non-GAAP diluted net earnings per share guidance. GAAP for full year diluted net earnings per share guidance will remain unchanged. For non-GAAP, diluted net earnings per share we are increasing to $2.30 at the midpoint, while maintaining both our full year constant currency revenue growth guidance of 4% to 6% and full year free cash flow guidance of $1.9 billion to $2.1 billion. We will provide more details later in our call today, including on a GAAP basis. Our view of the macro environment remains unchanged from recent months. Customers continue to prioritize their data-first digital transformation, despite some reservations about the macroeconomic environment for the future. While the broader IT market is still pressured, demand for our products and services grew sequentially in the third quarter across all key segments of our business, driven by high-growth areas like AI and HPE GreenLake. We continue to see strong interest in our AI and supercomputing offerings from enterprise customers who are incorporating artificial intelligence into their businesses. This is translating into significantly higher demand for our HPC & AI business segment as customers discover HPE’s unique capabilities to power unprecedented level of performance for AI at scale, including using our market-leading supercomputers built with sustainability in mind to train and tune their AI models. Total HPE revenue during the third quarter increased 3.5% year-over-year to $7 billion, which exceeded the midpoint of our guidance. Non-GAAP gross margin rose 120 basis points year-over-year to 35.9%, very close to the record level we achieved in the second quarter. Higher profitability in the third quarter compared to last year also corresponded to an increase in non-GAAP diluted net earnings per share, which was $0.49, up 2% year-over-year. And we generated $955 million in free cash flow, an increase of nearly $370 million. The HPE GreenLake cloud platform is a key driver of financial performance, with our hybrid cloud offerings through the platform continue to attract new customers and compel existing customers to expand their contracts. HPE GreenLake orders rose 122% year-over-year, resulting in a nearly $1.5 billion increase in our as-a-service total contract value since last quarter. Our cumulative booked total contract value now stands at just under $12 billion. The scale and the strength of HPE GreenLake is evident; it supports 27,000 unique customer logos and 3.4 million connected devices, and more than 1,100 partners sell HPE GreenLake, one of the largest partner ecosystems selling as-a-service offerings in the industry. As we grow our ARR, we are also increasing the share of high-margin software and services. Software and services increased 2 percentage points sequentially to 68% of the total ARR mix, compared to 66% in the second quarter, with ongoing contributions from SaaS offerings tied to our HPE Ezmeral Software, storage and HPE Aruba Networking, our operational Services and OpsRamp, our recent acquisition. We are well-positioned to continue to grow the software and services mix within our ARR. For example, we saw a double-digit increase in demand with HPE operational services this quarter, which will contribute to future recurring revenues. The impressive gross margin in our as-a-service recurring revenues helped lift our already-strong overall company gross margin this quarter. These results demonstrate the relevance of our differentiated HPE GreenLake value proposition of providing one unified hybrid cloud experience to empower customers to access, analyze and extract value from their data, no matter where it lies, at the edge, in the colos or data center and in the public cloud. Now I would like to highlight a few important takeaways in our business segment results. First, as I said earlier, HPE’s performance in the Intelligent Edge segment was particularly noteworthy in the quarter. Intelligent Edge revenue increased 53% year-over-year and operating profit more than doubled in another exceptional quarter for this business segment. I’m particularly pleased that our Intelligent Edge SaaS revenues continued to climb double-digits. We are gaining share, benefiting from improved availability of supply, high shipment volume and a strong response to our SaaS edge offerings in terms of both demand and revenue. Momentum in Intelligent Edge was consistent around the globe, with revenue increasing by double-digits in all regions in the third quarter. One example is the University of Maryland, which wanted a stronger cloud-based policy-driven wired and wireless network that could provide improved automation, better device visibility and easier and more secure access for students, faculty and staff as they are returning to campus. The University selected HPE Aruba Networking for a campus-wide refresh to enhance the flexibility, visibility and security of its network through HPE Aruba ClearPass, our SaaS platform to onboard new devices, grant varying access levels and keep network secure. The HPC & AI business segment saw a way for demand acceleration in the quarter, as we converted on AI deal opportunities and shipped orders that leverage our unique end-to-end AI value proposition, from training to tuning to inference. As a result, we exited the quarter with the largest HPC & AI order book we have ever had. Our AI momentum also helped grow our total HPE order book, which is now at more than 2 times pre-pandemic levels, driven by exceptional customer demand for our AI solutions and sequential demand improvements across our four product segments. Only HPE can combine our unique AI software and slingshot networking fabric. HPE services offerings and market-leading sustainable supercomputers. Our open ecosystem of AI suppliers is also an advantage for customers, who are turning to us for a full-spectrum of enterprise AI workloads and use cases, spanning large-scale model development, training, tune and inferencing. Through the UK’s GW4 Alliance of four UK research universities, HPE won a contract from the UK Research and Innovation to develop Isambard 3, a supercomputer that leverages the latest HPE Cray XD supercomputers, HPE Slingshot Interconnect and NVIDIA Grace CPU — GPU Superchip. The system will provide researchers engineers and data scientists purpose-built capabilities to train AI models and accelerate research in clean energy, drug discovery, medical diagnosis and astrophysics. In addition, we were selected by Tokyo Institute of Technology Global Scientific Information and Computing Center to build its next-generation supercomputer, which is called TSUBAME 4.0, which includes AMD CPUs and NVIDIA’s GPUs to accelerate AI-driven scientific discovery in medicine, material science and climate research. Recursion Pharmaceuticals is a leading public tech-bio company that uses advancement in AI to accelerate and industrialize the discovery of new drugs. Recursion turned to HPE’s AI software to scale its foundation model efforts, significantly speed up training across its more than 25 petabytes of biological and chemical data and improve team collaboration. We are seeing AI projects generate exciting results on our supercomputers. For example, the LUMI supercomputer built by HPE with AMD CPUs and GPUs is the fastest system in Europe and the third fastest in the world. It has enabled generative AI projects, such as creating the world’s largest finished language model, and it has helped researchers apply AI for early detection of diagnosis of breast and prostate cancers. We continue to make progress in ushering in the area of exascale supercomputing, which enables unprecedented scale and performance for larger AI models, such as generative AI. This quarter, HPE in collaboration with the Lawrence Livermore National Laboratory started to build and test El Capitan, one of the largest upcoming exascale supercomputers. El Capitan, which uses AMD CPUs and GPUs is expected to reach two exaFLOPS of peak performance, will allow researchers to apply AI to advance U.S. national security and breakthroughs in medical and drug research initiatives. We are seeing demand improving in both our Storage and Compute segments. Storage demand was solid year-over-year with a cloud-native HPE Alletra portfolio recording triple-digit revenue growth. Storage SaaS revenue also increased double digits as we continue to intentionally drive more of HPE’s Alletra own IP through HPE GreenLake. Compute performed well considering the sector ongoing cyclicality. We saw sequential unit demand increase in the quarter. One area where we anticipate demand picking up in the coming quarters is customers seeking a solution to run AI inference workloads. Our new HPE ProLiant Gen 11 servers optimized for AI workloads are well positioned for this growing customer need. During the third quarter, we started shipping these servers, which boosted AI inference performance by more than 5x over previous models. And just last week, we expanded our portfolio for enterprise tuning and inference solutions with NVIDIA and VMware to accelerate their customers’ generative AI deployments. To round out our major segments, in HPE Financial Services, revenue climbed 7% year-over-year and financing volume ticked up 6%. HPE Financial Services continues to be strategically important as we continue to ramp up our as-a-service volumes through HPE GreenLake. We continue to strengthen our innovation from edge to cloud, position HPE well for the future. In June, we hosted more than 10,000 customers and partners at our annual HPE Discovery event, where we unveiled exciting new edge, hybrid cloud and AI solutions to help customers achieve their business goals and gain competitive advantage. At HPE Discover, we announced we have entered the AI public cloud market with HPE GreenLake for large language models. Available at the end of this calendar year, the offering will enable a wide variety of enterprise customers to privately train and tune their data, using our industry-leading AI sustainable supercomputer infrastructure and software. We also extended our hybrid cloud leadership at HPE Discover with new HPE GreenLake hybrid cloud services, including our new SaaS-based IT Operations Management solution from our recent acquisition of OpsRamp. And to drive faster, easier and more sustainable ways to deploy our HPE GreenLake hybrid cloud solutions outside of the data center, we expanded our partnership with colo market leader Equinix, which enable customers to go from [quarter] (ph) production in days by using our HPE GreenLake for private cloud enterprise stack. Two new HPE GreenLake for private cloud enterprise customers are global logistics solutions leader, Swisslog, and global media — global company [Media House] (ph). Swisslog chose HPE GreenLake for private cloud enterprise to help accelerate their automation of its warehouse centers with a cutting-edge on-premises private cloud that could provide rapid, secure and controlled service delivery. Media House, which owns more than 30 different news brands in Europe, wanted a modern on-premise private cloud to accelerate its digital transformation and better leverage data to attract and retain subscribers with a more personalized customer experience. HPE GreenLake will help the company achieve operational agility, mitigate risk and address IT skills gap and advance its digital priorities. At HPE Discover, we expanded our HPE GreenLake private cloud portfolio with HPE GreenLake for Private Cloud Business Edition, a new offering that allows customers to spin a virtual machine across hybrid clouds on demand. This new offer is an extension of a hyperconverged portfolio with automation and hybrid cloud software built into the private cloud solution. Early in the quarter, we previewed a new sustainability dashboard on the HPE GreenLake platform alongside a comprehensive portfolio of sustainability services designed to help organizations reduce the carbon footprint associated with the hybrid IT estate. Customers understand that the hybrid IT estate can be one of their biggest sources of operational emissions and have made measuring and reducing their carbon footprint business imperative. Driving the steady drumbeat of innovation strengthened our HPE GreenLake hybrid cloud value proposition for customers to extend our industry leadership, expand our total addressable market and position us well to accelerate the momentum across edge, hybrid cloud and AI in the future. We have been advancing our strategy for the last several years and even a very dynamic market environment, it is clear that our strategy, combined with strong execution and a terrific team set us apart. Our third quarter performance demonstrates the progress we have made to shift our portfolio to higher growth, higher margin areas that they are the most critical to customers as they continue to transform. Our pivot to software and services-rich businesses has led to new customer logos, greater recurring revenue, margin, earnings per share and free cash flow. This is why we are once again raising our non-GAAP diluted net earnings per share guidance. Despite a slowdown in some parts of the IT industry, our HPE team has executed our strategy, bringing differentiated innovation and a diverse portfolio to customers around the globe. This positions us to continue to win in the market and deliver for our shareholders. I’m very pleased to pursue these priorities more closely with Jeremy Cox, whom I appointed as our Interim Chief Financial Officer earlier this month. Jeremy is an experienced finance leader whose customer-centric approach, institutional knowledge and track record of operational excellence, sets him up well to serve in this role while we conduct an internal and external search for a permanent CFO. Jeremy will now discuss our quarter financial results in greater detail. So Jeremy, welcome. Over to you. Jeremy Cox: Thank you very much, Antonio. I’m honored to take on the responsibility of Interim CFO as we go through the process. I’ll start with a summary of our financial results for the third quarter of FY 2023. Antonio discussed key highlights on Slide 4. Let me begin with Slide 5, financial highlights. We’re actively diversifying our business mix towards our higher-growth, higher-margin portfolio of Intelligent Edge, HPC & AI and HPE GreenLake solutions. This pivot is clearly visible in the 120 basis-point year-over-year expansion of non-GAAP gross margins. We delivered a solid quarter within an IT market still under some pressure. Cycle times remain elongated and digestion of prior orders will continue to have some near-term impact. This has been particularly true in Compute and, to a lesser extent, in Storage. Despite these challenges, we delivered 3.5% year-over-year revenue growth in constant currency to $7 billion, which exceeded the midpoint of our Q3 revenue guidance. This figure included a modest amount of AI revenue. We do see several promising indicators that suggest stabilization. Antonio mentioned the sequential improvement in demand across our four product segments. We’re starting to see indicators that our largest customers are returning to the market. Intelligent Edge continues to increase revenues rapidly, both on a year-over-year and sequential basis and robust AI demand is evident in our as-a-service orders. Our non-GAAP gross margin rose 120 basis points year-over-year to 35.9%. This is off just 30 basis points from our high watermark of 36.2% last quarter. Our margin structure reflects the pivot of our business mix to higher margin, software-intensive recurring revenue, such as Intelligent Edge. The edge mix was up 450 basis points year-over-year. Our Q3 ’23 non-GAAP operating margin reached 10.3%, this is down 120 basis points sequentially and 20 basis points year-over-year. Sequentially, the driver was largely return of Compute operating margins to just below long-term target range of 11% to 13% after six consecutive quarters above the range. We expect the impact of Compute operating margin cyclicality on HPE’s operating margins to decline over time, as our revenue mix shifts towards our higher-growth, higher-margin businesses. Our Intelligent Edge business reached a record-high 29.7% operating margin. We remain focused on productivity and continue to expect revenue growth to outpace OpEx growth over time. Our solid Q3 and margin — revenue and margin performance led GAAP diluted net EPS to $0.35 and non-GAAP diluted net EPS to $0.49, which was up $0.01 year-over-year despite Compute cyclicality. It was also $0.01 above the high end of our Q3 guidance range of $0.44 to $0.48. Our Q3 free cash flow was $955 million. We continue to return substantial capital to our shareholders, paying $154 million in dividends and repurchasing $187 million in stock this quarter. We have now returned $831 million in capital to shareholders this year. Moving to Slide 6. Our as-a-service revenue pivot continues to show strong momentum. ARR reached $1.3 billion in Q3 ’23. The benefits of as-a-service deals we won in prior quarters are now appearing in our results, though, the large AI-as-a-service deals booked in Q3 have yet to reach revenues. Year-over-year ARR growth in constant currency has accelerated from 25% in Q4 ’22 to 31% — 38% and now 48% in Q3 ’23. The 48% growth is above our long-term 35% to 45% target and should be viewed as an indicator of our long-term momentum rather than as a new growth trajectory. The fastest-growing components within ARR year-over-year are Storage and Edge. We continue to lift HPE GreenLake’s value proposition with an increasing mix of higher-margin, recurring software and services revenue. Antonio mentioned that in Q3, our software and services mix rose to 68% and should continue to increase. While this mix has traditionally tilted to services, software is now half of the total. In the future, we expect software growth to exceed services growth and for as-a-service margins to rise over time. To Slide 7. Our Q3 as-a-service order growth was robust. We’re pleased to have delivered 122% year-over-year order growth which has raised our cumulative as-a-service TCV to nearly $12 billion. The driving factor was AI demand. A significant percentage of our AI orders have come under the as-a-service model and the strength this quarter should also provide confidence in our long-term 35% to 45% ARR growth outlook. Order growth will fluctuate given the volatility of large as-a-service deals. Now let’s turn to our segment highlights on the next slide. And remember, all revenue growth rates on this slide are in constant currency. In Intelligent Edge, we grew revenues 53% year-over-year and 8% sequentially, delivering record revenues for a fifth consecutive quarter. Customers are increasingly adopting our software-centric solutions such as Edge Connect SD-WAN software and our Aruba Central management platform. We’ve expanded the Axis Security and SASE funnel to 6 times since the acquisition. Our operating margin of 29.7% was up more than 1,300 basis points year-over-year and 280 basis points sequentially. We’re benefiting from revenue scale and prior pricing actions, which are helping us build visibility into the durability of our mid-20% margin target over time. While we’re making progress on our order book, we expect to carry an above-normal order book into FY ’24. In HPC & AI, revenue grew 3% year-over-year. Customer discussions on large language models and generative AI that began in Q1 turned to wins in Q2 and are now showing up as as-a-service orders in Q3. AI, the predominant driver of our 122% year-over-year growth in as-a-service dollars has also driven sequential growth in our corporate total order book, which I’ll discuss in a moment. We expect AI deals to provide gross margin rates above historical levels. We believe building and operating large AI models requires unique computational capabilities, including silicon and software that our HPE Cray supercomputers and HPC & AI solutions are extremely well positioned to enable. As for operating margin, our Q3 performance was just below breakeven. The early stage of the AI market, tightness in certain key components and long lead times in this segment mean that operating margins in HPC & AI will continue to fluctuate. We’ll discuss our outlook for revenue growth, investment and margin improvement at our Securities Analyst Meeting. Storage fell 2% year-over-year but rose 3% sequentially. HPE Alletra revenue grew triple digits in Q3 for the fifth consecutive quarter. It is now one of our higher revenue products and thus growth rates may normalize. This product is shifting our mix within Storage to higher-margin, software-intensive revenue and is a key driver of our ARR growth. We’ll continue to invest in R&D and our owned IP products in this business unit, such as our new file-as-a-service and HPE Alletra MP offerings. Q3 ’23 operating margin of 10.7% is down 360 basis points year-over-year as we transition to HPE Alletra. HP Alletra includes a meaningful component of ratable revenue, which pushes revenue recognition out into future periods. Compute revenue was down 10% year-over-year to $2.6 billion and down 5% sequentially. Deal elongation challenges we’ve discussed previously were most prevalent in the Compute business as some customers digest prior investments. Declining AUPs from a record high in Q1 ’23 was also a significant driver. But, as previously noted, we did see sequential demand improvement. And after six quarters of above plan operating margins in Compute, this quarter’s 10.9% was a shade below our long-term margin target of 11% to 13%. HPE Financial Services revenues rose 7% year-over-year and financing volume of $1.7 billion grew 6% in constant currency, driven by HPE GreenLake. Our operating margins were down 340 basis points year-over-year, reflecting rapid interest hikes and higher cost of funds that will gradually offset over time through pricing, as well as lower asset management margins as supply challenges ease. Time and time again, HPE FS has proven resilient in a downturn, thanks to the quality underwriting of our book of business. Throughout the pandemic, our annual loss ratio never exceeded 1%, and our Q3 loss ratio of 0.48% was even lower than it was in the full year 2019 pre-pandemic. Slide 9 highlights our revenue and non-GAAP diluted net EPS performance. The progress we’re making against our edge-to-cloud strategy is evident in the financial results we delivered on both the top and bottom lines. We’ve held our revenue steady this quarter and expanded non-GAAP diluted net EPS year-over-year despite an uneven spending environment, our transition towards a recurring revenue model and FX rates remaining a significant headwind. FX was a 280 basis point headwind to revenue growth in Q3. On Slide 10, we’ve included a new depiction of our portfolio shift, which illustrates just how significant the Intelligent Edge business has become for HPE. Even three years ago, Intelligent Edge constituted just 10% of revenue, and this quarter, it represents 20%. Operating profit trajectory is even more dramatic. Edge contributed just over 10% of operating profit three years ago and is now 49% of total segment operating profit. We will offer our forward-looking view at our Security Analyst Meeting. Slide 11 illustrates the progress we’ve made on our gross margin structure. Our Q3 non-GAAP gross margin is up 120 basis points year-over-year despite FX headwinds. Our year-over-year non-GAAP gross profit and margin growth show the success of our strategic portfolio pivot and the pricing actions HPE has taken. Slide 12 illustrates our non-GAAP operating margin, which was 10.3% in Q3. This is down 20 basis points year-over-year, also inclusive of FX headwinds, and 120 basis points sequentially. While the primary driver of the sequential decline was the return of Compute operating margins to near our target range, we also made certain targeted investments in the quarter to further enable our pivot. Our deliberate portfolio mix shift, pricing strategies and productivity focus put us on track to increase operating margin in FY ’23. On Slide 13, as previously announced, we exercised the put option on our shares in H3C and signed a put share purchase agreement that values our 49% H3C stake at US$3.5 billion. The next step in the process is to obtain the necessary regulatory approvals and to conclude certain conditions necessary for closing. We expect to conclude this process in the first half of calendar year 2024; although this time line could be further extended pursuant to the terms of our agreement. We intend to update our plans for the use of proceeds once the transaction closes. You can assume that we will use the same disciplined returns-based framework for evaluating investments, capital returns and maintaining an investment-grade credit rating that we’ve outlined in the past. Finally, we continue to benefit from H3C dividends in FY ’23. We’ll offer an update on our go-forward expectations for H3C dividend at SAM in October. Now to Slide 14. We generated $1.5 billion in cash flow from operations and $955 million in free cash flow. Our Q3 free cash flow improved by approximately $670 million sequentially and nearly $370 million year-over-year. Similar to our Q4 ’22 performance, we expect to generate significant free cash flow in the remainder of FY ’23 and are reiterating our guidance of $1.9 billion to $2.1 billion in free cash flow in FY ’23. The timing of receipts and payments plus inventory investments have held cash conversion cycle steady sequentially at 23 days. We expect to exit the year with a neutral cash conversion cycle. Now let’s turn to outlook on Slide 15. As we’ve mentioned, the broader IT market is still pressured. Macro uncertainty is affecting some of our end markets, yet customer investment is rising in others, such as Edge and HPC & AI. We believe our portfolio differentiation will continue to drive share gains in key markets. We are also entering Q4 with an order book that is more than 2 times pre-pandemic levels. Our order book has increased from more than 1.5 times pre-pandemic levels entering Q3, primarily on the strength of AI orders. The assumptions in our guidance, which incorporate our current thinking on the macroeconomic picture, demand, inflationary pressure, supply and FX rates remain relatively unchanged. We’ve indicated throughout the fiscal year that our financial performance is likely to be weighted to the first half of the year. We continue to view this as the proper framework for FY ’23. For Q4, we expect revenues in the range of $7.2 billion to $7.5 billion. We expect GAAP diluted net EPS between $0.36 and $0.40 and non-GAAP diluted net EPS between $0.48 and $0.52. We’re reiterating our prior fiscal year 2023 guidance of 4% to 6% revenue growth in constant currency. We expect FX to be a 300 basis-point revenue headwind from our previously communicated 250 to 300 basis-point headwind. In parallel, we also reiterate our expectation that margin strength from our portfolio mix shift will deliver non-GAAP operating growth of 6% to 7%. We’re reiterating our GAAP diluted net EPS guidance of between $1.42 and $1.46 due to tax rate differences and additional amortization of intangibles from our recent acquisitions. We’re raising our non-GAAP diluted net EPS guidance from between $2.06 to $2.14 to between $2.11 and $2.15. We reiterate our guidance for free cash flow of between $1.9 billion and $2.1 billion. For OI&E, we benefited this year from higher interest income and FX hedging costs lower than we originally forecasted. The combination of these and other anticipated benefits in the second half of this fiscal year leads us to expect OI&E to be a positive $50 million to $70 million on a full year basis. We had previously expected OI&E to be neutral for the full year. In terms of capital returns, we are maintaining our dividend and expect to return approximately 60% of free cash flow to shareholders via dividends and repurchases. So to conclude, the uneven end market demand thus far in FY ’23 is an opportunity for HPE to showcase our differentiated portfolio led by HPE GreenLake Hybrid Cloud, Intelligent Edge and HPC & AI, and we’ll continue to take the steps required to further accelerate the pivot of our product portfolio and our company towards faster growth, higher margin recurring revenues. We look forward to updating you with HPE’s outlook beyond FY ’23 at our Securities Analyst Meeting in October. Now let’s open it up for questions. See also 15 Highest Paying Countries for Economists and 10 Best Value Penny Stocks To Buy. Q&A Session Follow Hewlett Packard Enterprise Co (NYSE:HPE) Follow Hewlett Packard Enterprise Co (NYSE:HPE) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: We will now begin the question-and-answer session. [Operator Instructions] The first question is from Simon Leopold with Raymond James. Please go ahead. Simon Leopold: Great. Thanks for taking the question. I wanted to see if you could put the AI wins in the same terms you did at the analyst section you had in June when you told us you had $1.6 billion in awards. That was a combination of CapEx and recurring deals that would be spread out over a number of years. So, what I’m looking for is an update on that and how much of the AI are you expecting in that fourth quarter? And sort of what’s the timeframe for seeing the benefits? Thank you. Antonio Neri: Thanks, Simon. Well, all those deals we talked through came through. They were booked and the pipeline continues to be super strong. In fact, I will say the pipeline we came in, we exit is pretty much the same. So that means throughout the quarter, we booked those deals and we exit pretty much with the same pipeline we came in. So clearly, the momentum in the business is significant. But as you can see, our progress is showing up in as-a-service, which you saw the 122% as-a-service order growth, which is very significant, and that fuels our order book to be now more than 2 time than pre-pandemic levels, and we exit the HPC & AI quarter with the largest ever order book we ever had. Now we start now shipping some of those orders, those wins, but it’s long ways to go. And remember that there’s two components related to that. Number one is availability supply, which obviously in the AI space is constrained. Number two is the fact that when you deploy these deals, you have to install it and then drive acceptances, which means elongated times for revenue recognition. And then maybe in a specific win or two, there are other conditions related to the contractual agreements. So the net of this is that what we discussed at the end of Q2 and then during the HPE Discover came all through and then what I’m really pleased of is the quality of the deals we are getting. And I just referenced a half a dozen or so in my opening remarks to give a sense of the type of customers we’re winning to make sure you understand the proof points associated with that. And so, as we go forward, we expect this momentum to accelerate, but the revenue recognition will be different than the what I call the demand bookings in our systems because, obviously, that takes time. In any case, the other thing I will say is that one of the reasons why customers are coming to us is because we have a complete life cycle of solutions from training to tuning to inferencing. So, on training side, obviously, these are companies that develop their own language models, whether it’s startups or large unique customers. On the tuning side, which I believe will be — one of the biggest opportunity will be when customers use these foundational models that you can get in the market we’re going to offer over time, five unique of them in our AI public cloud instance. So they can tune those models with their data in a private, secure, responsible way. And then number three, which I’m really excited because it would be an accelerator of both Compute and Edge, is going to be the AI inferencing. And so all those three will move concurrently. And so you have to look at this not just the next quarter, but on a mid- to long-term basis, call it, two, four and then eight quarters. Jeff Kvaal: Thank you, Simon. Gary, could we have the next question, please? Operator: The next question is from Aaron Rakers with Wells Fargo. Aaron Rakers: Yes. Thanks for taking the question, and congrats on the results. I guess I wanted to build on Simon’s question a little bit. I think in the context of last quarter and what you had disclosed at the analyst event, you had also alluded to within that pipeline, large hyperscale cloud opportunities. I’m curious what are you seeing in that vertical? Should we expect that to further expand? Just kind of any context around the positioning within cloud where HPE Enterprise hasn’t really historically had a material footprint. Why are you winning in that — in those opportunities if they’re expanding? Antonio Neri: Yes, Aaron. So one of the opportunities we won in Q3 was a large hyperscaler. We haven’t even started building and shipping that. So that tells you the size of it. And we have further opportunities down as I look at ’24. The reason why they come to us is, number one, it’s because we have a unique amount of intellectual property. Think about it as an open ecosystem with our networking fabric, which obviously supports NVIDIA. We have a fantastic relationship with NVIDIA, but also supports other type of accelerators. And depending on the AI workload, it can be a mix and match. If you hear my comments, right, in some cases, we have NVIDIA GPUs with potentially AMD CPUs. In some cases, all NVIDIA, in some cases — in the case, for example, of the Aurora system, the Argonne Laboratory is actually all Intel. So that provides flexibility for customers whether it’s performance driven or supply driven over time. And the other one is because we have unique expertise in AI. Remember, we have been in AI for a decade. It’s just we have done it for unique discrete customers. That we’re building this system on a purpose base. But now this is why we entered the AI public cloud to democratize the AI for every enterprise — and that’s why we saw the growth in the HPE GreenLake as-a-service AI bookings, because they cannot build that themselves. And the other piece of this is the ability to consume this in a sustainable way. I think sustainability is becoming a key component because customers deploy AI want to make sure they control the carbon footprint with it. And then the data center services, which are essential to run this massive at-scale AI solutions. And then for the large language model companies, one of the things that attract them to us it’s not just all of the things I just said, it is the fact that working with us, they can get access to our route to market, so they can reach enterprises in ways potentially they couldn’t by themselves. So it’s a combination of multiple things. That they are all coming our way, I will say. But ultimately, our strategy is a software-led strategy using our supercomputer as a cloud kind of experience and then wrapping around all the services and the software needed to provide that level of capability. Jeff Kvaal: Thank you, Aaron. Gary, could we have the next question, please? Operator: The next question is from Meta Marshall with Morgan Stanley. Please go ahead. Meta Marshall: Great. Thanks. Maybe taking a second on the Intelligent Edge business. Can you just kind of give a sense of what is the biggest forward driver that you’re seeing? I think people understand kind of the catch-up spend and the backlog release that has been done, but just what you’re kind of seeing in ongoing kind of orders today? And is that Wi-Fi 6? Is it still kind of return to work? Just what are the biggest drivers that you’re seeing to kind of help continue the growth of that business? Thanks. Antonio Neri: Well, thank you for the question. I’m incredibly proud of the work we have done in the Intelligent Edge business segment. This is the opportunity I highlighted in 2018, where I said we will invest over the next four years to build the right solutions that ultimately will allow customers to drive what I call a data-first digital transformation. So, it’s a combination of things: number one, return to work, obviously, you need to have the right connectivity; number two, in order to process the data, you need to connect devices and things that are essential, right, in order to provide the right cloud experience on those types of workloads and applications. But our portfolio is unique because we provide edge to cloud networking capabilities. Our strength obviously has been always in the campus and branch. We see that to transition to Wi-Fi 6. In fact, we shipped more than $30 million ports so far with Wi-Fi 6. By number of access points and ports, we are one of the largest, if not the largest, I will say. And also now that drives the 26 million ports we drove in the switching side, which was the thesis when I acquired Aruba in 2015. Over time, we have made these all cloud native and we have added to it. And so, as we look forward, what I’m excited is that we are delivering more capabilities and expanding our time with the same experience. So, we added Software-Defined Wide Area Network. Three, four years ago was a niche market, now is a very large market more than $5 billion in the TAM, and that’s why we did the acquisition of Silver Peak. Now that’s integrating the same control plane with HPE GreenLake as a part of the Aruba experience. And now we just completed the acquisition of Axis Security. So it takes Axis Security and Silver Peak. Now we’re going to offer the most comprehensive SSE framework at the edge. And then also we are integrating Athonet, which provide both core 5G software-defined solutions and private 5G at the edge. All of this comes under a cloud native model in a subscription based model, which will continue to fuel the growth as we think about ’24 and ’25. Bottom line, it is one of the most comprehensive portfolio out in the market and no surprise obviously with the growth we have, obviously, we are converting more of our order book. But we exited Q3 and we expect to exit Q4 with a significant elevated order book in — as we enter ’24. And you can see the results right now represent 20% of the company revenue and almost half of the company profit. And so, the mix shift had really worked for us in this particular part of the portfolio as it is now with GreenLake as well. Jeff Kvaal: Thank you, Meta. Gary? Operator: The next question is from Asiya Merchant with Citi. Please go ahead. Asiya Merchant: Great. Thank you for taking my questions. If you can — storage was up sequentially, which was a positive and it seems like the HPE Alletra is getting traction. As you think about the fourth quarter — the fiscal fourth quarter, if you can provide some guidelines on how you’re thinking about your storage portfolio, both on the top-line as well as when you think margins kind of get back to, I think, the target margins, which are much higher than where they are right now? Thank you. Antonio Neri: So, let me start and I will pass it to Jeremy. The team and I drove an intentional strategy to pivot that portfolio, which was a conglomerate of different offerings that we built over 15 years or so to one consistent architecture that allows customers to consume data services, both primary and secondary in a cloud-native way and a subscription-based model. So, HPE Alletra is our primary storage that now covers pretty much all the price segments of the price bands, if you will, of the traditional storage from general purpose to business critical to mission-critical. And we address block and file. And in the future, we’re also going to address the object piece. So as a customer, you can now subscribe to HPE GreenLake, deploy one consistent back-end infrastructure, whether it’s in a colo, or the edge, or in your own data center and consume hybrid cloud data services. And you can put block type of solutions or file and then eventually object, which is a significant CapEx reduction for customers because they don’t have to buy three different ways to deploy it. And an OpEx reduction because obviously, it’s very efficient to manage in a cloud type of experience. And so, this business went from zero to in excess of $1 billion very, very quickly. And it’s amazing that it’s one of the fastest-growing products in our portfolio, growing triple digits. But what I’m really pleased is that it comes with a significant subscription, which is growing double digits. So maybe, Jeremy, you want to take the second part of the question, how we see this evolve, in particular from a margin perspective. Jeremy Cox: Sure. And that’s where I’ll pick up, Antonio, it was on Alletra. I think we’ve previously talked to you guys about how this product is really a combination now of a higher software component and that software component does have an element of taking what was prior product revenue and now deferring that onto the balance sheet, about 14% is deferred onto the balance sheet. And so, as we see that work off over time as that product is deployed out, we’ll start seeing an inflection point, and that should positively impact revenue as we look forward, particularly into FY ’24. And that also has an impact on the margin line, too, as that deferral is deferring software-based revenue that has a higher margin concentration to it. So we would expect to see our operating margins start to recover back to kind of historical levels as well as we look forward to ’24. Antonio Neri: And as Jeremy said, right, so there is a specific component is ratable here. So, we are going through that transition. But for two consecutive quarters, we saw demand improving, Q1 to Q2 and Q2 to Q3, and that’s very positive. And we expect that to show up as we go forward as we transition those orders into revenues. Jeff Kvaal: Asiya, thank you. Gary? Operator: The next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi, thanks for taking my question. I guess you mentioned a couple of times in your prepared remarks about the cyclicality in the Compute business, which is a headwind. Maybe if you can outline your thoughts on where we are in the cycle? Is there more downside to revenue and margins as we move into fiscal fourth quarter? Or — you did reference a demand improvement. So I’m just sort of curious, does it imply fiscal 3Q is sort of the near-term trough here in the business. And more broadly, if I can ask like questions that investors are asking us today is how much of the demand improvement that you’re seeing going into fiscal ’24 helps you offset the tailwind that you have this year from backlog and still enable you to grow in fiscal ’24? If you can share any early thoughts on that? Thank you. Antonio Neri: Sure. So first of all, I think it’s important to recognize that the traditional general-purpose Compute business goes through these cycles, right? Last year, we obviously have got a significant demand uptick because of the supply chain challenges. Customers are absorbing that, in some cases, we still need to deploy some of those products and the like. But we saw signs of stabilization and we saw demand improvement at the unit level, which is super, super important because demand in the unit level also drives attach. And as I referenced in my remarks, that unit demand together with the storage demand and obviously, the acceleration we saw in HPE GreenLake drove double-digit growth in operational services, which obviously is important as we think about ratable revenue and profit as we look into the future. Now we have this unique expectation of the company because in the past, we wanted to give you visibility of what is general-purpose compute and what is HPC and supercomputers. But when you combine the two is what I refer to the server category. Because in the end, there is a server component associated with that. And there is different IP you bundle depending it’s a general purpose or a supercomputer. And the combination of general-purpose compute, as you refer, and HPC and supercomputers demand clearly improved very nicely quarter-over-quarter. I think as I think about 2024 as a server category, I think you’re going to see the continued improvement in demand on HPC & AI. I think the AI inference related to Compute will be announced to the rate for Compute. And then we have to see the evolution of price in the commodity space, which you will expect some time in ’24. That curve will end up again because as demand stabilize and improves, cost of commodity will start going up. And remember, we also have a tradition in the making from what I call Gen 10 and Gen 10.5 to Gen 11. And Gen 11 also comes with a higher, we call it, product intensity. So as more options and the options come with larger memory and larger type of storage and obviously more GPU embedded in the traditional compute will drive, over time, AUPs up. I don’t know if Jeremy, do you have anything to add. Jeremy Cox: Maybe I’ll pick up on the margin side of it, Antonio. Obviously, in these cycle times, we’ve — I think we’ve proven that in down cycles where commodities are declining, causing declines in AUP. We’ve been able to hold pricing to drive margin. And then as it inflects back and turns back up, we’ve been able to be leading market leaders on pricing to make sure that we’re catching it appropriately on that. So our expectation is as that changes throughout this process, on top of the point that Antonio made about Gen 11 really driving an AUP premium for us, which can also be an impact. We still expect that 11% to 13% operating profit, structural range to be reflective of what our longer-term expectations are. Antonio Neri: But let me reinforce one important point because if you go back two years or three years, whatever was the cyclicality at the time, we will have a different dynamic in our total company revenue and profit. I want to reemphasize that because of our mix shift to edge, hybrid cloud and now AI as we go forward, which always expect margins to improve. The strong performance we had in that mix shift more than offsets the cyclicality we saw in Compute, which is very evident in our Q3 results because our margins improved again, 120 basis points. If you go back two years ago, our margins at the company level were in the 33%-s, in 2022, we’re in the 34%-s, and in 2023, we are in the high 35%-s. And so that tells you that structurally, our business composition is shifting, and we intend to continue to drive that mix shift. And that’s why software and services with Intelligent Edge and hybrid cloud and now AI with our software-led strategy, we’ll continue to sustain that. And we will be able to manage the cyclical Compute much, much better. Jeff Kvaal: Thank you, Samik. Gary, could we make this our last question, please? Operator: And our final question will come from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes, thank you. Antonio, you’re exiting this year with a high single-digit decline in revenues and Edge clearly is doing extremely well and some benefit from backlog. How confident are you that HPE can grow revenues in fiscal ’24, given the current exit trajectory of the business? You also noted some stabilization. So curious to get just some high-level thoughts, not explicit guidance, maybe, but just some directional commentary on how you could see that playing out. Antonio Neri: I think your comment is related to Q4, right? So obviously, we are going to lap a very high quarter because last year in Q4, we were able to convert more of that order book related to the fact that supply started improving in Q4, and you saw that in Q1. So to me, it’s just a lapping of the numbers. But that said, we’re going to talk to this at the Security Analyst Meeting, we expect revenue to continue to improve in fiscal year ’24. We’re going to tell you exactly what that will look like. But I will say that while revenue will improve year-over-year, and remember, in Q1, we’re also going to have a big lap because Q1 revenue was $7.8 billion, the fact of the matter on a yearly basis, right, this year, we are growing 4% to 6%. And Jeremy talked about the headwind we saw in the FX, which is now 300 basis points. So, we are growing faster than what we guided you at the beginning of the year, which was 2% to 4%. We are now growing 4% to 6%. And we expect our revenue to continue to improve because of these momentum we have in the businesses, but we’ll guide you a specific percentage at the Security Analyst Meeting. But the other important part is that the mix of our revenue is changing, and the gross margin mix is changing, and also the way we generate free cash flow is changing. And so, more to come when we talk at the Security Analyst Meeting, okay? I know that, unfortunately, you have to cover a lot of companies today, and I understand HP Inc. is about to start the call. I hope you can see from this quarter results how our strategy is working. We are delivering on our commitments. We always do what we say. And we are shifting successfully our portfolio. And so, despite some aspects of the market, being a little bit more challenged than others, we continue to grow revenue, we continue to expand margins, and we’ll continue to improve our net earnings per share on a non-GAAP basis. So, I’m looking forward to see you at the Security Analyst Meeting in October. We’re going to have it in New York, so it’s a little bit more accessible. So, I hope to see you soon. And if you have any questions, we’ll follow up with you offline. Thank you for your time today. Operator: Ladies and gentlemen, this concludes our call for today. Thank you for attending. You may now disconnect. Follow Hewlett Packard Enterprise Co (NYSE:HPE) Follow Hewlett Packard Enterprise Co (NYSE:HPE) We may use your email to send marketing emails about our services. 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Blink Charging Co. (NASDAQ:BLNK) Q2 2023 Earnings Call Transcript August 8, 2023 Blink Charging Co. misses on earnings expectations. Reported EPS is $-0.48 EPS, expectations were $0.48. Operator: Greetings and welcome to the Blink Charging Company Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session […] Blink Charging Co. (NASDAQ:BLNK) Q2 2023 Earnings Call Transcript August 8, 2023 Blink Charging Co. misses on earnings expectations. Reported EPS is $-0.48 EPS, expectations were $0.48. Operator: Greetings and welcome to the Blink Charging Company Second Quarter 2023 Earnings Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] And please note this conference is being recorded. I will now turn the conference over to your host, Vitalie Stelea, Vice President of Investor Relations. Sir, the floor is yours. Vitalie Stelea: Thank you, Ali. Welcome to Blink’s second quarter 2023 earnings call. Today, on the call, we have Brendan Jones, President and CEO; and Michael Rama Chief Financial Officer. The discussions today will include non-GAAP references. These are reconciled to the most comparable US GAAP measures in the appendix of our earnings deck. You may find the deck along with the rest of our earnings materials and other important content on Blink’s Investor Relations website. Today’s discussion may also include forward-looking statements about our expectations. Actual results may be different from those stated. The most significant factors could cause actual results to differ are included on page two of the second quarter 2023 earnings deck. Unless otherwise noted, all comparisons are year-over-year. Now regarding the Investor Relations calendar, Blink will be participating in the JPMorgan Automotive Conference in New York City on August the 10th. Barclays CEO Energy Power Conference on September the 5th through September the 7th in New York City, and H.C. Wainwright 25th Annual Global Investment Conference on September the 11th through September the 13th. And please follow our announcements for additional investor events in the future. I will now turn the call over to Brendan Jones, President and CEO of Blink Charging. Please go ahead, Brendan. Brendan Jones: Thanks, Vitalie. Good afternoon, everyone, and thanks for joining us today. Before we get into the good results from Q2, I would like to provide a quick refresher on Blink and our capabilities. Now Blink is the only fully integrated US full service EV infrastructure provider. And what that means is we control our own design, our own manufacturing, our network services. Our products have been designed to meet any charging needs and with best-in-class reliability. Now, in addition to all that, we are unique in the marketplace because we have diverse and synergistic revenue streams. Not only do we sell a variety of chargers and network services, but we also own and operate chargers with flexible offerings. In fact, whether we sell or operate them, there is virtually no difference from an operational standpoint. We use the same processes and contractual relationships to undertake commissioning, deployment, service maintenance and uptime monitoring. Overall, we believe that our vertical integration and ability to drive synergistic revenue streams provides us with a competitive advantage and positions Blink for sustained growth and improved profitability as we continue to scale the business. So now let’s transition and let’s talk about the performance during Q2. If we move to slide six, we are pleased to say that we delivered a record quarter far exceeding any previous quarters in Blink’s performance history for the company. Our second quarter 2023 revenues increased nearly three-fold to $32.7 million when compared with $11.5 million in the second quarter of 2022. Our second quarter revenue growth of more than 100% was almost exclusively organic and was driven by strong demand for our products and an unprecedented growth in services. On our service revenue increased by 211% to 7 million and our charging service revenue increased almost 200% to 4.4 million compared to 1.5 million in the second quarter of 2022 Now that is nearly a $3 million increase in revenue at a 68% gross margin, which includes the depreciation expense and importantly, our network fees, which are recurring in nature, increased by an impressive 253% to 1.7 million.. Blink’s ability to generate high margin revenue that is reoccurring in nature is another solid building block as we move towards achievable towards achieving profitability. Now, Blink’s companywide gross margin in the second quarter of 2030 was another absolute record coming in at 37% compared to 17% gross margin in the second quarter of 2022. Our strong revenue margins in service definitely helped here. However, the majority of the positive margin came from blink manufactures, chargers sold during the quarter and our efforts in the areas of expense management, cost avoidance and our manufacturing process. As we scale our business and increase volumes, we believe we can do even better. Our margins will continue to improve as we move forward. In the second quarter, we contracted, sold or deployed 5830 chargers globally and is important to mention here that DC fast chargers are an increasingly becoming a larger portion of our revenue mix. Blink Chargers dispersed during this quarter 16 gigawatts of energy across all of Blink Networks globally. Now, if we look even deeper, as you can see, the second quarter was Blink’s strongest ever and another record setting quarter for the company. We have been laying the groundwork to build our footprint and capture market share and customers for more than three years. This quarter is a testament to the success of our strategy and the strength of our business model. We believe that these positive results demonstrate that our strategy is working. Importantly, we are optimistic that as we focus on building EV, as the focus on building EV infrastructure intensifies, the momentum in our industry and our ability to capitalize on favorable market conditions will continue. We don’t view the results of this quarter as a one-off. Rather, we believe there is a tremendous opportunity to continue this momentum. With that in mind, if we flip over to slide six, you can see that we are increasing our revenue target for 2023. We are now targeting revenue in the range of $110 million to $120 million versus our previously stated target range of 100 million to 110 million. This new target is based on our current visibility of the marketplace, our pipeline and our sales backlog. We are also reiterating our annual gross margin target in excess of 30% for the full year of 2023, with expected margin accretion in 2024. Now let’s move over to slide seven. And this is a big topic. It’s achieving profitability and how this is a key priority for this management team. Today, we are announcing that we are targeting positive adjusted EBITDA run rate by December of 2024. We’ve waited to provide this target until we had visibility to provide a target as realistic and as attainable as possible. We have seen and are seeing the demonstrated success of synergies, vertical integration, proactive cost saving actions, comprehensive product portfolio and positive trends in the revenue backlog. We had a very positive second quarter, but we are not done yet. This team remains focused on further reducing our operating expense and burn rate through expense management, cost avoidance and revenue enhancement actions. In the second quarter of 2023, our operating expense increase related to significant growth since the second quarter of last year and also due to significant one-time charges which Michael Rama will detail for you later in this call. Over the past three years, Blink has acquired six companies. Since the beginning of 2023, we have identified and moved forward with more than 8 million in operating expense reductions. We will see additional reductions as we continue combining the functions and integrating the acquired entities into Blink. For 2023, we also expect additional ongoing expense savings for Sunsetting Legacy Networks and leveraging the newly launched Blink Network. Not only are we eliminating legacy networks like we just did with SemaConnect Network in June, but our new Blink Network is expected to require less maintenance and ongoing costs than some of our competitors with older and more fragmented systems. In addition, we have more opportunities in the G&A area, especially when it comes to streamlining functions under one ERP system and implementing shared services for core functions. Over the last few months, we have adopted a culture of continuous improvement, and this approach is becoming the mindset across our organization. We do not look at this approach as just a one-time solution, but as the embrace of a data driven, continuous, methodical and state and sustainable improvement plan throughout all aspects of our business. In fact, we have been working with one of the leading global consulting firms and identified numerous actions with a disciplined plan to achieve additional business savings and revenue enhancement strategies. We remain intent on our goal to focus on our core competencies, which include our intent to unlock the potential value provided by the spin-off of our car sharing business. We acquired Envoy in the second quarter and already identified over $1 million of Envoy yearly synergies from combining the two entities of Envoy and Blink mobility. We continue to execute on our plan to IPO Blink Mobility by the end of this year. Next, let’s jump over to slide eight and we can see the growth to date and the forecasted growth for electric vehicles and the EV chargers globally. We believe we are only at the beginning of this long runway. There are over 1 billion vehicles in the world today, with the auto industry adding anywhere from 70 to 90 million vehicles every year. Unless if less than half of those become electric by 2044, then the forecasted charger numbers are nearly 500 million chargers by 2040. And that seems very reasonable. And this represents global growth in excess of 30 times. When it comes to the US market, you’ll see on slide nine, you can see that the market is projected to grow to over 30 million chargers by 2030 and over 90 million chargers by 2040. This is approximately 100 billion in investment by 2040. We think it is especially important to note that according to McKinsey, PricewaterhouseCoopers or Bloomberg New Energy Finance, the vast majority of chargers, over 90% of them, are forecasted to be level two chargers and we agree with this assessment. The industry is still developing and it’s changed greatly over the last 15 years and it’s growing. A new debate now has started in which charging standard will become the predominant one in the US. Is it CCS or is it NACS? This question has been in the news recently as we saw significant numbers of OEM commit to NACS. Now, as it relates to Blink, we are happy to say that we are agnostic and we are able to provide and support whichever standard becomes predominant. We view the adoption of NACS as a positive development for Blink. We look at our customers and our segmentation by OEM. Tesla drivers are our number one customer group for level two chargers today, and this is partially due to the fact that Tesla is by far the largest market share of EVs in the United States. With our newly unveiled 240 kilowatt DC Fast Charger, which will support both NACS and CCS standards, we believe Blink is in position to capture additional sales and service revenue. Now if we pivot a little to DC Fast Chargers on slide 10, you can see that DC Fast chargers are growing part of our business with about 987 DC Fast Chargers contracted and sold in the first half of 2023 and about 10 million in revenue this year so far can be attributed to DC fast charger sales. Now let’s jump over to slide 11. You can see examples of our innovative product portfolio, which has advanced and flexible solutions for both level two chargers and high power DC Fast Chargers. With these offerings, we serve as both residential and a variety of commercial customers and are prepared for the increased demand, whether it be due to NEVI or natural inflections of customer preference for EVs. Let’s jump to slide 12. Within the last 12 months, Blink has contracted, sold, deployed or acquired over 5830 chargers, both domestically and internationally, bringing the total charge count for the company to nearly 79,000 chargers since Blink’s inception. 78% of the total company wide chargers is attributed to North America and 22% to international locations. Now on slide 13, we show a partial sampling of our customers. They represent well established commercial entities, multifamily complexes, planned communities, health care facilities, fleets and municipalities around the world. We are very proud of our contract with United Postal Service. And as a reminder, the contract goes up to volume of 41,500 chargers over the next three years and Blink has quite — been quite successful and these numbers are reflected in our financial results. Fleets are becoming a wider segment of our business as government and commercial enterprises are converting to EVs to save on operating costs. So with that, I’m going to turn it over to Michael Rama, our CFO. Michael, take it from there. Michael Rama: Thank you, Brendan, and good afternoon, everyone. Turning to slide 15, total revenue in the second quarter of 2023 grew 186% year-over-year to $32.8 million. In the six months ended June 30th, 2023, total revenue grew 156% to $54.5 million. Product sales in the second quarter of 2023 were $24.6 million, an increase of 179% over the same period in 2022. In the six months ended June 30th, 2023, product sales were $41 million, a growth of 143% over the same period in 2022. This was due to customers purchasing greater volumes of our L2 Chargers and DC Fast Chargers. Second quarter 2023 service revenues, which consists of charging service revenues, network fees and car sharing revenues, were $7 million, an increase of 211% compared to the second quarter of 2022. For the six months ended June 30th, 2023, service revenues were $11.8 million, an increase of 213%. The year-over-year growth was primarily driven by greater utilization of our chargers in the US and internationally. The increased number of chargers on Blink’s networks revenues associated with blink mobility, car share program and incremental service revenues from acquisitions. Gross profit for the second quarter of 2023 was approximately $12.3 million, an increase of 528% over the same period last year. As a percentage of revenue, gross margin was 37% in Q2 2023, compared to 17% in the same period of the prior year. For the six months ended June 30th, 2023, gross profit was approximately $16.8 million, an increase of 375% over the same period last year. As a percentage of gross revenue, gross margin was 31% compared to 17% in the same period of prior year. As Brendan mentioned earlier, our strategy of vertical integration and insourcing of manufacturing, as well as cost avoidance and cost optimization efforts have contributed to the continuous increases in our gross margins. Now, operating expenses in the second quarter of 2023 were $52.4 million compared to $23.9 million in the prior year period. The year-over-year increase reflects the increase in non-cash share based compensation of $10.6 million in Q2 2023 versus Q2 2022. Increases in non-cash amortization of intangible assets of 900,000 as well as operating expenses associated with the Q2 2022 acquisition of SemaConnect. Operating expenses in the six months ended June 30th, 2023 were $87.7 million compared to $40.5 million in the same period of the prior year. Please note included in operating expenses for the three and six months ended June 30th, 2023 are impact or the impact of additional non-cash share based compensation and a one-time non-recurring payment to our former CEO as well as the non-recurring bonus payment expense related to the performance milestones achieved by our CTO. The milestones relate to the design and launch of Blink’s recently implemented new network. We believe Blink’s new network will be beneficial well into the future as we sunset the legacy networks and onboard a significant number of new chargers. Our investment in the development of the Blink Network has already started to pay off with the elimination of the legacy semiconductor network in June of 2023 and with European networks currently in process of migrating. The key takeaway here is we incurred these expenses now, and by doing that, we reduced the ongoing operating expense moving forward that will directly benefit our bottom line and bring us closer to profitability and positive free cash flow generation. As Brendan mentioned earlier, we are focused and committed to further reducing our operating expenses and burn rate through expense management, cost avoidance and revenue enhancement actions. Adjusted EBITDA for the second quarter of 2023 was a loss of $13.5 million compared to a loss of $15.6 million in the prior year period. This is an improvement of $2.1 million year-over-year as we expect this trend to continue as we realize more business savings, as we mentioned earlier. In the six months ended June 30th, 2023, adjusted EBITDA was a loss of $31.3 million, an increase from a loss of $28 million in the same period of the prior year. The slight increase in the first half loss is attributable to the results in the first quarter of 2023. The adjusted EBITDA for the three and six months ended June 2023 excludes the impact of stock-based compensation, acquisition related expenses and one-time non-recurring expenses as I mentioned earlier. Now adjusted earnings per share for the quarter for the second quarter of 2023 was a loss of $0.44 per diluted share compared to a loss of $0.41 per diluted share in the prior year period. In the six months ended June 30th, 2023, the adjusted earnings per share was a loss of $0.92 per diluted share compared to a loss of $0.76 per diluted share in the same period in the prior year. Non-GAAP adjusted EPS is defined as adjusted net income, which excludes significant non-cash items such as amortization of intangible assets, non-recurring acquisition related and one-time non-recurring expenses divided by the weighted shares outstanding. Now turning to slide 16, you can see that sequentially we saw a significant increase in gross margins when compared with our historic results. This is primarily due to the high demand for our product, our ability to meet the demand and generally increased utilization. We previously shared our commitment to expanding our manufacturing capabilities to replace contract manufactured chargers with in-house produced units. That strategy is starting to pay off now. We have outlined a detailed roadmap to reduce operating expenses even further. In SG&A alone, we see further opportunities resulting from the combination of the four legacy companies that make up Blink today anywhere from IT and Network support to streamlining the ERP systems and processes around the globe. We have a well-defined plan and the team is laser focused on executing methodically in order to ensure sustained profitability and the target of achieving positive adjusted EBITDA run rate in December of 2024. There are still a lot of work ahead of us, but we are excited as we finally are seeing the positive financial results from our strategy and recent actions. And now I will turn the call back over to Brendan Jones for a few final comments. Go ahead, Brendan. Operator: Mr. Jones, I think your line might be muted, sir. Brendan Jones: Hey, sorry about that, folks. So to add to Michael’s points, we had a great quarter. We had maybe a monumental quarter with our strategy and our growth initiatives we put in place as we see them starting to be reflected in our financial and operating results. We knew this was not going to be easy and would require vision, significant investment, and I will say some difficult decisions. We have taken concrete actions and as Michael and I outlined, expense reductions, cost avoidance strategies and revenue enhancements. And we will continue to do so with a commitment to methodical and continuous improvement. As many of you know, this is a tough industry and we believe there is no other way than focusing on the fundamentals while also growing revenue and being innovative. That’s truly the success. Build the basics, focus on fundamentals, bring new product to market, increase revenue. And we truly think that our advantage is in our people and in our team. And we are willing to go against anyone in the industry with this team that is behind blank. So with that, that ends our formal comments. And I think we’re now ready to take some questions. Q&A Session Follow Blink Charging Co. (NASDAQ:BLNK) Follow Blink Charging Co. (NASDAQ:BLNK) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question is coming from Craig Irwin with ROTH MKM. Your line is live. Craig Irwin: Evening, guys. Thank you for taking my questions. So the revenues obviously really impressive, but I would say the gross margins are even more impressive. Can you maybe unpack gross margins a little bit for us? I’m going to guess there’ll be some naysayers out there saying, oh, one time, not going to happen again. Was there anything one time in there that gave us such a solid number? And you know, can I get better from here? You know, there, there are products in the market that I believe do actually have 50% gross margin, but they’re sold in much lower volumes these days than they were many years ago. Anything you can you can give us to help us understand the sustainability of margins and, you know, the potential for continued progress from this impressive level you met this quarter. Brendan Jones: Yeah, I mean, really as we stated in the previous quarter and we’ve continued to state as we control more of our own manufacturing. We’re starting to see margins improve and on our network services when we own and operate the state station, that is simply adding to the good news because the margin is considerably higher than what our target is of 30% for the full year. So what we have to make sure is we continue our efforts to sunset legacy products and reduce expenses associated with bringing on more and more of our blink built products, whether it’s from India or Bowie facility or coming out of our facility in Phoenix. So the key there to really maintain and make this sustainable is not to say, hey, well, all that focus on reducing costs that was a one-time thing. No, that’s a permanent part. Expense reduction is a permanent part of Blink, making sure that we’re efficient in everything we do is continuously important. And then building our own chargers, having a reduced cost on network fees, not paying expensive software development costs because we have it all outsourced, it’s all in-sourced at Blink. We have to double down on all of that. And as we continue all of those efforts, you know, you’re going to see our margins continue to improve. We’re going to stick with our 30% because we as you saw in Q1, we had a lot of legacy products we have to get through. We still have some of that, but so far, so good. And this is a disciplined approach. So I think all that wrapped together contributed to it and it’s also contributed to our success moving forward. Craig Irwin: Fantastic. And then a question directly related to the revenue side. The NEVI funding is starting to find its way into the market. Can you maybe shape for us what your participation is likely to be as far as, you know, subsidy funding over the next several quarters? Do you expect this to continue to support your growth rate and the overall level of demand for your products out there? Brendan Jones: You know, we’ve been successful with and without NEVI funding and we’re going to continue to be successful with or without that. However, we are targeting a number of states. We’re not going to be after all 50 states. We’re targeting other states. We’re targeting routes that we believe are highly accretive to high utilization. And we’re targeting states where they’re sticking and maintaining closer to the 80% to funding level. Some states are electing to go lower because the NEVI guidance only says you can do up to 80, but some states are going lower. We like DC Fast Charging, but also we’re we understand the cost associated with and the break-even point and the long-term return on sea that is associated with DC Fast Charging even if you get 80% funding for Navy. So we’re going to pick and choose and take what works for Blink. And right now you’ve got six, seven states in on an RFP, only one state out with winners, and they still have another round to do out of Ohio. So we’re at the very, very beginning of it. Craig Irwin: Well, congratulations, guys. This is a really very, very beginning of it. Well, congratulations, guys. This is a really impressive quarter. I’ll go ahead and hop back in the queue. Thank you. Brendan Jones: Perfect. Thanks, Craig. Operator: Thank you. Our next question is coming from Matt Summerville with DA Davidson. Your line is live. Brendan Jones: Hey, Matt. Matt Summerville: Thanks. Good evening. Nice quarter. A couple of questions. Can you maybe talk about I mean, you’ve discussed kind of all these things you’re doing from a cost standpoint, from a structural standpoint. Can you talk about, you know, savings realized to date? How much incremental you should realize in the back half of ’23? And just based on what you’ve identified at present, what that roll forward should look like into 24? And then I have a follow up. Brendan Jones: Yeah, I mean, as you saw we talked about. So just in 2023, we had some additional synergy savings that came in the back end of 2022. So when we focus on G&A, we did about another 8 million already and those are going to take effect. Some of them have been slightly realized. You’ll see some of those, some of them have severance associated. So they’ll the net effect will come in in Q3 and then in Q4. But then we have additional targets to get through. And that’s both from a G&N perspective and then from a vendor related. So every time we combine a network or reduce, we’re also sunsetting vendors. Now sometimes we have to cleave those vendors from our different business entities because they hold on to them like a security blanket. But what we’re doing is using universal systems for the globe and having the same system in England as we use in the US, the same in England as we use in blue corner in Belgium, in the Netherlands and India and everywhere else throughout the world. So that is going to go on. I’m not going to give you a dollar amount because we’re actually just getting into the forecasting phase on how much more we have to go on synergies. But it’s going to be a continuation cost avoidance and cost reduction is going to be a theme in the company. And I think that’s the big takeaway. It’s not something we do when we’re trying to hit a number. It’s something we do as a business. Now we’re going to have to do continuous improvement every day, every week, every month, every quarter in order to make this company one of the best in the industry. Matt Summerville: Then as a follow-up. I’m curious you talk about reaching EBITDA, adjusted EBITDA positivity on a run rate basis by the end of next year. Should that also coincide with free cash positivity? And in that regard, how should we be thinking about your capital needs between now and when you achieve those milestones? Thank you. Brendan Jones: Yeah, so it’s a great question. We see free cash flow manifesting later in 2025. We’re not going to give guidance on that yet, but there will be a need for some additional cash raises as we move forward. As we’ve stated many times, we’re looking at all instruments available for Blink from funding, whether it be debt, equity raises, convertibles et cetera. Michael Rama, the CFO, is focused with Vitale on that every day on where additional capital is going to come from. But also we’re going to get a lot of that capital simultaneously from continues to increase revenue. If you look at revenue, we keep increasing revenue by over 100% over the last three years and we see that trend continue. So as we continue to reduce expenses, continue to bring new products and increase revenue and bring in some additional capital, as we said, with EBITDA, we see that in December 2024, then we’ll see cash free, cash free positive flowing. Right after that, there will be a raise that helps us get there. Matt Summerville: Thanks, Brendan. Operator: Thank you. Our next question is coming from Sameer Joshi with H.C. Wainwright. Your line is live. Sameer Joshi: Thanks. Hey, Brendan, Michael. Congrats on all the progress. Just getting a little bit granular on the 5800 plus units installed. What proportion of these were DC Fast Chargers and also what proportion of these were owned versus deployed at other locations? Brendan Jones: Yeah. So I’ll tell you on DC Fast Chargers it’s significantly less than 5% of the total. When you look at the 5000 number for the quarter and then you look at 10,000, I mean roughly 1000, I’ll average it up. DC Fast Chargers that have been sold and deployed this year. It’s a fractional number at best. So it continues to be a small percent. What we’re goal right now is we want to get DCs to 5% of the portfolio and then push it up from there. But when we do DC, as an owner operator model, we want to continue to make sure we get funding to put them in the ground. When we do it as a sales model, it’s a different thing. We get a high margin on the product and you know and it also contributes greatly to revenue. Michael, do you have the split for last quarter on owner operated versus sales? Michael Rama: Yeah, you know, we’re still tracking where I don’t have the specific numbers, but we’re still tracking where still the product is still outpacing obviously the own and operate, but own and operate is still is hanging tough. It’s a good area to be in. We’re still obviously you see our own and operate. You know charging revenues continues to increase in Europe especially. So our split on revenues 80/20. We’re still we’re not in that proportion and selling the units, I’d say we’re still closer to 60 or 65 to say 35% on the product sale side of it. Brendan Jones: But we want to you know, just to add to this point, because I think it’s a great question. We want to make sure that everybody understands to a degree it makes no difference. The support structure, whether its owner operate or will we sell a charger, is the same. So there’s no duplicated systems. You know, if we sell it, we follow the same process. If we own and operate it, we sell it. Now, the capital distribution is different on it, but the system is the same. So we’re going to take revenue in the space where revenue exists and we’re never going to say no to our customers whether they want to buy a charger or an owner operator charger. And I think that is our uniqueness. We’ll be exploited to both models. Owner operator or sales. Sameer Joshi: Understood. Thanks for that. In terms of the one-time charges or expenses this quarter, I just want to understand the 11.663, that’s the stock based comp. And then the 11.632 is the one time recurring expense. The one-time recurring expenses are also stock related, but for the previous year. Is that right? Brendan Jones: In the stock based? Yeah, the stock based comp includes about close to 6 million in the, I’ll call it, there’s part of the separate settlement. There was shares that had to be issued. There was acceleration of share based expense that had to be accelerated into the quarter. So that is reflected in the actually in the share based comp line. And then the 11.6 is relative to the I’ll call it the cash portion of the consideration that had to be done in Q2. Sameer Joshi: Understood. So once you exclude these one-time costs, the OpEx, what is the OpEx level? Is it closer to the 1Q number with some inflation or the question I’m getting at is when you say Q4 2024 EBITDA breakeven, are the costs at that level going to be comparable to today’s costs? Michael Rama: I’ll add that if you look at our Q1 operating expenses versus Q2, when you strip out the when you strip out, I’ll call it, the several one timers plus included in Q2 was Envoy, the new acquisition. When you strip those out to be onapples to apples basis, our OpEx expenses for the Q2 was about half a million or so less than Q1. Remember, as Brendan mentioned, we still had about we still have some severance and synergies that we’re flushing through in Q2. So and we continue to right-size those areas as we move forward. So I would look that not, you know, we continue to monitor each one of those areas. And I think I don’t want to say we want to look at Q4 as a proxy. We want to look at the business as a whole and continue to scale in the appropriate areas and make sense that duplication of efforts rightsizing and the right expense profile is adequate for the size company we’re expected to be as we keep going forward. Sameer Joshi: Yeah, I understood. I think second part of my question was just trying to get to, is there operating leverage in this with the current cost structure and that your adjusted EBITDA breakeven in December of 2024 takes that into account or not? Brendan Jones: Yeah, there’s definitely leverage in there. And obviously that’s part of the what we’re looking at is part of the leverage comes going to come from the consolidation and of the networks for networks down to one and then the vendor related to that support of that system. So there’s definitely going to be scale in one ERP system and a shared service that we’re going to be able to imply and push through to the entirety of the company, not just in the US but internationally as well. Sameer Joshi: Understood. Great. Thanks a lot and congrats once again on all the progress. Thank you. Brendan Jones: Thanks. Operator: Thank you. Our next question is coming from Chris Souther with B Riley. Your line is live. Christopher Souther: Hey, guys, can you give us a sense as to the revenue cadence for the rest of the year? I mean, if you put up the same revenue you had in 2Q for third and fourth quarter, it seems like you’d already be at kind of the high end. And typically the revenue is kind of grown throughout the year. I just wanted to get a sense of how you guys were thinking about seasonal cadence for this year, if there was anything different going on. Brendan Jones: Michael, you want to hit it first because I couldn’t hear all the question. Michael Rama: You know about the — just start out obviously as you do the math you’re right it seems to be a, you know, closer to the top. We’re being conservative, right. Because obviously as we move forward, we’re, you know, we’re reflecting anything that, you know, certain unknowns that we’re not aware of. But we see a strong pipeline, we see a strong backlog. And, you know, we’re just like to be a bit conservative, to be honest. Right and we feel that this was the appropriate level to come out with at this time. Christopher Souther: Got it. Okay. And then can you give us a sense as to how much of the legacy product you still need to burn through, you know, product gross margins in the mid 40% range? I’m just kind of curious if there are any reasons that should come down in the back half of the year here or if that’s kind of a new good run rate kind of as a go forward? Brendan Jones: Yeah, you know, the estimates are that around 20% of the overall portfolio is going to be legacy products we want to work through. But we didn’t do is rest on our laurels and just said, okay, we’re going to have to get it and we’re going to have a margin impact where possible. And we already achieved one result. We renegotiated some of the prices on the third party contracted chargers. We successfully did one significant group out of Europe. So they’re in there. But instead of as we begin to play through that remaining inventory and that use case, it’s going to have less of a negative impact and even to some degree a positive impact on margin as we play through that inventor. In the US, we are beginning to really start to play out of all thirdparty. Now we have some remaining in home chargers and some remaining L2s that came from our contract manufacturer. But you know, we’re going to see most of those wiped out by the end of the year and they’re less than 10% right now of the overall inventory that’s coming through. So we feel we feel pretty good there. There’s still some work to do, but we’re focused on it where we can renegotiate and get a lower price. We’re working on that as well. But you’re going to our goal is to get clean on all legacy equipment moving into 2024. Christopher Souther: Okay. And then just last one last earnings call. You provided some color around the top 50% of your Blink owned charging network. The utilization being, you know, double-digit percentage. And you talked about more metrics for the full fleet forthcoming. I just want to see if there was any update you could provide there. Brendan Jones: Well, I mean, yeah, it continues to be good. And you know, on the owner operating model, especially on the L2 side, you know, three years ago we reinvented the system in which we placed chargers on the owner operator model. And ever since we did that and undertook that very methodical, data driven approach, you know, the overwhelming majority are in 15% or higher of utilization of those, and that is showing in the charging revenue that we’re happy we use that same model in Europe to predict optimum locations as well. And as you can see by the numbers, the utilization numbers are increasing there. And when you talk to owner operator, you know, that’s the key thing. You know, if you know, we don’t believe in a philosophy where you have an obligation to put a charger in where you’re not going to get the utilization, if we own and operate it, we’re only going to place it in where someone we know that it’s 15% or better and we’re break even at 10% utilization on every L2 installation on DC, you got to get 20 or better to start getting into positive station economics. But you know, on L2, we’re starting to hit home runs. We’re going to continue to drive that as we move forward. Christopher Souther: Appreciate it. I’ll hop in the queue. Thanks. Operator: Thank you. Our next question is coming from Stephen Gengaro with Stifel. Your line is live. Brendan Jones: Hey, Stephen. Stephen Gengaro: Thanks. Good afternoon. How are you? Brendan Jones: Doing great. Stephen Gengaro: Good, good. Well, thanks for taking the question. So curious your sort of updated thoughts on this. When we think about charging in general, just kind of from a big picture perspective and you think about level two versus DC Fast, how do you think the market evolves? I mean, everybody’s talking about NEVI, but how do you think sort of the habits of drivers evolve as far as demand for DC charging versus the demand for level two charging in urban areas, etcetera? Brendan Jones: Yeah, I mean, it’s a great question and it’s been out there in the industry for a long time. But the one thing that hasn’t changed is the percentages. When you look at driver experience and you come back with, well, 80% of my charger is on an L2 or 90%, and then you look at the use cases when you include commercial fleet and 90% of the charging is predicted to be L2, the driver experience becomes if they’re going on a trip DC Fast Charger, if they’re somehow in the major metros and they didn’t charge they need a DC Fast Charger. But the economics and if you were going to hit these 30 million chargers that need to be installed by 2030, it’s the most economical way to do it is L2 and take advantage of where the cars sit. And that math proves true in the ownership experience. They go, well, I’d much prefer to plug in when I’m sitting at the doctor’s office and I’m there for two hours and the expense the kilowatt dispensed is at a cheaper cost. When you look at what it takes to charge a Porsche Taycan on a 350 kilowatt charger and you’re talking 90 plus percent of kilowatt hour, the economics don’t work out. That person is only going to want to use that charger if it’s the last resort. And that’s on a trip going to grandma’s house, do whatever. But if they got a charger in their multifamily dwelling, that’s a blank charger and it’s at $0.39 a kilowatt hour, they’re going to go to that. And charge up overnight people to be full. Stephen Gengaro: That’s helpful color. Just as we think about that. How do you think about Blink’s strategy, sort of behind that sort of a world we’re living in? Brendan Jones: I think what we need to do is continue to innovate and provide chargers and provide network service, expand as we move forward into more energy management, more load shedding opportunities as we expand into multifamily dwelling, as we do more fleet business et cetera. The ecosystem is going to expand in L2 and you’re going to see L2 starting to use battery back systems, which we’re doing in Florida on the DC level and in Philadelphia in a project. So we keep seeing we need to innovate. We need to keep the COGS low on our chargers and continue to reduce the cost of producing these, whether we’re producing them in India or whether we’re producing them in the United States. But that’s the key to us is that vertical integration. I don’t have added expense. I’m not going to a change order if I have third party manufacturing and I say I want this feature on it and I’m paying 40% more because it’s a third party manufacturer. I just go and get my guys to do it and we price it out and we make it happen. That is going to be what sets us apart. We can stay in front of commoditization where others cannot. Stephen Gengaro: Great. Thank you for the color. I appreciate it. Operator: Thank you. We have reached the end of our question-and-answer session. So I will now turn the call back over to Mr. Stelea for any closing remarks. Vitalie Stelea: Thank you all for your interest in Blink Charging. At this time, we’re going to end the call. You may disconnect. Operator: Thank you. This concludes today’s conference and you may disconnect your lines at this time and we thank you for your participation. Follow Blink Charging Co. (NASDAQ:BLNK) Follow Blink Charging Co. (NASDAQ:BLNK) We may use your email to send marketing emails about our services. 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Rivian Automotive, Inc. (NASDAQ:RIVN) Q2 2023 Earnings Call Transcript August 8, 2023 Rivian Automotive, Inc. misses on earnings expectations. Reported EPS is $-1.08 EPS, expectations were $1.41. Operator: Good day and thank you for standing by. Welcome to Rivian’s Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. […] Rivian Automotive, Inc. (NASDAQ:RIVN) Q2 2023 Earnings Call Transcript August 8, 2023 Rivian Automotive, Inc. misses on earnings expectations. Reported EPS is $-1.08 EPS, expectations were $1.41. Operator: Good day and thank you for standing by. Welcome to Rivian’s Second Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. After the speakers’ presentation there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Tim Bei, Vice President of Strategic Financial and Investor Relations. Please go ahead. Tim Bei: Good afternoon and thank you for joining us for Rivian’s second quarter 2023 earnings call. Before we begin matters discussed on this call, including comments and responses to questions reflect management’s views as of today. We will also be making statements related to our business operations and financial performance that may be considered forward-looking statements under federal securities laws. Such statements involve risks and uncertainties that could cause actual results to differ materially. These risks and uncertainties are described in our SEC filings and today’s shareholder letter. During this call, we will discuss both GAAP and non-GAAP financial measures. A reconciliation of GAAP to non-GAAP financial measures is provided in our shareholder letter. Just before the call, we published our shareholder letter, which includes an overview of our progress over the recent months. I encourage you to read it for additional details around some of the items we’ll cover on today’s call. With that, I’ll turn the call over to RJ, who will begin with a few opening remarks. RJ Scaringe: Thanks, Tim. Hello everyone and thanks for joining us today. During our call, I will highlight key developments during the second quarter and provide an update on the progress we’re making against our core value drivers. Production continues to ramp, which is translating into improved profitability and capital efficiency. We are also driving material cost reductions through commercial and engineering design updates, including the integration of our in-house dual motor into the R1 product line. We remain focused on the customer experience as we expand our physical, digital and mobile footprint and took important steps during the quarter to improve our charging experience. Importantly, prior to getting into the quarter’s details, I’d like to thank our employees, customers, partners, suppliers, communities and shareholders for their continued support of our vision. Consistent with our last earnings call, Claire and I will be inviting different leaders to join us each quarter. For this call, I’ve asked Wassym Bensaid, our Senior Vice President of Software Development to join given the critical role software plays in enabling our business and the ever improving and expanding capabilities and features of our vehicles. During the second quarter, we produced 13,992 vehicles, which represents a 50% increase compared to the first quarter. Importantly, approximately 70% of the R1 units produced during the second quarter were R1S vehicles. This represents the first time R1S quarterly production was higher than R1T production. Our team in Irvine has made strong progress during the first half of the year, maturing the manufacturing process of the R1S to the point where the build efficiency is essentially equal to the R1T. It’s also important to note the R1S is more profitable than the R1T. The ramp of our in-house Enduro Motor line remains a key enabler to near-term production performance. Due to our progress during the first half of the year, we are increasing our 2023 production guidance to 52,000 total units. Building on the successful launch of the in-house Enduro Motors for our commercial vans last quarter, we successfully integrated this motor into the dual motor variant of the R1 platform during the second quarter. This is an important milestone from a cost perspective and we’ll also be instrumental in expanding the consumer market opportunity for R1 vehicles. We believe the majority of our long-term R1 demand will come from dual-motor variants. These variants have pricing that starts at just over $70,000, extend up to 400 miles of range, reach 0 to 60 mph in as quick as 3.5 seconds, torque to 11,000 pounds and generate over 800 foot pounds of torque and 650 horsepower. We believe the dual-motor variants offer great value while providing high on and off road performance. The technology and clean sheet approach we’ve taken with the R1 product line has really enabled the uniquely differentiated product, the features, the attributes, the way the vehicle feels so special. And this is the result of thousands and thousands of tradeoffs we’re making between different pieces of content, the way we think about design, the way we think about technology integrating with that design. And of course the R1 product line was intended and is our handshake with the world. It’s our flagship product. And so as we’ve now been thinking a lot about how does that brand position that we’ve created for a product point of view integrate across the mosaic of all the other touch points we have as a company. And then of course into R2 those same, that same mindset and that same ethos is being applied of course in a smaller form factor and a lower price point. And having spent a lot of time with the teams and closely coordinating all these different trade-offs and sort of thinking about how does Rivian manifest at this lower price point with a smaller form factor, I can say we couldn’t possibly more be more excited about what’s to come with R2 and really looking forward to showing our product in the early part of 2024. It represents in much the same way that R1 rethought a segment, rethought a space, R2 takes that even further and stretches our ideology and our brand ethos really into such a great segment and such a large addressable market. Now on to our second quarter results, which reflect our continued extreme focus on cost efficiency as we accelerate our drive towards profitability. On a quarter-over-quarter basis, delivered vehicles grew by 60%, while gross profit per vehicle improved by about $35,000. We achieved meaningful reductions in both R1 and EDV vehicle unit costs across the key components, including material costs, manufacturing, labor, overhead, and logistics. Maintaining our cost reduction efforts through consistent focus and collaboration across all levels of the company is a core part of the culture we’re building. I also want to take this opportunity to highlight some of the progress we’re making from our partnership with Amazon. When designing the electric delivery van, we set out to develop a delivery van which offers a step change in safety, innovation, technology and of course, driver comfort. As of early July, there are EDVs in operation across over 800 cities in the United States. In addition, we recently initiated deliveries of EDVs to Amazon in Europe. It was a strong quarter and we remained focused on ramping production, driving cost efficiencies, developing future technologies and creating an amazing customer experience. With that, I’ll pass the call to Wassym to discuss our software development strategy. Wassym Bensaid: Thank you, RJ. It’s good to be here to discuss our software capabilities and the progress we are making. The impact of software is pervasive throughout the company. The most obvious and customer facing aspects of our software is what customers see and experience through their in vehicle digital experience, our over the air updates and the Rivian mobile app. Our priority here is to take feedback from our customers and enhance the customer experience, whether that’s through dry modes, comfort features, range efficiency or addressing other pain points that customers may experience. Over here I have actually been called the Chief Reddit Officer given my interaction with customers on the Rivian subreddit. Since launching our own platform in the fall of 2021, we have pushed 22 major software updates to our vehicles. These updates have been filled with features such as Birds Eye Camera View, Drive Cam, Snow Mode, Camp Mode, Bed Mode and much more, all designed to enhance our customers experience. Most recently this included the integration of a better route planner, which we expect to meaningfully improve our customers charging and routing experience. This technology will give our customers the ability to plan and compare charging stops along the way. It also provides us data to help with the site selection of our Rivian Adventure fast-charging network. And the road map we have is equally exciting. While I don’t want to share too much yet, over the next months you will see us launch a towing mode update including trader profiles, but camera views, adaptive range estimation and doing charge stations discovery and the navigation app. We also plan to launch drone mode, which will provide an immersive camera experience powered by our computer vision and augmented reality technologies. We believe that our software capabilities are a structural differentiator that will only grow in importance as electric vehicles continue to increase in complexity. Our unique capabilities stem from the intentional decisions we made years ago, when we decided to truly take a clean sheet approach to the software stack and electrical hardware in the vehicle. What this means is that we own the software stack and control nearly every single computer in the vehicle. We designed our software stack to scale to multiple hardware architectures, allowing us to rapidly support three product variants with the high level of code reuse across R1T, R1S and EDV. This modular platform approach is also enabling us to prepare a rapid migration to our next gen zonal electrical architecture, which brings increased levels of system integration and will allow us to achieve significant material cost savings thanks to the hardware consolidation. As I mentioned earlier, at Rivian software is foundational. It supports and optimizes functions throughout the company. What I just described was on the consumer facing side of our work. The work my team does behind the scenes is equally important. Our connected software architecture allows us to gather sophisticated data that provide powerful insights, enabling us to improve the reliability and safety of our products and reduce our service costs. It allows our service teams to perform remote diagnostics and assess the issues that customers may be experiencing well in advance. So we can determine when to deploy mobile service vehicles, what parts to bring, and in some cases even fix the issue through over-the-air software. This in-house platform also powers our manufacturing operations in the plant allowing us to have in line diagnostics that automatically detect potential assembly issues as the vehicle moves through the line and allows us to perform exhaustive electrical quality checks on our vehicles. This ultimately saves us time, improves quality, and improves efficiency during the manufacturing process. As a team, we’re excited about the work we do and the impact we are having. It’s not often that you get the challenge to redefine how an industry views software. We’re encouraged by the work we have done and even more excited about what’s to come. With that, let me turn the call over to Claire. Claire McDonough: Thanks Wassym. Second quarter results reflect the strong progress our team delivered against the operating plan we outlined earlier this year. As RJ mentioned, we remain focused on the drivers of long-term value for our business, ramping production, driving cost efficiencies, building future technologies and improving the customer experience. Turning to our second quarter results, we produced 13,992 vehicles and delivered 12,640 vehicles, which was the primary driver of the $1.1 billion of revenue we generated. Total revenue for the quarter included $34 million of proceeds from the sale of regulatory credits. We expect the sale of regulatory credits to increase over time, but to vary quarter to quarter. During the second quarter, we improved our gross profit per vehicle by approximately $35,000 as compared to the first quarter of 2023, representing a growth margin improvement of over 4400 basis points. The primary drivers include fixed cost leverage, the change in LCNRV inventory write downs and losses on firm purchase commitments, material cost reduction and increased revenue per vehicle delivered. Now going deeper into the material cost reduction drivers, after a full quarter of EDV production with the introduction of the LFP battery pack and our in-house Enduro Drive unit, we are now seeing a 35% reduction in material costs for our vans as compared to Q4 2022. Concurrently, we’ve seen and continue to see strong progress on our R1 material cost reduction through commercial cost down efforts and a reduction in short-term premiums. Total gross profit for the quarter was negative $412 million as compared to negative $704 million in the same period last year. Total operating expenses in the second quarter of 2023 fell to $873 million as compared to $1 billion in the same period last year. The primary driver of the reduction in operating expenses was related to lower levels of stock based compensation expense. We continue to rationalize our operating expenses despite significant investments in core in-vehicle technologies and the customer experience. Over the past year, we’ve expanded our physical and mobile service offerings, increased our demo drive capacity, developed and launched a new motor platform, expanded our Rivian Adventure network, built a parts distribution center and remanufacturing center and so much more. All of this was done while lowering our quarterly operating expenses by $131 million of which $89 million consisted of cash expenses. These are all forward investments that position us to capitalize on our direct-to-customer relationship and enable us to scale efficiently as our car park grows. Our gross profit improvements coupled with our operating expense rationalization resulted in $424 million of improvement in adjusted EBITDA as compared to the prior year. We ended the second quarter of 2023 with $10.2 billion in cash, cash equivalents and short-term investments. We continue to believe that our cash can fund operations through 2025 and with the addition of our $1.5 billion green convertible notes and the amendment and extension of our $1.5 billion asset base lending agreement earlier this year, we have strengthened our balance sheet as we approach the launch of R2 in 2026. Turning to our business outlook for 2023, we remain focused on ramping production and driving greater cost efficiency across the company. Based on the progress of our production ramp, including the ramp of our in-house motor, along with the latest understanding of the supply chain, we are increasing our production guidance to 52,000 total units. We have also seen strong progress in our cost down efforts and are improving our Adjusted EBITDA guidance to negative $4.2 billion dollars. Finally, we are reducing our capital expenditure guidance for 2023 to $1.7 billion due to a shift in capital expenditure timing. We continue to believe the average capital expenditures per year between this year and next year will be in the low $2 billion area. In closing, we have seen progress in all three aspects of our path to generate positive gross margin, ramping productions, driving material costs down and increasing average selling price. The substantial reductions in EDV material costs driven by the introduction of the LFP Pack and Enduro Drive unit is reflective of the material cost improvements we expect to experience with our R1 platform following the 2024 shutdown to reroute the R1 line to 85,000 units per year and introduce new technologies. This reinforces our confidence in our long term financial targets. We see a clear path to our approximately 25% gross margin target, high teens adjusted EBITDA margin target and approximately 10% free cash flow margin target. With that, let me turn the call back to the operator to open the line for Q&A. Q&A Session Follow Rivian Automotive Inc. / De (NASDAQ:RIVN) Follow Rivian Automotive Inc. / De (NASDAQ:RIVN) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Dan Levy with Barclays. Your line is now open. Dan Levy: Hi, good evening and thank you for taking the question. I wanted to dig in first on the gross margin improvement and I realize you said that you’re making progress on each of the areas that you flagged in terms of improved fixed cost absorption and material cost reduction. But maybe you can give us a little bit of a voice over, a little bit deeper color on how this is playing out? How much more ground is there in terms of renegotiating some of your supplier contracts? How much more upside is there on the pricing front? And any color on the path to being a contribution margin positive, which is a step in ultimately getting to total gross margin positive? RJ Scaringe: Thanks, Dan. Yes, this is a major, major focus for us as a business and something that across all aspects of product development or quality teams, our manufacturing teams we’re working towards. And as we look at unpacking is your question sort of dug into the gross margin improvements, a portion of it absolutely is the fixed cost absorption improvements that just are born out of the increased volume. But I’m glad you point out a really important element of this is also material cost improvements, so reductions in our bill of materials. And this is — what we’re seeing today is some of, but not all of the improvements that are coming. And as Claire said in her opening remarks, we’ve achieved roughly 35% reduction in material costs on the EDV program in conjunction with the shutdown that happened at the beginning of this year and we expect a similar level of reductions on R1 with the shutdown that’s going to be coming next year. But preceding that there’s a whole host of ongoing commercial negotiations, some of which were already beginning to feel and see on R1 and many of which are going to be coming. And I want to just call out a few of the points that I also made in my opening comments. A lot of the improvements in engineering that are going into the vehicle are to drive cost out. So one of the biggest areas is the improvements we’re making to the network architecture and consolidating a number of our ECUs into a smaller number of ECUs, ultimately a 60% reduction in the number of ECUs in the vehicle and along with that roughly 25% reduction in the wiring harness length in the vehicle. And so when we look at, you know, when we talk about the confidence we have around further reductions in cost this is not confidence out of thin air. This is confidence that ties to contractual obligations associated with these component changes as well as contractual obligations with our suppliers built into commercial negotiations. And we’ll continue to see significant improvements quarter-over-quarter in the cost structure to build our vehicles ultimately laddering up to the margin targets we talked about, the 25% gross margin target for our normal facility, for our normal vehicles produced in our own plant. And Claire, do you want to maybe just talk a little bit about some of the other aspects here around contribution? Claire McDonough: Sure. On a contribution margin basis, given the significant impact to our material costs on the EDV, the EDVs that we’re producing today are contribution margin positive, and then as we think about the R1, the R1 will be contribution margin positive by the end of this year as you heard from RJ through continued progress on supplier contract negotiations as well as some of the upside to price as we introduce the max pack variant later this year. Dan Levy: Thank you. That’s very helpful. And then just as a follow up, I think, one of the broader themes in the EV sales landscape today is just around demand and I think, there’s questions broadly around some weakness of demand. Maybe you can give us a sense, I know you’ve taken away the order backlog, but what confidence do you have that you are — that your backlog will sustain well into 2024 and that you’re going to be supply constrained for the foreseeable future? RJ Scaringe: One of the things we’re perhaps most excited about is just how well received the products have been, and the level of excitement we see from our customers and the folks that are driving our vehicles and we see that manifesting in JD Power awarding us the highest level of customer satisfaction within the EV space, within the premium EV space. But importantly, we see it through the day-to-day interactions we have with the owners of our vehicles, and they become the biggest advocates and essentially marketers, if you will, for our brand and what we’re building. With that said we feel very confident in the continued backlog that we have we have clear visibility into deep, into 2024 with that backlog, that’s established. And as more and more vehicles are on the roads and, we now have tens of thousands of R1s on the roads, it continues to feed the flywheel of awareness about the brand. And as I said some of our strongest advocates are people that are driving our vehicles every day. And so we we’re quite bullish on the continued strong demand we have for our products. Dan Levy: Great, thank you. Operator: Thank you. One moment for our next question, please. And the next question comes from the line of Adam Jonas with Morgan Stanley. Your line is now open. Adam Jonas: Hey, thanks everybody. My first question is on Tesla charging. As we know, there’s a kind of a two-way flow here where there’s power, there’s electrons going into the car, but then data coming out of the car to Tesla. So I’m curious, what data are you required to share or planning to share with Tesla as you join their charging network? Then I have a follow up. RJ Scaringe: Adam, thanks for the question. Yes, this is a, I think an exciting development just around the relationship that we’ve put together with Tesla, along with other manufacturers to utilize the North American Charging Standard event as a part of that access their charging network. And we continue to build out our Rivian Adventure Network and that will also have North American Charging Standard adapters or plugs I should say, on it. And that allows us, with our network to access a very large car park with the existing Tesla car park that’s out there, which gives us much clearer visibility to profitability of our charging network as well. But in terms of, specifically what occurs in terms of data transfer, there’s not any data transfer built into the relationship. So it’s a charging relationship whereby our customers will access the network and ultimately pay for the charging, and that will flow from us through to Tesla. Adam Jonas: Okay. Thanks for confirming that. And just to follow up on your ADAS strategy, you have Mobileye today, but we understand you’ll be adding your own camera based ADAS systems side by side with Mobileye on the same windshield. I’m just wondering how long you plan on having these two redundant systems together before you substitute out Mobileye and rely on your own in-house system? Thanks. RJ Scaringe: Yes. As we think about some of the key differentiating elements of what we’re building, of course Wassym spoke about our electronic stack and building our own network architecture and designing and developing all the core to use in the vehicle which is what facilitates and enables this significant reduction in number of ECUs in the vehicle that will be coming into play next year. In much the same way, we also deeply believe that controlling the sensor set the perception stack across the vehicle and allowing that to feed into our autonomy compute module, what that gives us is the ability to have really early fusion of information, meaning we can cross leverage information across multiple cameras, our radar set and in the future additional sensors as well to put us in the best position to have high quality perception information that feeds into our control algorithms. So with that as a, I guess, bit of a technical background on it, that’s the reason we’ve taken the view of owning the hardware stack and the software stack around our self-driving platform is going to put us in a position to create long-term the lowest cost system with early sensor fusion, and therefore the highest level of confidence from the perception stack feeding into the, feeding into the control control system. Adam Jonas: Okay. Thanks RJ. Operator: Thank you. One moment for our next question, please. And next question comes from the line of John Murphy with Bank of America. Your line is now open. John Murphy: Good evening, guys. I just, RJ I just wanted to follow up in particularly, because we have Wassym on the line as well, on that comment you just made, when we think about that Nextgen architecture, I can understand kind of what you’re, what you just talked about. Is there anything else from the software side or the functionality of the vehicle from the powertrain side or the HMI side that this Nextgen architecture allows you to do that you might not be able to do right now, and it might put you, out in front in the lead versus other vehicles? RJ Scaringe: Oh, sure. Well, thanks John. This is something we’re super excited about. It’s actually the reason we had Wassym join the call today so we could provide some additional color and commentary on the importance of software and how this is such a core aspect of our organization and built into every aspect of how we think about our vehicle platforms and architectures. Just to comment on, and I’ll pass it to Wassym for some additional comments, broadly if we wind the clock back many years, we took the decision to develop all the ECUs across the vehicle and so that’s, typically these are ECUs would be coming from Tier 1 suppliers, and those ECUs typically when they come from Tier 1 suppliers, they’re sort of embodied in that ECU is a set of functions and therefore of course a set of software applications and that mosaic in a traditional world, that mosaic of third party, Tier 1 sourced ECUs has to work together. And it’s a very cumbersome network architecture to work with and makes things like over the updates very, very difficult because coordinate, you have to coordinate across multiple different companies on a software platform and software stack that, you as the manufacturer would know. And so we felt very, very strongly that this is something that had to be cord us as a business. We built deep domain expertise in terms of our electronics development capability of course our software development capability. And that, of course, launched into the R1 product where we own the software stack, we own essentially all the ECUs in the vehicle. What that also does, in addition to allowing us to do lots of over the updates, and as you heard Wassym mentioned earlier, since the launch, we’ve had 22 major over the year updates, beyond that it allows us to look at cost optimization in a really unique way because a specific controller is not tied to a specific sourcing relationship or to a specific set of functions, but rather we control the controller and we control what’s on it. So over time, we’re consolidating the number of computers we have in the car to be significantly reduced. And next year that first step of that is a 60% reduction in the number of computers in the car relative today. Now that doesn’t necessarily directly create customer features. Of course, it takes cost out of the vehicle, allows us to operate with, we think, a significant multi-thousand dollar structural cost advantage relative to the traditional approach. But importantly, it also opens up opportunities to do some really amazing features where you can cross leverage compute, you can cross leverage perception as I referred to with Adam’s question. But Wassym, maybe if you can talk just a little bit about this, I know you said in your comments we don’t want to give away too much, but we, until late last night, Wassym and I were reviewing some of our software roadmap, and I’m so excited for the world to see the things that we have coming soon, Wassym maybe you can talk a bit about that. Wassym Bensaid: Yes, absolutely. I think really the core strength that we have is, we own every single computer on the vehicle. So we’re able to not only update the infotainment or the connectivity, but we can update the vehicle controls, we can update the vehicle dynamics, the energy management, ADAS, the way the vehicle drives, the way the vehicle navigates, communicates with the entire world. We’re able to create end-to-end unique experiences that really redefine the ownership with our customers and really create that regular connection with our community of customers. So we have those capabilities to continue enhancing the feature set. Through that complex integration, we’re also able to leverage on those skills, so that we can virtually distribute all these different software features into more constrained hardware platforms in the future, which will bring significant cost down and significant bill of material savings for us for the next generation. I think the last item that I really want to highlight and this is usually not very obvious. I think it’s really the role of software behind the scenes. It’s the entire connected data infrastructure that we have created where we not only collect data to help with product improvements, reliability improvements, safety improvements, but we’re also able to help with reducing the service costs for the company. We’re also helping with the acceleration of the overall manufacturing ramp. We’re also able to help with the improvement from a quality standpoint for our manufacturing. John Murphy: Yes. That’s very helpful. Can I just ask one last one just on the R1S was it 70% of the R1 mix in the quarter? Yes. I’m just curious how we should think about mix on the R1s going forward. Is the R1s going to continue to take a greater portion of the mix as that’s ramping up further and further or is this the kind of level set mix we should think about going forward? RJ Scaringe: Yes, John, it’s a great question. We commented on before up through the first quarter of this year we’d been producing in any given quarter, majority of vehicles were produced were R1T and the second quarter, this past quarter was the first time that R1S represented a majority of what we’re producing. And so, for the next quarter or two, we’ll be producing greater than, 70% plus of R1S to help address some of the really long backlog. And this is by far and away one of the biggest customer complaints we have, which is the amount of wait time associated with getting a Rivian today. So to bias a little bit towards addressing some of that, that very long painful backlog for R1S, but then with that steady state long-term settling into about 70% R1S production with the remaining 30% being R1T. John Murphy: Thank you very much. Operator: Thank you. One moment for our next question, please. Our next question comes from the line of Rod Lache with Wolfe Research. Your line is now open. Rod Lache: Sorry, I was on mute. Can you hear me now? RJ Scaringe: We can, Rod. Rod Lache: Okay. Sorry about that. Was hoping that you can give us a sense first of all on the bomb and advantage that you see from being able to acquire components with your own silicon and software? Presumably most of your peers are still buying, steering systems and braking systems, and ADAS systems and suppliers are generating some additional revenue for the, the engineering and software that they are adding. Is there a way to maybe talk about what this actually will ultimately mean for an R1 and R2 in terms of dollars per vehicle and when you’ll be sort of a more competitive than in terms of cost? RJ Scaringe: Yes, this is a great questions. It’s a bit hard to speak to from an apples-to-apples point of view. But what I’d like to do, just maybe look at two aspects of this. The first is, as you said, removing the Tier 1 as an aggregator of features onto an ECU, what you might often hear called a domain controller that removes that, that margin stacking effect. But importantly it allows us to optimize the way we design the hardware around what we’re delivering from a feature set point of view. Meaning we’re not taking a piece of hardware that’s been developed for a broad application across many to many different vehicles. Take like a body controller or a powertrain control module. So the first is just the optimization that occurs simply by it being specifically designed for us. But the second, and that, I’ve spoken to this a couple times here that I think is really, really important and very hard to do, if you don’t control the hardware in its entirety, is the ability to consolidate what are typically separate ECUs that are tied to specific function sets. And to be able to consolidate those ECUs into single computers that are really tying to a zone of the vehicle, like let’s say a front zone of the vehicle a middle zone of the vehicle, a rear zone of the vehicle. And that massive reduction in number of computers in the vehicle not only simplifies not only reduces the number of modules, but also simplifies the wiring harness and the electrical architecture in the vehicle. And so this is an area for us that’s been a core focus. And ultimately we’re talking about thousands of dollars in savings per vehicle. And to be able to build an architecture that has as few of computers as small number of computers as possible, as simplified of a wiring harness as possible becomes a massive enabler for cost down. And we’re going to see that first in R1 next year with some of the changes I talked about already. But importantly, this forms the basis of what will be going into R2. And, R2 from a cost point of view has very aggressive targets, above and beyond just what we’re putting in place with the electrical architecture and the compute stack that’s in the vehicle, but also, well into other aspects of body design, which will leverage the opportunities afforded to it through the simplification of electronics and network architecture. Rod Lache: Okay. Thanks for that. Was hoping you can just separately talk about any progress that you’ve made in your discussions with Amazon regarding the exclusivity deal and just thoughts on the outlook for demand for the EDV and, whether some resolution of that is required in order to achieve the, the target of positive gross profit next year. RJ Scaringe: Sure. So we continue to have a great relationship with Amazon. It’s a great partnership. I think one of the things that I’d want to call out is just the complexities of scaling a logistics network or I should say, taking a scaled logistics network and converting it to electric. As I said, my opening comments we’re now, we now have EDVs operating in over 800 cities across the United States. We’ve recently entered Europe with the product. And the feedback we’re getting from drivers has been incredible. You can find this sort of all over the web and certainly no shortage of YouTube clips around just the, I’d say the level of excitement and how, the drivers recognizing the amount of driver focus that went into the design of all the, the touch points, the ingress, egress, the UI, so we’re really pleased with that. Now with that said, as we work closely with Amazon to expand how many of those vehicles are getting out, and of course that ties to how rapidly we ramp the production of the EDV product. We’re also in, and I’ve talked about this before, actively working with Amazon to allow us to sell vehicles outside of Amazon sooner than what was originally contemplated in our contract. And so that work remains ongoing. We’re very optimistic on that work. Again, the close partnership and of course, Amazon’s large position in Rivian helps align incentives to have us solve this year very shortly. Claire McDonough: And Rod, addressing your second part of the question on impact to gross profit positive in 2024 we hadn’t contemplated any external sales beyond Amazon from a commercial standpoint in the, the comments that we’ve historically made. Rod Lache: Okay. Just, just to clarify, are you contemplating Amazon at its current run rate or is that a major factor at all in the positive gross profit target? Claire McDonough: The way I would characterize it is, as we’ve talked about in the past, Q4 is always a seasonally low volume quarter for Amazon and so that is also been reflected in our gross margin commentary given the Q4, bridge that we’ve spoken about in the past. Rod Lache: Okay. All right. Thank you. Operator: Thank you. One moment for our next question, please. Our next question comes from the line of George Gianarikas with Canaccord Genuity. Your line is now open. George Gianarikas: Hi, good afternoon and thanks for taking my questions. Maybe first to focus on your pricing strategy, I know you mentioned earlier that the demand landscape is incredibly strong, but I’m curious as to whether you have thoughts on what’s happening with some of your competition in the marketplace and whether you feel comfortable with current prices, your vehicles. RJ Scaringe: Thanks, George. We’ve we take a very methodical and thoughtful approach to how we look at our vehicle pricing and, if we look at between the R1T and the R1S each of those products when we think about a price, there’s actually a band of pricing that they operate across, and that band is enabled or unlocked, if you will by the introduction of additional variance. So the first step in that is introducing the dual motor into the vehicles. As you heard in my opening comments, the dual motor as our “base powertrain” is a really exciting configuration. It’s still capable of zero to 60 and three and a half seconds towing of 11,000 pounds. It’s really an enjoyable architecture. And as a base configuration, it’s outstanding. And of course, it doesn’t have the same off-road capabilities necessarily as the quad motor, but we think for a majority of use cases, it’s really a perfect fit. So that’s the first step in providing customers with a lower price variant of either R1T or R1S. And then the next step, which is coming here shortly, is the introduction of our standard pack. And the standard pack not only is a lower cost pack for us to build, but importantly allows customers skin to an R1 vehicle just over $70,000. And so as we think about the positioning of the product, the capabilities of the product with on-road, off-road dynamically the feature set that’s in the vehicles, we feel quite comfortable with the positioning of what we’ve done. Now, I’d also want to just comment, there’s lots of ways to try to measure demand, and one of the things, we look very closely at is residual value. And residual value is nice because, it gives us a reflect, it sort of reflects, how our used vehicles are trading, which gives us indication of overall demand positioning. And the R1 products within the truck and SUV segment are among the best residual values of any product in those categories, regardless of electric or combustion. So across both combustion vehicles and electric vehicles, our vehicles are maintaining value extremely well. And even so far as a brand, typically you buy a brand new car the moment you “transact on a vehicle”, you lose roughly 10% to 15% of its value. People often say you drive an awful lot and it loses value in our case, once the transaction occurs, the vehicle value doesn’t really drop. They’re maintaining really well. And of course that’s just an artifact of the strong demand backdrop that we have and the willingness to pay for the products we’re building. George Gianarikas: Thank you. And maybe as a follow up, you spent a lot of time in the release discussing vertical integration, maybe relative to your initial plans, a couple, few years ago, the speed at which you vertically integrate maybe has have been a little bit slower. So I’m curious if there is one key component of your business that you could insource today in a world of infinite capital, theoretically, what would it be? Thank you. RJ Scaringe: The — we spoke about this a bunch on the call today. The area that I would say, we’ve — from the very beginning, we knew we wanted to completely control and we do completely control Very good about this is investing in the software and electronics capabilities within the vehicle. So I would say that’s among the most important things to own in looking at what is a structurally cost-advantaged vehicle manufacturer look like in the world of today. We’ve recently vertically integrated our drive unit, and that’s with the Enduro drive unit at the single motor per axle. And Claire commented on this before, but that is creating very meaningful cost advantages relative to what we launched with. And just as a reminder, what we launched with, we did the inverter in-house the gearbox in-house, the assemblage in-house, we purchased the rotor and stator from a supplier. On our dual-motor setup, that’s now coming house, and that’s the strategy we’ll continue to pursue with the propulsion platform, and we’re working very hard to continue to advance that given the cost efficiencies and cost advantages that clearly is driving in the business. George Gianarikas: Thank you. Operator: Thank you. One moment for our next question please. Our next comes from the line of Mark Delaney with Goldman Sachs. Your line is now open. Mark Delaney: Yes. Good afternoon and thank you very much for taking my question. I was hoping to better understand the financial outlook and the updated EBITDA guidance for 2023. I believe it implies a slightly larger EBITDA loss in the second half of this year relative to the first. So I was hoping to better understand what the drivers of that may be. Claire McDonough: Mark, what are the key drivers embedded within that second half guidance is a more conservative outlook around the magnitude of tailwinds that we ascribed to the unwind or reduction in our LCNRV charges on a go-forward basis. And so that’s a little bit of color as you think about the fact, excluding LTV, we expect to make significant progress against our improved gross margins as we track throughout the second half of the year. We began to introduce the Enduro drive units that RJ just spoke about into the R1 vehicles that will be a material cost reduction There the continued progress from a commercial cost vantage point as well as some of the increases that we’ll continue to see as we ramp up production in the course of Q3. and importantly as well, drive towards higher average selling prices through the introduction of our dual Max pack in the end of this year as well. Mark Delaney: Thanks for that Claire. And then my other question was just on the opportunity for sell products beyond the vehicle. I mean you spoke a bit already around software — but I think there’s other services and accessories that are an important part of the long-term opportunity for Rivian in terms of profitability, so things like insurance and selling some of the gear and camping accessories curious if you could share an update around where the company stands on providing some of those products? Thanks. RJ Scaringe: Thanks, Mark. When we think about the overall revenue opportunities we have as a business. Of course, the obvious place for us to all sort of our minds to go to is the vehicle. But there’s a whole ecosystem of products and services that surround the vehicle that we think represents significant opportunities, both in terms of alleviating customer pain points, but also in terms of creating really exciting and sort of joyful customer experiences. And so that starts with the purchase process and simplifying what a digital transaction looks like, which we’ve done through our platforms, we continue to push ourselves hard to improve that further that then immediately connects into the insurance platform. We’ve not announced any of this specifics on the returns for our insurance platform, but it’s a profitable part of our business, and it’s — the attach rate on this is quite high. So we’re very bullish on the long-term potential of our insurance offering. And then as you called out, what we think of as our adventure product? So the year that goes with the vehicle, this is a huge opportunity and something that, particularly as we look at the R2 product line, there’s really exciting intentionally thought out opportunities that sort of as the vehicles are being architected, we’re putting some of these really fun personalization items into this contemplated adventure products offering where it also moves cost out of the core vehicle and into the accessories, which allows us to achieve a baseline vehicle with very aggressive cost structure. And then last but certainly not least is the role that software complaints. So there’s a host of ways this has been talked about and looked at. I think often, this is sometimes oversold. I’d say, in the space where we sort of imagine these very, very large revenue numbers or companies often imagine these, I want to call out that we believe table stakes are going to be — is going to require a very robust, very thorough software platform but it still provides opportunities for very specific, unique, highly differentiated, highly complex features to be sold as an additional service or subscription. And we’ve seen this play out in the autonomy space, but we see and where we certainly have plans for ourselves, but there’s a host of other areas. And Wassym, if you can just talk about this for a moment because this is something I know you and I spend a lot of time on. Wassym Bensaid: Thanks, RJ. I mean, first of all, we are developing and expanding software and services for our commercial business. Every EDV that we sell today comes with a subscription for [indiscernible]. We continue to enhance the road map and add more features and more services to it. On the consumer side, as RJ mentioned, we are being really extremely thoughtful about which features could become paid options. We believe that there is an opportunity in a specific subset of features. Those features need to meet certain criteria. It has — this is the future that require a very high level of complexity from a development standpoint or features, which require high compute, whether it’s in the vehicle or in the cloud. We have internally road map that we will communicate as we basically build it with our customers. Mark Delaney: Thank you very much. Operator: Thank you. One moment for our next question please. Our next question comes from the line of Emmanuel Rosner with Deutsche Bank. Your line is now open. Emmanuel Rosner: Thank you very much. So it sounds like the factory rerates planned for next year is a very important step in towards reaching your goals. Can you maybe just help us understand again the timing of it? And importantly, what sort of available capacity you would leave you with on the other side of it, but also effective capacity for 2024 as a whole? RJ Scaringe: Yes. Thanks, Emmanuel. The updates we’re making to the line next year, I’m glad you asked the question what you did. They have really two core purposes. The first is, as you called out, it’s a capacity increase for the R1 line, where we effectively grow the capacity of R1 from 65,000 units on an annual basis to 85,000 units. But I’d say more importantly in the area that we believe we’re going to have certainly, there will be lots of interest in over the next few quarters is what that represents in terms of a step change in our cost structure. And we integrate with that shutdown, a host of product level improvements that simplify the vehicle and remove considerable costs consistent with what Claire and I both spoke about before that we saw with – associated with the shutdown in EV. Now that’s not to say, and I want to be very clear. It’s not going to say cost improvements aren’t happening, leading up to that. We have a very clear road map with contractually set up agreements with our suppliers. Some of those being commercial, some of those being technical changes preceding this batch, if you will, of changes – coordinated changes that are happening with the shutdown. Now in terms of the timing of shutdown that will be happening mid next year, we are doing everything we possibly can to minimize the amount of time we need to have the line down to make those changes and improvements. But it will have an impact as a result of the line being down on the R1 output during that time frame. And our – we haven’t provided guidance in terms of 2024 production volume. Yet, but certainly, that will play into ultimately the guidance we do provide. Emmanuel Rosner: Okay. That’s very helpful. And then let me ask you about your balance sheet. Claire, you made comments in the prepared remarks that you’ve obviously strengthened it, and you still have $10 million in cash. And it will take you to, I guess, operationally through 2025. How are you thinking about additional needs for capital raise and potential timing of it and the modalities of it? Like is it something that you could — you would think of doing short — sooner rather than later or to the extent that you have room until 2025, it will be later on or more opportunistic? Claire McDonough: Thanks, Emmanuel. As you mentioned, we remain confident in our cash balance and the fact that it can fund our operations through 2025. And as I spoke about in my prepared remarks with the addition of the convertible notes that we raised in our ABL, that further derisks the launch of R2 as we think about the $10.2 billion of cash and equivalents we have on the balance sheet today. But with that said, our priority is to maintain a strong balance sheet. For us, it provides a safeguard during volatile industry conditions and mitigate risk while scaling important growth capital projects such as the investments that we’re making into R2 and our facility in Georgia as well. And so with that in mind, we’ll continue to evaluate a variety of capital markets available to Rivian across the entirety of the capital structure. And as we’ve spoken about and exemplified prior actions in the first half of this year, we’ll continue to employ a diversified approach as we look to maintain that strong long-term balance sheet position. Emmanuel Rosner: Great. Thank you. Operator: Thank you. One moment. And the final question will come from the line of Benjamin Kallo with R.W. Baird. Mr. Kallo, your line is now open. Next question, one moment, it comes from the line of Chris Pierce with Needham. Your final question. Chris Pierce: Can you just talk about the mechanics in the plumbing behind the 1-day sale in the sense that are these new customers or existing reservation holders that are kind of willing to swap out of a current reservation versus waiting for reservation or is this kind of to get flexibility having the vehicle sooner? Or do customers tend to want what they want, and this gives you opportunity to kind of find new customers? I just want to get the sense of how it went, will we see more of them, that type of thing. RJ Scaringe: Thanks, Chris. I think you’re referring to an event we did in Normal and where we had on-site sale. Chris Pierce: Yes. RJ Scaringe: Yes, I think this has gotten so much more attention than we ever could have imagined. This was an artifact of us looking at some of the vehicles that are coming off the line and the potential where those vehicles were sort of late on matches where our customer changed order configuration or changed color combination, whatever the case may have been where they were available to be matched locally and essentially provide a on having to shift the vehicles. It was something we did more as an experiment to look at. I would say it’s sort of one of many types of experience we run conduct being direct to consumer and having the ability to do things like that. Chris Pierce: Thank you. Operator: Thank you. At this time, I’d like to hand the conference back over to Mr. R.J. Scaringe for closing remarks, please. RJ Scaringe: Well, I want to thank everybody for joining today. We’re really excited about the progress we’re making in and hopefully reflected in collectively in our comments and discussions today. It’s clear that our focus very much remains on not only ramp — continuing to ramp production in our normal production facility, but importantly, driving costs down across the business on our path to profitability. And we see that manifesting in significant progress between Q1 and Q2 and our overall gross margin structure, and we intend to continue to make that type of progress as we approach the long-term target for the Normal facility of 25% gross margins. I’d say the other point I’d want to call out and this, again, evidenced by Wassym joining us here on the call is just the importance that we place on the tactical differentiation of our products and our platform and not only enabling us to run and manage our operations more effectively in terms of over their updates, continued progress or continued features that make a range of vehicles, but importantly, actually simplifying the vehicle architecture because of the control of these core technology stacks around electronics, software and associated network architecture. And that really forms the basis of the foundation, if you will, for what’s to come with our R2 platform. And this is so foundational to what we’re building in, obviously, takes a lot of work on the front end to build all this capability and both on the hardware side and the software side. But we’re going to start to see the benefits of that being realized in the immediate term through the cost savings and the significant improvements we’ll see quarter-over-quarter. But importantly, we’ll see it when we reveal and show the products for R2 and the level of content and what will be available at the price points we’ll be talking about for R2 when we show that product early next year. So with that, thank you, everyone, for joining and look forward to our next call. Thank you. Operator: This concludes today’s conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day. Follow Rivian Automotive Inc. / De (NASDAQ:RIVN) Follow Rivian Automotive Inc. / De (NASDAQ:RIVN) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

SunPower Corporation (NASDAQ:SPWR) Q2 2023 Earnings Call Transcript August 1, 2023 SunPower Corporation misses on earnings expectations. Reported EPS is $ EPS, expectations were $-0.04. Operator: Good day, and thank you for standing by, and welcome to the SunPower Second Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the […] SunPower Corporation (NASDAQ:SPWR) Q2 2023 Earnings Call Transcript August 1, 2023 SunPower Corporation misses on earnings expectations. Reported EPS is $ EPS, expectations were $-0.04. Operator: Good day, and thank you for standing by, and welcome to the SunPower Second Quarter 2023 Results. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Mike Weinstein, Vice President of Investor Relations. Please go ahead. Mike Weinstein: Good morning. I would like to welcome everyone to our second quarter 2023 earnings conference call. On the call today, we will begin with comments from Peter Faricy, CEO of SunPower, who will provide an update second quarter announcements and business highlights, followed by an update on 2023 guidance, including recent sales trends, backlog, operating expense, and financing. Following Peter’s comments, Beth Eby, SunPower’s Interim CFO, will then review our financial results. As a reminder, a replay of the call will be available later today on the Investor Relations page of our website. During today’s call, we will make forward-looking statements that are subject to various risks and uncertainties that are described in the Safe Harbor slide of today’s presentation, today’s press release, our [2023] (ph) Form 10-K and quarterly reports on Form 10-Q. Please see those documents for additional information regarding factors that may affect these forward-looking statements. Also, we will reference certain non-GAAP metrics during today’s call. Please refer to the appendix of our presentation, as well as today’s press release for the appropriate GAAP to non-GAAP reconciliations. Finally, to enhance this call, we’ve also posted a set of PowerPoint slides, which we will reference during the call on the Events and Presentations page of our Investor Relations website. In the same location, we have posted a supplemental data sheet detailing additional historical metrics. With that, I’d like to turn the call over to Peter Faricy, CEO of SunPower. Peter? Peter Faricy: Thanks Mike, and good morning, everyone. Today, I will discuss our Q2 2023 results, our preannounced reduction of our full-year 2023 guidance, and our view of the most important factors that could affect 2024. I will also talk about our approach to platform investment intended to continue growing market share and our continued focus on our five pillar strategy to build SunPower into the world’s best residential solar company. Before I do that, I want to welcome our new Chief Financial Officer, Beth Eby, joining us for her first earnings call. Beth came aboard two months ago from NeoPhotonics and a long successful carrier at Intel. I expect she’ll play a critical role in developing and implementing the company’s strategic growth plan and in leading SunPower’s Finance organization activities. In the second quarter, we saw a slowdown in customer bookings and installations that frankly was steeper than we initially expected earlier this year, as the impact of higher interest rates has had a significant impact on consumer behavior. We reported negative $3 million of adjusted EBITDA this quarter, which was lower than we expected even though we’ve been projecting most of our EBITDA and cash generation in the second-half of the year. As Beth will discuss in more detail later, slower bookings across most of the country and higher installation expenses were the primary drivers of lower results in the quarter. As we preannounced last week, we’ve reduced our 2023 guidance to reflect the current market conditions to new ranges of 70,000 to 90,000 new customers, $1,450 to $1,650 adjusted EBITDA per customer before platform investment and $55 million to $75 million of adjusted EBITDA. These new ranges reflect a reduction to projected operating expense this year, including a reduction in labor force and reduced platform investment as we delay some hiring in certain projects to maintain financial strength through weaker near-term market conditions. Please turn to slide number four. We added 20,400 new customers in Q2. This is a 3% increase year-over-year. Adjusted revenue grew at 9% year-over-year as price increases continued to partially offset the impact of higher product costs, although higher installation costs were also realized in the quarter. SunPower’s new homes business secured a record $108 million in bookings in the second quarter, a 11% growth year-over-year. Record sales were driven in part by the growth of solar standard communities outside of California and an improved market for builders. July trends continue to remain strong, while SunPower has completed over 100,000 new home installations more than any other solar company. SunPower’s overall retrofit backlog now stands at 20,000 retrofit customers with another 39,000 in the new homes channel. Adjusted EBITDA per customer came in at $1,000 before platform investment, which primarily reflects higher installation expense and some modest write-down of inventory value. We also experienced a delay of some lease related revenue and customer recognition into Q3 in California, as we experienced some delayed interconnection completion from the State’s utilities under a higher than normal caseload. Sunbelt energy storage systems sales continue to show strength in California under the new NEM 3.0 rules, at a 49% attach rate in our direct channel in the State. We expect this number to climb as the increased value of batteries drives storage sales under NEM 3.0. Lease demand continues to grow with 108% increase in contract volumes in Q2. As we’ve noted previously, further growth for leasing is expected in 2023 and beyond, due to the combination of lease payment competitiveness versus higher utility bills and bonus tax incentives under the Inflation Reduction Act. SunPower remained customer centric and agnostic towards lease or loan financing and we believe that our current access to capital markets of the top tier residential solar company is a major competitive advantage. Please turn to slide number five. Our Q2 customer growth of 3% year-over-year ended the first-half with 41,300 new customers more than halfway towards the new midpoint of full-year guidance. Adjusted revenue grew to $461 million and 9% increase. We also take note that our market share continues to grow as we highlight a 31% increase in project permitting in the first-half of this year versus the overall industry value of 13% permit growth as reported by Ohm Analytics. Please turn to slide number six. We reduced our 2023 guidance last week, and I want to take a few moments to discuss why we did that and what are the actions that we are taking to offset some of the negative impact. While we are starting to see an improvement in year-over-year bookings in recent weeks, our reduced customer guidance for the year now reflects our recalibrated expectations for the full-year impact of slower top of funnel lead generation and bookings. In California, we’ve been expecting a decline in new bookings under NEM 3.0, given the strong pull forward in demand that we intentionally executed in Q1 under NEM 2.0. We’re starting to see some recovery here though with a modest improvement in net bookings for June and July. As I mentioned earlier, Sunbelt storage system sales in the second quarter are stronger in California under NEM 3.0, where we saw 105% increase to a 49% attach rate in SunPower direct channel. Looking beyond California, second quarter bookings have been weaker than our expectations earlier this year, and this is a major driver behind our decision to reduce guidance. Nevertheless, we are seeing stronger top of funnel lead generation and a more notable improvement in net bookings that’s been in progress since the May low point boosted by stronger results in several States, including New York, Connecticut and Illinois. New homes bookings have been tracking ahead of our projections this year, with the homebuilding industry more resilient than expected in the face of higher interest rates. Bookings accelerated ahead of expectations in Q2 to set a new all-time record boosted by NEM 2.0 sales in April. Importantly, we expect our backlog of 39,000 installations to position SunPower to benefit from customer recognition in 2024. We estimate that more than 70% of the customer recognition in the second-half of this year to reach the midpoint of the new customer guidance is covered by a combination of backlog and projected new homes installations. This gives us more confidence in the new range with the final outcome dependent on how incremental bookings and component sales to dealers trend for the remainder of the year. As Beth will go over in a few minutes guidance for 2023 EBITDA and EBITDA per customer before platform investment have been reduced to reflect lower gross margin this year as a result of customer pricing mix, sales channel mix, inventory cost, and higher direct installation costs spread over lower volumes. As I mentioned earlier, the reduced guidance also reflects some delayed platform investment and reduced operating expense as we maintain financial strength of the near-term economic and market uncertainty. Long-term, we continue to see substantial tailwinds for the U.S. distributed solar market, including low market penetration, climbing utility bills, a strained electric grid and a decade of tax benefits under the Inflation Reduction Act. Platform investment is intended to continue to position SunPower to gain market share as conditions continue to develop. We plan to adjust our investment pace judiciously as conditions change. Finally, we’re projecting an improvement in cash from operations during the second-half of this year. We intend to manage this with plans for inventory reduction, continued expansion of customer financing capacity, and liquidity in place. Please turn to slide number seven. With the summer heat waves hitting virtually everyone these days, I want to reemphasize that conventional electric utility rates are the primary competition for our industry. The U.S. Energy Information Agency reports that average U.S. retail electric rates continue to rise upward of 8% year-over-year in May, despite the moderating cost of bulk wholesale power and key fuels such as natural gas. Price increases continue to hit the Northeastern States in California with 10 States seeing increases greater than 15% year-over-year. More recent heat waves in the West Texas and other South Central States have strained electric grids and customer utility bills as well. We believe that the steep cost increases and the impact of grid instability on residential customers continue to elevate the value proposition of residential solar as one of the most powerful ways to stabilize and reduce home electric bills. Despite lower fuel prices, the Edison Electric Institute is projecting a 20% increase and the electric utility capital investment from 2022 to 2024 over the previous three years. As these investments are recovered through electric bills, we continue to believe that the value of customer finance rooftop solar is likely to continue rising. Federico Rostagno/Shutterstock.com Please turn to slide number eight. Next, I’ll share with you some of the most important progress we’ve made in Q2 as we move forward with the five pillars of our long-term strategy. For customer experience, SunPower remained the number one ranked home solar installer last year as indicated by our ratings and reviews on multiple platforms. For products, we launched a new larger 19.5 kilowatt an hour version of our SunVault energy storage system with a possible configuration of up to 39 kilowatt hours, a nearly 50% increase in energy capacity. For growth, SunPower grew in SunVault Energy storage sales by 58% year-over-year in the retrofit category. The company more than doubled its SunVault pass rate in California year-over-year as solar power battery enabled maximum savings following the NEM 3.0 implementation. During each week of July, SunVault attach rates in California were consistently above 60% in the SunPower direct channel. For digital, SunPower released an advanced cost saving mode for SunVault users, it provides seamless integration with the homeowners’ local utility and enables the battery to discharge at peak times. And finally, SunPower Financials launched leased products in three new states: Texas, Pennsylvania and New Mexico, all have a significant population of single family homes eligible for the energy community’s bonus credit as defined by the Department of Treasury under the Inflation Reduction Act. Please turn to slide number nine. As we announced this morning, I’m pleased to share that we have been arrived with an agreement in principle with ADT for SunPower Financial to act as the exclusive lessor for their solar customers. We are very excited to be able to expand our reach beyond the borders of SunPower, to enable more Americans to benefit from home based clean energy. We expect this program to begin contributing meaningfully to SunPower’s financial results in 2024 and gross margins that are roughly in line with the existing finance business. We continue to work on agreements with financing partners that would increase our lease financing capacity, we look forward to providing you with further updates as these arrangements progress. Our lease bookings continued to grow strongly in the second quarter, our all-in cost of capital for leasing remains below 6.5%, including tax equity, with the added advantage of lower interest rate sensitivity across the full capital stack. We believe this to be equal to or better than our peers. Before I turn it over to Beth for the financials, I’d like to thank Guthrie Dundas for covering the role of Interim CFO in addition to his regular responsibilities as Treasurer, thank you, Guthrie. And on that note, I’ll turn it over to Beth for more details on our Q2 results. Beth? Beth Eby: Thank you, Peter. Please turn to slide 11. For the second quarter, we are reporting negative $3 million of adjusted EBITDA and $461 million of non-GAAP revenue, an increase of 9% year-over-year. We added 20,400 new customers in Q2, a 3% increase year-over-year. Slower growth has been driven largely by the effect of higher interest rates on customer demand, despite stronger interest in lease financing. The drop in demand in California under NEM 3.0 was largely expected, but also contributed to lower results for the quarter. Adjusted EBITDA per customer declined to $1,000 in the second quarter, primarily the result of higher costs spread over lower volume. In California, some lease customer revenue recognition was also delayed into Q3 by extended wait times for interconnection and permission to operate resulting from higher workloads at the State utilities. This affected Q2 results by approximately $7 million of EBITDA. We still expect to recognize all NEM 2.0 retrofit backlog by year-end. Platform investment is primarily products, digital and corporate OpEx. This declined quarter-over-quarter based on actions Peter mentioned earlier to match our investment and OpEx levels to slower market conditions. Our aim is to maintain financial strength through this challenging period, as we position the company for continued gains in market share under stronger market conditions. Adjusted non-GAAP gross margin dipped to 13.7% in the quarter, while customer pricing increased in the quarter, we saw some pressure on our ability to raise prices from increased supply in the market. These price increases were more than offset by higher cost for materials and labor. Separately, we incurred an unusually high charge of $8 million in the faster amortization of preinstall expenses, due to reduced cycle times and a write-down of $5 million of inventory. Turning to the balance sheet. We ended the quarter with $114 million of cash and $164 million of net recourse debt, including $180 million of drawn revolver. We also had $424 million of inventory at the end of the quarter. We have plans in place to bring inventory levels down in line with second-half 2023 demand. We continue to value our ownership of lease renewal net retained value in SunStrong using a 6% discount rate. With growth in the portfolio, we now estimate the value of our stake at about $280 million. Please turn to slide 12. We reduced our 2023 guidance last week to a new range of $55 million to $75 million of adjusted EBITDA, driven by an anticipated 70,000 to 90,000 incremental customers with adjusted EBITDA per customer before platform investment of $1,450 to $1,650. As Peter mentioned earlier, more than 70% of the customer installations required to achieve the midpoint of customer guidance in the second-half are accounted for within our retrofit backlog and projected new homes installation. Platform investment plan for the year has also been reduced to a range of $50 million to $70 million and continues to be primarily comprised of product, digital, and corporate operating expense to drive our company toward larger operational scale, with growing adjusted EBITDA per customer and a superior customer experience in the years to come. We plan to delay these investments as we prudently match our cash usage to market conditions. Longer term, we expect this to maintain financial strength and support stronger growth in the future as the market improves. Before we turn the call over for Q&A, I want to turn you back over to Peter to review some of the factors we are considering as we look ahead toward 2024. Peter Faricy: Thank you, Beth. Please turn to slide 13. While we typically don’t provide guidance for the next year at this point, I want to leave you with some factors that we are analyzing as we look forward to 2024. From a macro perspective, we expect that increasing utility rates and lower equipment pricing will be tailwinds for the industry. We also look forward to a more stable interest rate environment, as well as improved clarity on the bonus tax credits available under the Inflation Reduction Act. For SunPower specifically, we see us benefiting from lower cost products, we intend to hold our platform investment at reduced levels for the near-term and we expect this to benefit financial results in 2024 as we keep an eye on long-term opportunities for growth and investment. Stronger-than-expected new homes bookings growth with a large backlog this year should add to customer recognition in 2024, with additional lease financing capacity expected to close this year, we expect sales to benefit in 2024 from the growing popularity of lease financing and bonus tax credits from the Inflation Reduction Act, SunPower Financial continues to grow its financing origination attach rates with SunPower customers and we will continue to seek additional opportunities for growth through partnerships like the one we announced today with ADT. And finally, we expect to begin seeing financial benefit from our collaboration with General Motors in late 2023, as we start selling EV charger and solar equipment to Silverado customers. With that, operator, I’d like to turn the call over for questions. See also What Are The Best Stocks To Buy Right Now? and 25 Most Unfaithful Countries in the World. Q&A Session Follow Sunpower Corp (NASDAQ:SPWR) Follow Sunpower Corp (NASDAQ:SPWR) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you so much presenters. [Operator Instructions] Our first question comes from the line of Sean Morgan of Evercore. Please ask your question. Sean Morgan: I was just wondering as you kind of work through some of your existing inventory, do you expect — when do you expect to start to see some of the benefit of some of this cost deflation we’re seeing on the equipment side? Peter Faricy: Yes, good morning, Sean. Thanks for the question. We expect to work through our inventory as we go through Q3 and Q4. And I would expect that on the improvement in equipment prices, that something will reflect in our guide for 2024 primarily. Sean Morgan: Okay, thanks. And then on the VPP availability to customers, is that going to be limited by which grid the customers are, sort of, connected to or will that be something that anybody that has the home energy management digital system to be able to sort of access? Like how does that work functionally? Peter Faricy: Yes. Yes, great question. So in the short-term, you’re right. It is limited to which utilities have a program that we can participate in with our customers. And so think of it as we have programs where we work with individual utilities directly. And then we also have this partnership with OhmConnect, where we take advantage of both battery storage and reduction of usage as sort of a two-pronged approach to VPP programs. Our goal is that we can directly connect to the energy markets and become more independent of individual utilities over time. And so our vision is that all of our customers have an opportunity to contribute their battery storage in particular back to the grid as we go on in time. Think of that as something that we’re working on and would love to launch in the future years. Sean Morgan: Okay, thanks. And welcome to Beth. Beth Eby: Thank you. Operator: Thank you so much. Your next question comes from the line of Tristan Richardson of Scotiabank. Please go ahead. Tristan Richardson: Guys. Appreciate the comments and the update on the macro. Maybe just curious on the leasing side, you noted 100% growth in bookings for SunPower Financial. But maybe can you give us a sense of where do you see, sort of, the overall customer additions in the ‘23 guide in terms of lease versus more traditional lease or loan/cash just as you think about lease just really taking share in the overall market? Peter Faricy: Yes. Good morning, Tristan. So as you know, our business has traditionally been 20% cash, 80% financed. Of the financed a year ago at this time, we would have said that was 80% loan, 20% leased. We haven’t quite flipped completely of the other side with loan and lease, but that’s the direction we’re headed. So think of it right now as maybe 60:40 lease and we’re headed towards probably a run rate by Q4 of 80:20 lease. I think forward looking, we still as we mentioned at almost every call we’re on, we really take a very customer centric approach. We offer our customers the opportunity for lease, cash and loan. And we think that’s really important, because we really want to do what’s best for them and what meets their financial needs. What’s interesting is that in this economic environment, leases have become a little bit better value than loans. And I think that’s reflected in the fact that we’re selling a lot more leases. But it’s important from our perspective to be able to offer both vehicles, because that will change in time. And if interest rates drop, we’ll be prepared to see an acceleration in our loan business. But right now, we’re quite pleased with our lease capacity. We’re quite pleased with the growth of the lease business. And as you saw with our announcement with ADT, we have a lot of opportunity to grow our lease business both within the SunPower footprint that you know today and outside of that footprint as we go forward......»»

General Motors Company (NYSE:GM) Q2 2023 Earnings Call Transcript July 25, 2023 General Motors Company beats earnings expectations. Reported EPS is $1.91, expectations were $1.85. Operator: Good morning, and welcome to General Motors Company Second Quarter 2023 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening […] General Motors Company (NYSE:GM) Q2 2023 Earnings Call Transcript July 25, 2023 General Motors Company beats earnings expectations. Reported EPS is $1.91, expectations were $1.85. Operator: Good morning, and welcome to General Motors Company Second Quarter 2023 Earnings Conference Call. During the opening remarks, all participants will be in a listen-only mode. After the opening remarks, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, the conference call is being recorded, Tuesday, July 25, 2023. I would now like to turn the conference over to Ashish Kohli, GM Vice President of Investor Relations. Ashish Kohli: Thank you, Amanda, and good morning, everybody. We appreciate you joining us as we review GM’s financial results for the second quarter of 2023. Our conference call materials were issued this morning and are available on GM’s Investor Relations website. We are also broadcasting this call via webcast. Joining us today are Mary Barra, GM’s Chair and CEO; Paul Jacobson, GM’s Executive Vice President and CFO; and Kyle Vogt, CEO of Cruise. Dan Berce, President and CEO of GM Financial, will also join us for the Q&A portion of the call. On today’s call, management will management will make forward-looking statements about our expectations. These statements are subject to risks and uncertainties that could cause our actual results to differ materially. These risks and uncertainties include the factors identified in our filing for the SEC. Please review the safe harbor statement on the first page of our presentation as the content of our call will be governed by this language. And with that, I’m delighted to turn the call over to Mary. Mary Barra: Thanks, Ashish, and good morning, everyone. Our operating results continue to demonstrate strong growth, thanks to an incredible customer response to our new trucks and SUVs around the world and strong execution of our business plan by the GM team, our dealers, and suppliers. Together we delivered $3.2 billion in EBIT adjusted in the second quarter, including an $800 million charge for new commercial agreements we have with LGE and LGES. The charge reflects the conscious decision we made during the Chevrolet Bolt EV recalled to serve our customers in ways that go beyond traditional remedies, and we’re taking new steps that will reduce our costs and improve our margins over time. We’ll provide more details about EV margin improvement and IRA benefits at the Investor Day in November. Our momentum is broad-based. Year-over-year, we have now delivered four consecutive quarters of higher retail market share in the U.S. and our total share was up almost one full point in the first half, with strong pricing and incentive discipline. We lead the U.S. industry in both commercial and total fleet deliveries calendar year to date. We now have led the U.S. industry in initial quality for the second year in a row. We are focused on strong cost discipline and we are taking additional steps to lower our capital spending. All of this impacts the bottom line, so we are raising our full year earnings, free cash flow, and EPS guidance for the second time this year. We now expect full year EBIT adjusted earnings to be in the range of $12 billion to $14 billion up $1 billion from our guidance. Adjusted automotive free cash flow is now expected to be up $1.5 billion in a range of $7 billion to $9 billion, and EPS is now expected to be in a range of $7.15 to $8.15 per share. The actions we are taking to be more efficient are also having an immediate effect on capital spending. We now expect capital spending in 2023 to be in the $11 billion to $12 billion range, which is about a billion less than the high end of our prior guidance, and we are working on more reductions. This guidance assumes that we successfully negotiate new labor agreements without work stoppage. Our results in our new guidance underscore the strength of our products today. Last quarter we talked about new vehicles we’re launching to support strong margins. All of them are connecting with customers. At the higher end of the pickup market, the GMC Sierra 84 and Denali models are now 70% of heavy duty retail sales. Premium models also account for more than 70% of sales for the new GMC Canyon mid-sized pickup. For the Chevrolet Colorado, our high performance off-road models, the Z71 Trail Boss and ZR2 represent more than half of retail sales. The new Chevrolet Trax is also off to a very fast start and it’s driving solidly profitable growth. In the U.S., we delivered more than 20,000 Trax in the second quarter and we expect that to keep growing. Half of these customers are new to General Motors. All of these new vehicles help us deliver more than a $1,600 per unit increase in the ATPs U.S. compared to first quarter, with flat incentives and essentially flat inventory. We have the largest ATP increase in the industry by far. The other growth products I highlighted last quarter is Chevrolet Montana in South America and the tracks in Korea also continue to build momentum. The Montana is our first compact pickup for the Brazil market and in just four months it has earned one third of the segment. We’re now expanding distribution to other markets in South America. In Korea the Trax is an unqualified success just like it is in the U.S. Pricing is strong and has earned more than 50% market share in its segment and two thirds of the customers are new to GM. These hits in the great work the team has done on cost have us on track to deliver significantly higher EBIT adjusted in GM International this year excluding China equity income. Looking ahead we have several launches and growing segments around the world that will keep our momentum going. In North America these include the 2024 Chevrolet Traverse, which we revealed earlier this month. It goes into production in Lansing, Michigan late this year. In the EV market, we achieved our target to produce 50,000 electric vehicles in North America in the first half. About 80% were the Chevrolet Bolt EV and EUV platform, but the Ultium platform production is increasing. We’ve had more than 2,000 customer reserve GMC Hummer, EVs and Cadillac LYRIQ in transit to dealers at the end of June. With both cell and vehicle production increasing, we continue to target production of roughly 100,000 EVs in the second half of the year and will continue to grow from there. Demand for our EVs remains very strong because the Ultium Platform is purpose-built for electric vehicles and it does not force customers to compromise on style, performance, utility, range or towing. We have experienced unexpected delays in the ramp because our automation equipment supplier has been struggling with delivery issues that are constraining module assembly capacity. We are working on multiple fronts to put this behind us as quickly as possible and things are already improving. For example we have deployed teams from GM manufacturing engineering to work on site with our automation supplier to improve delivery times. We’ve also added manual module assembly lines and we’re installing more module capacity at our North American EV plants beginning with factory zero and spring hill this summer; Ramos Arizpe in the fall and CAMI in the second quarter of next year. And to address pent-up demand among our Hummer EV customers, we are planning to increase second half production by thousands of units. In the meantime Ultium Cells LLC is delivering great quality and production is ahead of schedule. Looking ahead the next phase of our EV acceleration is coming into sharper focus. For example we have now secured more than half of our 2030 direct sourcing target for many critical raw and process materials we need with significant on-shoring. During the quarter, this included an expansion of our Cathode Active Material joint venture in Canada and an investment to bring manganese sulfate processing to a new facility in Louisiana. As with other recent announcements, these agreements provide us with significant off-take and favorable commercial terms, which is a key component of the EV margin improvement strategy we outlined last quarter. Now let’s talk about fixed costs. Due to the success of the $2 billion fixed cost reduction plan we announced earlier this year, we have identified another billion in fixed costs that we will deliver over the same 2023 to 2024 timeframe. This new action will offset about $1 billion in depreciation and amortization, which means that relative to 2022, our automotive fixed costs will be down $2 billion on a net basis as we exit ’24. Key components include about $1 billion from the voluntary separation program, another $800 million in reduced sales and marketing expense and the remainder coming from significant reduction in all areas of the business, including engineering expense, travel, and administrative costs. We’re not done by any stretch. Mark and I have asked Norm de Greve, our new Chief Marketing Officer to take a fresh review of our spending and put us on a course to deliver world-class levels of marketing efficiency. Our product teams are also embracing a strategy we call winning with simplicity that will reduce design and engineering expense, supplier cost, order complexity, buildable combinations, and manufacturing complexity. For example, our teams are applying even greater discipline around our color and trim pallets, the way we package features and options and reuse. For our EV and ICE vehicles, we are targeting a 50% reduction in trim levels through a smart bundling of customer features and options. This results in fewer part numbers to simplify marketing, engineering, manufacturing, while maintaining the best features customers want. Yet we are maintaining market coverage for all major segments and price points and the U.S. will compete in ICE and EV segments that represent about 90% of the industry volumes in 2030. Our next generation full-size pickup and SUVs will show just how powerful winning with simplicity will be. We are investing significantly less capital and expect to deliver vehicles that will have much higher levels of customer-facing content and even better margins than today. Another great example of a capital efficient program is the next generation Chevrolet Bolt that we plan to execute. Our customers love today’s Bolt. It has been delivering record sales in some of the highest customer satisfaction and loyalty scores in the industry. It’s also important source of conquest sales for the company and for Chevrolet, more than 70% of customers are new to GM. We will keep some momentum going by delivering a new Bolt that delivers what customers have come to expect, which is great affordability, range and technology and we will execute it more quickly compared to an all-new program and with significantly lower engineering expense and capital investment by updating the vehicle with Ultium and Ultifi technologies and by applying our winning with simplicity discipline. We will have more details to share soon. Now, before we move to Paul’s comments and Q&A, I’d like to invite Kyle to update you on the important steps Cruise has taken to scale its business and make it profitable. So, Kyle over to you. Kyle Vogt: Thanks, Mary. We are halfway through our first year of rapid scaling and it’s going extremely well. We’re on a trajectory that most businesses dream of, which is exponential growth, driven by continuous improvement, engineering innovation and solid product market set. Our formula for driving this growth is quite simple. Number one, we increase the supply of vehicles. Number two, we increase the service availability, some more people can use it and number three, we would make the product awesome. So let’s talk about how we’re doing on all those and get into the numbers. On the supply side, we recently hit 390 concurrent driverless AVs. We believe this is the largest and fastest growing AV fleet in the world. Yet you will see several times this scale within the next six months. This is all on the Bolt platform, which we can scale the thousands of AVs, but we’re also about to transition to origins, which are a game changer for cost and are incredible to write in. And today, I’m pleased to share that our test vehicles are already running in driverless mode on public roads in multiple cities. And we are confident in our regulatory and permitting paths despite this being the first time a major OEM has manufactured a vehicle without traditional controls. As a result, we believe we’re the only AV company with a well-defined and significantly de-risk path to reach billions in revenue. On the second item, availability, we’re rapidly expanding cities, hours and service area. As very recently, we now operate a significant portion of our San Francisco fleet, 24×7 across the entire city. We’ve expanded geofences and hours in Austin and Phoenix, and we plan to expand significantly in the next 30 days. Lastly, we’ve done the prep work and we’ll launch commercial service in two or three more cities in the next 12 weeks alone, bringing us to as many as six commercial markets with several more following shortly after. All the critical ingredients, things like mapping, ground infrastructure, validation, user acquisition, etcetera, have become several times more efficient as we move from city to city. On the third, making the product awesome, we have over 85,000, five-star reviews in San Francisco alone. People love the product and it gets better every month with each new software update. And based on data from tens of thousands of users across multiple cities, it’s clear to us now that demand will greatly exceed supply for several years, and this gives us margin opportunity and a potential to be a head of plan on revenue growth. Now that is rapid scaling. I’ll share a few additional data points before we move on. Cruise cracked three million miles just 49 days after hitting two million miles, and the next million is going to be even faster. We’re now doing over 10,000 rides per week, but more importantly, we’re growing rides at 49% per month on average over the last six months. 28-day user retention is nearly at the level of a fully matured human ride-hill service, and it continues to turn upwards. The product is extremely sticky despite the limitations in hours and service availability that exist today. All of that scaling is occurring while also improving safety and driving down costs. Let’s take a look at those. Safety continues to improve despite increasing complexity. Our analysis of the first million miles shows AVs experience 54% fewer collisions than human drivers in similar environments, and 92% fewer with AV was the primary contributor. In other words, the vast majority of collisions are caused by inattentive or impaired human drivers, not the AV. And we expect a gap between human and AV performance to get much wider over the next 12 months. On the cost side, we’re seeing ideal trends. Our operational cost per mile travelled has gone down by an average of 15% per month for the last six months, led by optimizations and infrastructure, process improvements and automation. Our fixed cost due to machine learning training and simulation are also decreasing over time due to better simulation techniques and investments in efficiently, but most exciting is the step function improvements in cost, we will see as our newer vehicles and AV architecture is launched, due to having a much longer service life, the origin significantly reduces our cost per mile. We also have an optimized sensing and compute architecture in late stage development that costs about 75% less than what will be on the very first origins. It’s the first time Cruise’s custom chips will hit the road, which we expect before the end of next year. As our fleet rolls over to this architecture, we’ll start to see costs head below $1 per mile, the magic threshold at which robots actually become cheaper for most people than owning a car. Lastly, we have something else that’s fed in the works for a few years that is highly disruptive to the already highly disruptive AV industry, more on that later this year. So putting you things together, it’s clear now that Cruise is no longer a science project. There was one significant risk in reasons to doubt, but it’s now a rapidly growing business with a transformational product in a multi-trillion dollar TAM. We’ve made incredible progress in Q2 over Q1, and I’m excited to continue that momentum in the months ahead. We’re truly just getting started. Back to you, Mary. Mary Barra: Thanks, Kyle, and thanks for sharing the progress that the Cruise team is making is just incredible. So, before we move into Paul’s remarks, I’d like to address our negotiations with the UAW, which just kicked off and with Uniform. First and most importantly, I want to say how proud I am of our talented and experienced manufacturing workforce. There’s a direct connection between their hard work and our success, and we have a great future ahead of us. As we’ve talked about today, the future includes continued investment in strategic ICE vehicles, like the full-sized trucks, full-sized SUVs, and mid-sized SUVs. Our future also includes retooling existing assembly plans and upscaling the team as we transform the company to grow rapidly in EVs. We have a long history of negotiating fair contracts with both unions that reward our employees and support our long-term success of the business. Our goal this time will be no different. That’s the best possible outcome for all of our employees, plant communities, dealers, suppliers, and investors, and we look forward to constructive talks. So, thank you and now let me turn the call over to Paul. Paul Jacobson: Thank you, Mary, and good morning, everyone. Thank you for joining us. I’d like to start by thanking the team for their collaboration on delivering yet another quarter of strong results, and consistently meeting or exceeding our financial targets. At the same time, we are growing the business with four consecutive quarters of year-over-year U.S. retail share growth, and stable incentive spend. The core auto-operating performance continues to fuel the results and fund investments to drive growth in our business, with Q2, even adjusted of $3.2 billion, including the $800 million charge from the LG agreements. We also generated a 7.2% EBIT-adjusted margins, including a 180 basis point headwind from those LG agreements. Aided by a strong consumer and a robust product portfolio, we are raising guidance for the second time this year, driven by great products, successfully balancing supply with demand, and proactive cost management. We have made bold commitments, and to achieve them, we are focusing on a solid foundation. As Mary mentioned, we are well along our way to achieving the $2 billion automotive fixed cost reduction. We are also announcing another $1 billion fixed cost reduction to offset higher depreciation and amortization from the significant manufacturing investments we have been making, and our ICE and EV portfolios. This expands the impact of the plan with the only automotive fixed cost excluded being the lower pension income, a non-operating non-cash item. The product simplification initiatives are expected to have incremental benefits in the years to come, as we refresh future ICE products and transition to EVs. We are also taking a capital-efficient approach to our growth initiatives. For example, we have a profitability-driven strategy towards selectively re-entering Europe, and we recently announced a collaboration with Tesla, the double access to charging for our customers without much incremental investments. Community, these factors, along with a reduction in headcount, marketing spend, and overhead costs, will result in us realizing about a $1 billion of year-over-year fixed cost savings in 2023, with most of this benefit coming in the second half of the year. Getting into the Q2 results, revenue was $44.7 billion up 25% year-over-year driven by supply chain improvements and stable pricing. Wholesale volumes year-over-year were up 20% in Q2 and 12% year-to-date. For the full year we now anticipate being towards the high end of our 5% to 10% guidance range. We achieved $3.2 billion in EBIT adjusted, 7.2% EBIT adjusted margins and $1.91 in EPS diluted adjusted. Total company results were up $900 million year-over-year driven by supply chain improvements versus Q2 2022, but more importantly, we also had a combined $1.4 billion of headwinds from the LG agreements, lower pension income and lower GM financial earnings. ROIC was above our 20% target, demonstrating consistently strong and improving core operating performance. Adjusted auto-free cash flow was $5.5 billion up $4.1 billion year-over-year, driven by improved supply chain conditions and higher earnings year-over-year. During the quarter, we repurchased $500 million stock retiring another $14 million shares bringing the 2023 total to $865 million and 24 million shares retired. We expect our strong balance sheet and cash flow to support continued share repurchases as part of our capital allocation framework moving forward. North America delivered Q2 EBIT adjusted of $3.2 billion up $900 million year-over-year and EBIT adjusted margins of 8.6%. The strength of the product portfolio supported market share growth, higher ATPs and again stable incentives. North America performance was impacted by $700 million of the LG agreement charge, which was a 190 basis point headwind to margin in the segment. We’ve seen two consecutive quarters of higher warranty related costs, an area we’re monitoring very closely. The fundamental quality of our vehicles remain strong as evidenced by the JD Power ratings, however inflationary factors have increased the cost to repair vehicles and we’ve also seen incremental expenses associated with the recent ARC airbag inflator recall. Total U.S. dealer inventory was 428,000 units at quarter end, essentially flat from last quarter. Inventory on dealer lots of our new and most in-demand vehicles continue to run at around 10 days, including our full size SUVs, the all new Colorado and Canyon mid-size trucks, the Chevrolet Trailblazer and the Chevy Bolt. We are still targeting to end 2023 with 50 days to 60 days of total dealer inventory, although seasonality, production schedules and timing of fleet deliveries may take us out of this range from time to time. Supply chain and logistics challenges are trending in the right direction, however there are ongoing logistics congestion and industry wide railcar capacity shortages that we continue to take actions to mitigate. GM international delivered Q2 EBIT adjusted of $250 million, largely flat year over year. China equity income was $100 million up $150 million year-over-year as we lapped the COVID shutdowns in Q2 of 2022 and aggressively took actions to help offset industry challenge. I’d like to thank the China team for their tireless efforts and perseverance through multiple years in a challenging environment. EBIT adjusted in GM International excluding China equity income was $150 million, down $150 million year-over-year, driven by a $100 million charge from the LG agreements and $150 million of mark-to-market gains recorded in the prior year. Absent these items, the results would have been up year-over-year with price increases more than offsetting FX headwinds due to the strength of the product portfolio, a trend we expect to continue in the second half of the year. GM Financial delivered EBT adjusted of over $750 million down close to $350 million year-over-year in line with expectations and primarily due to a higher cost of funds and lower net leased vehicle income, partially offset by increased finance charge income from portfolio growth and a higher effective yield. GM Financial’s key metrics, balance sheet and liquidity remain strong providing them the ability to support the GM enterprise and our customers across economic cycles. As a result, we are taking our full year EBT adjusted guidance up to the $2.5 billion to $3 billion range. Corporate expenses were $350 million in the quarter down $400 million year-over-year, primarily due to differences in year-over-year mark-to-market changes in the portfolio. Cruise expenses were $600 million in the quarter, up $50 million year-over-year, driven by an increase in operating spend as they continue to expand operations successfully. As we look forward, due to the strong Q2 core performance and outlook, we are again increasing our full year guidance to EBIT-adjusted in the $12 billion to $14 billion range, EPS diluted adjusted to the $7.15 to $8.15 range and adjusted automotive free cash flow in the $7 billion to $9 billion range. Most of the underlying assumptions in our guidance remain unchanged from Q1, with stronger pricing, the main driver behind the increased outlook as we foreshadowed. In addition, we expect better cost performance in commodities and logistics costs to be neutral for the full year. We’re bringing the high end of our 2023 capital spend guidance down by $1 billion this year to the $11 billion to $12 billion range in part due to our simplification initiatives. We are evaluating and we’ll provide an update on the medium-term capital spend outlook at our Investor Day later in the year, but expect the spend to come down from the previous $11 billion to $13 billion range. For full year adjusted automotive free cash flow guidance, we expect working capital headwinds related to the module assembly challenges Mary mentioned — offset the benefit from the higher EBIT adjusted lower short-term timing impact result revenue more of cells. But this is expected to unwind as module assembly capacity increases. In closing, we remain very well positioned for the future and achieving our medium and our long-term targets as we’ve highlighted. We’re focusing on profitability, and our recent results demonstrate are not sacrificing margin for volume. We will continue this strategy with the decisions we’re making today, helping to drive a fundamentally stronger company beyond 2023. And when you factor in our expected revenue growth, including the opportunities from the software-defined vehicle, AV and other new businesses, this sets us up to grow margin as we get to the back half of the decade. This concludes our opening comments, and we’ll now move to the Q&A portion of the call. Q&A Session Follow General Motors Corp (NYSE:GM) Follow General Motors Corp (NYSE:GM) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from the line of Rod Lache with Wolfe Research. You may go ahead. Rod Lache: Congratulations on these numbers. I was hoping to maybe ask you for a broader question about EVs. You made some assumptions for EV pricing and EV costs when you laid out your hands for mid-decade profitability. And I’m hoping that you can just update us a little bit on your thinking just based on how the markets evolved with some cases with more aggressive competitive pricing. And obviously, we’re also seeing some manufacturers put in different manufacturing innovations to drive down costs. What are your latest thoughts on that? And have any of your observations led you to change any of your plans? Mary Barra: Thanks, Rod, for the question. I would say we’re doing a lot in that space. Our — what we said last year at Investor Day, it gets low to mid-single-digit margins for our EV portfolio by 2025 remains unchanged. Even with all the things that are moving in that, we’re committed to getting there. I think when you look at the incredible cost discipline that we’re demonstrating right now as well as winning with simplicity. It’s just going to take cost out of every part of the business and make everything more efficient. And we think actually be better from a consumer perspective. . As it relates specifically to manufacturing costs, there’s quite a bit of work. We have a special team that is looking at how do we continue to drive efficiency, especially in the body shop. And of course, the battery team is working on how do we take cost out from an LTM perspective with what we’ve learned by now having that up and running. So I think there are several areas we’re working on. We intend to have industry-leading margins, and we’re not going to stop until we get there and we still have a lot of levers to pull. I don’t know, Paul, if you want to add anything. Paul Jacobson: No, I think you covered it. I think, Rod, one of the things that we’ve asked — we’ve been asked on this call frequently is about pricing strategy. And when you look at the demand we have for our vehicles and as we’re ramping up production, we still have pent-up demand. People are hanging in there with orders. And I think with some of the challenges identified as we ramp production, we see a lot of consistent strong demand for the products that we’re producing. And I think that comes from a purpose-built EV that we did from the ground up, which I think is going to continue to impress people as we get more vehicles out on the road. Rod Lache: Okay. And just a follow-up on that. Just it sounds like you’re not changing your expectations for mid-decade pricing. Just wanted to clarify whether there’s been any changes based on observations that you’ve made on capacity growth and competitive actions? And then secondly, can you just maybe elaborate a little bit on this $800 million LG charge? And what that actually means you alluded to lower cost, but it wasn’t clear whether that was a one-timer or was that launch cost or something else? Mary Barra: So first of all, on pricing in our plan, of course, we’re going to be — we’re going to watch what’s going on in the marketplace. But I think one of the things we demonstrated for almost 15 years now is we’re going to be very disciplined with incentives and with our vehicles and when I think when you look at the original pricing that we announced I think it was very in line with what the customer expects for the value they’re going to see from the products. And so far we’re seeing that. So we believe we have priced the vehicles right. Again we have a lot of pent up demand. The feedback we’re getting anecdotally for instance, from LYRIQ, new LYRIQ owners is they’re just delighted with the vehicle. So I think we’ve got the pricing strategy right. Of course, we’re going to watch it. And we’re not changing our mid — our 2025 EV profitability guidance. We’ll pull all the levers that we have to either get there if there’s challenges or make it even stronger. So again, Rod, we know it’s a dynamic business, but we’re committed to get there. And I think this leadership team continues to be able to do what they say. As it relates to the $800 million, there were many issues that we wanted to take care of, but I would say a chunk of it was us doing the right thing for our customers that goes beyond what a traditional recall expense back to a supplier would be as we look at that because we chose to do the right thing from a timing perspective. And I think our customers are happy as evidenced by the still the strong. Actually, we can’t build enough Bolts right now. So we’ll share more about what everything means for our EV margins when we get to November. But again, we thought it was the right thing to do, and we are — have been and will continue to work with our partner, LG ES to take cost out of what of the Ultium and specifically the Cells, Operator: Our next question comes from Itay Michaeli with Citi. Itay Michaeli: And congrats on the results. Just wanted to ask a couple of questions on the Ultium ramp. First, the issue what you identified with the automation equipment for the modules. Can you talk about when you expect that to be fully resolved? And are you still targeting the $400,000 of cumulative volume by the first half of next year? Mary Barra: Yes, we so we’re not walking away from any of the targets we put out, whether it’s 100,000 in the second half of this year, leading them to 400,000 by middle of next year. And what you’re going to see in the second half of this year and then really crank up in the first half of next year is a lot more Ultium-based product. . We were surprised the supplier, we thought they were in better on track for the delivery that they had. So we have seen in our teams to help them get the automation up and running. We’ve already seen a lot of improvement from I’ll say, the last four to six weeks, we’re going to continue on that path. But to derisk it, we’ve also added additional lines because we don’t want module production to gate our launch of all the products that we have coming in the second half of this year and continuing into next. And we know we’re going to need that module assembly capability anyway as we continue to grow beyond the 400,000. So disappointing, I’ve personally been reviewing the lines. As you know, I’ve spent time in ME earlier in my career running. So we’ll get this behind us. I’m very confident of the teams we have in place. So you’ll see it improve as we get through I would say, into the end of third quarter, beginning of fourth quarter, and then I think it will primarily be behind us by the end of the year, if not a month or so sooner. Itay Michaeli: Terrific. That’s all very helpful. And then just a follow-up on — broadly on U.S. EV demand. There’s been a lot of focus on rising inventory. So just curious how you slot reservation orders as you ramp up Ultium products. And also how you’re thinking about the Silverado EV pricing just given the recent action from your competitor. Mary Barra: Yes. So I think from the recent competitive action, if you look at the Silverado work truck, the range, the telling capability, the overall performance. It’s a true truck. So when people aren’t having to make compromises or trade-offs. So I’m very confident, and we have strong demand for the Silverado work truck as well as the RST, which will be — that’s from a retail perspective out toward the end of the year. So I’m very confident with where we are in the pricing for the Silverado EV. And that’s — your first question, Itay, was… Itay Michaeli: Just probably on EV demand, what you’re seeing in reservations and just how confident are you kind of — what you’re seeing for your products in the next few months. Mary Barra: Yes. Again, we’re seeing with LYRIQ, we’re seeing with the HUMMER truck and SUV, Frankly, the Bolt, I mean these vehicles are getting to the dealers’ lots. And if they’re not already sold, the — they’ve got a list of people who are waiting for them. So — and we still have a lot of reservations and people who put deposits down. The churn on that is very, very low. And for the rare customer who decides they’re not going to wait for the vehicle, there are several more waiting in line. So again, we’re very confident. And it’s not by accident. It’s because we — there’s been some criticism that we should have been faster with our EVs. We’re going as fast as we can, but we wanted to make sure we were leveraging a platform that’s going to give us efficiency with Ultium and that consumers weren’t going to have to compromise. So I’m very confident with the product portfolio we have coming, the pricing and the demand. Operator: Our next question comes from Mark Delaney with Goldman Sachs. Mark Delaney: GM had strong pricing and mix again in the second quarter even as supply and inventory for the industry are gradually recovering and borrowing costs for consumers are higher. You talk about how you expect the market environment to evolve in the second half of the year? And are there any levers for GM in particular in order to help to sustain some of the strong core automotive performance that you’ve been seeing? . Paul Jacobson: Mark, it’s Paul. Thanks for the question. We’re still kind of operating somewhat cautiously as we said from the beginning of the year. We’re not assuming major increases in pricing or in average transaction prices going forward. So we expect that to continue, and it really starts with the demand that we see for our vehicles. We’ve tried to keep inventory pretty consistent. We’ve grown it a little bit to get it to the lower end of that 50- to 60-day range that we’re working on. But overall, maintaining discipline on the incentive side as well. So we’ve really been focused on driving share with margin performance. I think the team has done a good job. As to whether that will continue, we’re kind of taking it day by day, month by month. And we’re very pleased with the results. But as long as we see demand continuing to be as strong as it is for our vehicles, we think we’re going to continue to perform. Mark Delaney: That’s helpful. And on Cruise and good to hear all of the updates on the progress that Cruise is making. I recall you mentioned Cruise vehicles being safer by 54%. Maybe you can elaborate a bit on how you’re measuring the safety of the vehicles that Cruise has with its AVs relative to a human driver. And are there any specific features on the origin as it relates to safety that you could point out as perhaps drivers of additional improvement going forward? Kyle Vogt: Yes, sure. I’d be happy to. So clarify the 50-some-percent number was a reduction in any kind of collision. And the way that we measure that as we looked at the first 1 million miles of driving across the Cruise fleet and compare that to a human benchmark that we established with leading transportation research institute. And that was based on millions of miles of driving by human drivers then selected a subset of all those miles and matched it to EV drive. So as close as possible to it, apples-to-apples comparison. But beyond that, 50-some percent collision reduction doesn’t really tell the whole story because that includes things where the AV was sitting still and just got rare ended by driver. That’s not really the fault of AV. When you look at collisions where the AV was the primary contributor, 92% fewer collisions. So most of the time, it’s the other vehicle that’s the primary contributor towards any collision that we’ve seen. And then I guess another one we’re really proud of is AV is it 73% fewer collisions with meaningful risk of injuries. These are the more severe types of collisions, not just the low-speed fender benders. So all these in aggregate tell a very compelling story. And I would emphasize that this is still — this is the product as it exists today, and we push out a new software update each month, which targets specific kinds of safety improvements. So I think there was a question early on, on how the AVs do relative to humans. I think our data shows that we’re already at least from this data, there’s strong evidence of significant safety improvements. And I think it’s going to continue improving at a rapid clip as we continue to invest in machine learning technologies and other ways to drive up the safety of the product. Operator: Our next question comes from John Murphy with Bank of America. John Murphy: I just wanted to ask a question like we often do on cap viewed. I mean 102.7 in North America. A skeptic might say, hey, listen, you’re running all out and as you bring on more volume, you’re going to need to add fixed costs and variable costs. And with the risk of pricing coming down, you can see real compression in margin. But an optimist might say, listen, that’s staff capacity, pricing will hold up and you’ll just bring on variable costs as volumes recover. I’m just curious where in the spectrum, I think you actually are in sort of that range because it does seem like there’s some real opportunity if pricing holds up and you just bring on these variable costs, but there might be some real significant upside to margins over time. . Paul Jacobson: Yes. So certainly, that has been part of what’s been working for us for the first six months. And despite that higher capacity utilization, you’re seeing inventory remaining pretty much flat with a lot of the inventory growth or inventory still strapped in that in-transit bucket. As vehicles are making their way to the dealers, we see them still turning very, very quickly, and that’s allowed us to continue to lean into the pricing and make sure that we’ve got consistent incentive performance. And I think you’ve seen some outperformance from GM over the last several months in that space compared to the industry as a whole. So I think we’ve shown a willingness to balance supply with demand as we did in the first quarter, where we cut some of the capacity utilization intentionally to make sure that we kept margins flat or kept — sorry, inventory flat and margins strong. So we’re going to continue to watch that. But as we’ve seen, it’s provided tremendous benefits for us so far, and we’re going to continue to manage it that way. John Murphy: But if you were to flex up on volume, would it be mostly a variable cost that would come in? Or would there need to be some fixed costs that would come along with that step-up of buying with. Paul Jacobson: Yes, it would be mostly variable costs. But when you think about where the company is being utilized, it’s at the higher end now, with the demand that we’ve seen for the higher trim levels on the full-size trucks, SUVs, et cetera. So we might not be able to do it in a linear way. where you’ve got some mix if you’re increasing production on some of the lower-priced smaller vehicles across the board. So we watch that and try to maintain as much balance as we can. John Murphy: Okay. Just a follow-up on fleet. Fleet has been a real good guy for you and the industry. When you think about the durability and resilience of that in the face of even potentially some risk to the economy here, how durable is that. And is there just massive pent-up demand on the fleet that might carry the day even if rates were a little bit higher and we see a little bit of a soft patch in the economy? . Paul Jacobson: Yes. I think you captured it well, John. Obviously, we’ve got a lot of pent-up demand from the last few years where fleet took the brunt of some of the capacity challenges due to COVID and due to the semiconductor challenges. In fact, if you look at the first half of the year, year-to-date, it was the best fleet performance since 2007, largely fueled by the commercial side of the business. And as we’ve said before, the fleet business is very different than it was in the past, where it was very, very thin margins in an effort to drive volume. Our fleet business is performing very, very well with margins similar to the retail side. So the business continues to perform, the team is doing a great job, and we expect that to continue for the short and medium term. John Murphy: I’m sorry, just one housekeeping question. The 792 charge for the LG issue, was that contemplated in your initial guidance? Because if it wasn’t, it’s actually — the raise today is more like a $1.8 billion raise in the outlook. I’m just trying to understand if you were contemplating that before? Paul Jacobson: It’s contemplated a guidance raise itself. It wasn’t contemplated as we came into the year. John Murphy: Okay. So the raise is significant today. It’s actually more than $1 billion on operating basis if you were to back that out. Is that fair. Paul Jacobson: Yes. Like we said, the business continues to perform going back to what we said in the first quarter as long as the consumer held up and strong, we expected that we’d be able to surpass the guidance we put out and that certainly what you’ve seen through the second quarter and what we can see July month-to-date has held up very well as well. Operator: Our next question comes from Adam Jonas with Morgan Stanley. Adam Jonas: So a question on the new Bolt. I think in your prepared remarks, you said it will be updated with Ultium and Ultifi technology. Sorry to be pedantic here, but I just want to know, are you using attributes of Ultium? Or is this a full ground-up Ultium platform? Mary Barra: So it will incorporate — when the new version comes out, we will say it’s an Ultium-based product. So we are definitely leveraging that technology because that’s going to really help us get costs down. Remember, today’s Bolt is our second-generation battery technology and from Gen 2 to Ultium. We saw about a 40% reduction as we started to launch. So that’s going to really help drive the profitability of that vehicle. And then with the work that we’ve done from a software-defined vehicle, Ultifi, it will have latest from that perspective as well. So this is a very capital-efficient quick way to build. And the strong consumer response we have to the Bolt and getting affordable vehicle out into the marketplace. So as we continue to look for ways to drive capital efficiency, this is something we look before. But as we’ve gotten more experience, the team took a look and frankly, I’m super excited about it. Adam Jonas: Okay. Just a follow-up. Audi announced it’s going to use SAIC’s next-gen EV platform for China and possibly, elsewhere. Since SAIC is your biggest Chinese JV partner. I’m just wondering, could GM also consider using SAIC’s EV platform to address the specific needs of the Chinese EV consumer? Or is the strategy there kind of Ultium only for China? Like are you open to a potential use of another non-Ultium platform even if you could adapt some technology. Mary Barra: Yes, Adam. Great question. I think the Ultium platform is much more efficient. I think they’ve already indicated that their dedicated platform wasn’t competitive from a cost perspective. We’re continuing to take costs out of Ultium. But of course, we always look at what the joint venture partner can bring to the party, and we’re going to look to make sure that we’re competitive from an EV perspective in that market as well. So we are open and always considering whatever is the most cost-effective way to have a vehicle that’s going to have no compromises to meet the performance of, in this case, the Chinese consumer. Operator: Our next question comes from Dan Levy with Barclays. Dan Levy: First, I just wanted to ask about the commentary on CapEx, which you noted the $11 billion to $13 billion for ’24, ’25 is under review. You trimmed the CapEx for 2023. Maybe you can just give us a sense of how you’re looking at the manufacturing build-out. I think you noted that there’s some simplification initiatives. Is that just something that was incremental? Or was that a byproduct perhaps looking at the market a little differently in terms of demand. I guess we’re just wondering is that the slowdown in spend just purely the simplification. Or is there something else on the manufacturing side with market demand that’s causing you to slow down a little bit the way that you’re spending? Mary Barra: As there was no market-driven slowdown, this was really us looking and making sure we had the absolute right portfolio entries. And as I mentioned, for both EV and ICE we’re going to — by 2030, we’ll be covering 90% of the segments, but we looked and found ways to do that more efficiently. The Bolt is a good example, instead of doing an all-new vehicle really leveraging the capital that’s already there and the benefits we have by having the Ultium platform. And then I think the winning with simplicity, in the past, we’ve gone in and done complexity reduction. But if you don’t do it as you design the vehicle, you drive a lot of capital in vendor tooling and in the plant. And frankly, this is something we’ve been working on for the last several months. Mark Reuss is leading this initiative with the marketing and manufacturing teams. And we are finding, there’s a lot of ways to take cost out of manufacturing and from a capital perspective as well. So it’s pretty significant. You’ll hear and see more about it. But just the comment I made about getting rid of trims that directly correlates to spending less capital, especially on the vendor tooling side. Dan Levy: And then as a follow-up, I just wanted to pass the question on this — on the charge associated with the Bolt. And really, this pegs the question, Ultium is a new product, and I think there’s a lot of unknowns with the new product. How should we think about the type of warranty expense you may need to accrue on these products, how much more — I mean, is there a need to be an added level of conservatism as the ramping? Or is there some clear data that you have that shows just early on that the quality will be far greater than the initial Bolt, which was — you’ve clearly evolved on your architectures. But just wondering how you need to think about warranty expense going forward on the new vehicles . Mary Barra: Yes. I would say if you go back, the Bolt’s been in market for several years now and actually had very good warranty performance. Remember, this was two specific manufacturing defects that have occurred at the same time, caused the issue on the Bolt that was in the LG ES process. We — our team worked hand-in-hand with them. We understand exactly what happened. When you look at what we’re doing at the Ultium plants from a cell perspective and the amount of error proofing and the fact that we’re following the quality process and have the traceability that if there were an issue, we wouldn’t have to do the whole population. All of that’s been put in place. So I think all those lessons learnt. Then when you look at what we’ve got from an Ultium perspective already and what we’re seeing, I think we’re very confident that we’re going to see strong or I would say, good warranty performance, strong warranty performance on these vehicles because, again, using General Motors manufacturing quality systems and processes across the board. So I don’t think that because it’s new, I think some of the things we’re struggling with to start up with our suppliers is the modules, that’s not going to necessarily drive a quality issue. Again, we have quality checks and processes and using the appropriate error proofing to know that when we have a cell, when we have a module when we have a pack, it’s measured and checked for quality. Operator: Our next question comes from Chris McNally with Evercore. Chris McNally: I wanted to quickly go back to the $30 billion autonomous elephant in the room. And just a quick tech question for Kyle. So Assuming that the San Francisco policy update goes in sort of the industry’s favor, do you just have a broad sense for when the 24×7 rollout will happen in San Francisco quarter, the consumer rides, I know there’s internal testing where you’re blanketing the city, but just curious on the consumer side. And then just how many AVs would it take to sort of blanket a city like San Francisco to have a disruptive service similar to Uber. Can you do it with under 1,000 to 2,000 origin? Kyle Vogt: Yes, good question. So on the San Francisco side, so right now, as I said earlier, a significant portion of our fleet is operating 24×7, and that service is open to employees. So we are not far from opening that up to the general public. I can’t give specific dates. But basically, we’re operating that service to employees. Things are looking pretty good. So that is coming pretty soon. And as for what it would take to blanket a city like San Francisco, our goal is, as I think I said on previous calls is to make sure that we ramp up manufacturing capacity. We’ve got a variety of markets to absorb those vehicles. And there are practical reasons to ramp up gradually in the city, just to make sure it acclimates as it’s transitioning to a new form of mobility. So it’s not our intention just to sort of vehicles and sort of direct them all into a single city. That’s our perspective. There’s over 10,000 human ride hill drivers in San Francisco, potentially much more than that, depending on how you count it. Those drivers, of course, aren’t working 20 hours a day like a robotaxi could. So it does not make a very high number to generate significant revenue in a city like San Francisco. But certainly, there’s capacity to absorb several thousand per city at minimum. Chris McNally: Much appreciate it. And then just a high-level question on the strategy for whoever comes to capital funding. Mary, it looks like there’s about 3-plus type quarters before you’d have to sort of consider funding Cruise? Just any thoughts on internal versus external funding given the environment. Mary Barra: I don’t really have anything to comment right now. We certainly are generating the free cash flow that we can fund Cruise’s expansion, and we’ll look to see what’s in the best interest of our shareholders. . Operator: Our next question comes from Tom Narayan with RBC. Tom Narayan: Mary, a question — maybe a philosophical one on autonomy and how you view Ultra Cruise. In light of what we heard from Tesla and how they are potentially planning to license an FSD product. Just curious to how you view Ultra Cruise, would that be a revenue profit center? Or just a product enhancer. How do you see the kind of Level 2 plus product for you? Mary Barra: We definitely see the Level 2 plus product as revenue-generating and profit-generating and very pleased with what we have with Super Cruise, and we’re going to continue to enhance as we move forward. And we’ll have more to share about this when we get to Investor Day in the fall. Tom Narayan: Okay. And as a follow-up on Cruise. You made a strong case, obviously, on the safety features. Just wondering if you could give some color on how perhaps you’re arguing that on a regulatory perspective, maybe on a federal level, like what are kind of the obstacles? And I mean, is that you see happening more likely now? Is there kind of a greater appeal now that you’re seeing all these safety benefits? Is it a stronger case now than maybe it was before? Mary Barra: I think as we continue to grow in miles, but first of all, we’re not arguing with the regulators. We’re talking to the regulators and sharing the information, which we’ve been doing for several years now. And so they understand how we’re measuring safe with what Kyle referred to with what we did with outside groups and continuing to share the information. I think it’s very goal aligned with what the Department of Transportation and NYCTA is looking for us to improve road safety. So of course, we’re going to continue that dialogue, share the information, and we’re very optimistic of where we’re headed. . Operator: Our last question comes from Ryan Brinkman with JPMorgan. Ryan Brinkman: Okay. Great. It looks like the China equity income in 2Q was similar to 1Q, rounding to $21 billion, down from sort of $0.2 billion a year ago and of course, $0.5 billion quarterly pre-pandemic. What is required, do you think to restore China profitability to where you would like it to be, I don’t know, from a sales or a share or perspective? It seems like you’ve got really great traction in that market for lower-priced EVs, such as for the Wuling brand. How should we think about your strategy for electrifying your high-end brands in China? Is that the catalyst do you think to higher profits in that market? Mary Barra: Well, definitely, we have strong ICE products and performance there are already clear to winning as we go forward is having the right portfolio of EVs for Cadillac and Buick especially. And so we have a lot of those vehicles being launched right now, and we’re continuing to work to make sure they’re efficient in meeting the customer needs. But let’s also remember, right now, we’re in the high single-digit market — market share place right now even with all the — in fact that there’s 100 new EV entries. So we’ve got to have the right EVs at the right price with the right technology. I was over there I guess, maybe two months ago now and did a full review of our product line and obviously spent time understanding where the competition is. I think we’ve got the right products coming. We’ve got to go out there and sell them now engage our team to get that done. Ryan Brinkman: Okay. Great. And then just maybe lastly on the Bolt charge. Is the charge driven more by something differently being done for the consumer versus what was previously communicated? Or is it more of a like rejiggering of the cost-sharing agreement between GM and LG for the previously announced actions? Mary Barra: Well, for a portion of it, obviously, as you announced the recall and then you look what it’s going to take, we took some time working with the LG ES team to come up with a diagnostic that then over a period of time indicates that the vehicle can go from the reduction of 80% battery charge to the — back to the full battery charge. That took a little longer. And so as we did that, we wanted to make sure we were taking care of the consumers, replacing the battery packs maybe faster than what we would have ended up needing to do. And just having attention to them because again, we have a very strong Bolt customer, and we wanted to make sure that they understood we’re going to stand behind it. So I think we took the right actions. And as we looked at that, where we were as we were well into having that issue behind us, we looked at what was right from where the costs fell. So we just were doing the right thing. LG is a very strategic partner to us. And like I said, there’s a lot of work that we’re doing together and individually to continue to improve our cost position. Operator: I’d now like to turn the call over to Mary Barra for closing comments. Mary Barra: Thank you so much, and I want to thank everybody for your questions. As I said at the opening of the call, the success we’ve had in the second quarter and the first half ties directly to the great new vehicles we’ve launched and strong execution of our business plan. Our outlook, both for the second half and over the next several years, will increasingly be shaped by our optimized ICE and EV portfolio, our investment that we’re making, not only in the vehicles, but also the growth opportunities as well as cost discipline. And — this will be the focus of our next Investor Day that’s going to be held in mid-November. The agenda will include a detailed look at our software strategy, led by Mike Abbott, who joined us from Apple in May. You’re also going to have the opportunity to drive our new STBs and experience the expanding capabilities, as I mentioned, of Super Cruise. And one of the most important vehicles you’re going to get to drive is the new Chevrolet Silverado EV work truck that we talked about it. I think most powerful examples of the benefits of the investment we made starting in 2018 on the Ultium platform. It offers up to 40% more driving range, faster charging and far greater towing capability than competitors because, again, it was purpose built to be an EV. And that’s something that we’ve made the investments. We were going through the growing pains right now. Others they’re going to need to do that as they get to their dedicated platform. So I’m very excited about what we’re doing to be able to demonstrate in November and just know that we’re going to continue to execute with discipline across all aspects of the business as we are in Q3 and into Q4. So appreciate everyone and look forward to seeing you then and probably talk to most of you before then. So thanks for your participation. And I hope everybody has a great day. Operator: That concludes the conference for today. Thank you for joining. You may disconnect. Follow General Motors Corp (NYSE:GM) Follow General Motors Corp (NYSE:GM) We may use your email to send marketing emails about our services. 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Goosehead Insurance, Inc (NASDAQ:GSHD) Q2 2023 Earnings Call Transcript July 26, 2023 Goosehead Insurance, Inc misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.28. Operator: Hello and thank you for standing by. Welcome to Goosehead Insurance Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. […] Goosehead Insurance, Inc (NASDAQ:GSHD) Q2 2023 Earnings Call Transcript July 26, 2023 Goosehead Insurance, Inc misses on earnings expectations. Reported EPS is $0.02 EPS, expectations were $0.28. Operator: Hello and thank you for standing by. Welcome to Goosehead Insurance Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. [Operator Instructions]. I would now like to turn the call over to Dan Farrell, VP of Capital Markets. Sir, you may begin. Dan Farrell: Thank you and good afternoon. Before we begin our formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements, which are based on the expectations, estimates and projections of management as of today. Forward-looking statements in our discussion are subject to various assumptions, risks, uncertainties and other factors that are difficult to predict, and which could cause actual results to differ materially from those expressed or implied in the forward-looking statements. These statements are not guarantees of future performance, and therefore, undue reliance should not be placed upon them. We refer all of you to our recent SEC filings for a more detailed discussion of the risks and uncertainties that could impact future operating results and financial condition of Goosehead Insurance. We disclaim any intention or obligation to update or revise any forward-looking statements, except to the extent required by applicable law. I would also like to point out that during the call, we will discuss certain financial measures that are not prepared in accordance with GAAP. Management uses these non-GAAP financial measures when planning, monitoring and evaluating our performance. We consider these non-GAAP financial measures to be useful metrics for management and investors to facilitate operating performance comparisons from period to period by excluding potential differences caused by variations in capital structure, tax position, depreciation, amortization and certain other items that we believe are not representative of our core business. For more information regarding the use of non-GAAP financial measures, including reconciliations of these measures to the most recent comparable GAAP financial measures, we refer you to today’s earnings release. In addition, this call is being webcast. An archived version will be available shortly after the call ends on the Investor Relations portion of the company’s website @goosehead.com. Now I’d like to turn the call over to our Chairman and CEO, Mark Jones. Mark Jones: Thanks Dan, and welcome to everyone to our Q2 2023 results call. I’m very pleased to report that we continue to successfully navigate challenging industry conditions with a sluggish housing market and an extraordinarily hard insurance market. Meaning we’ve been working both smarter and harder but have delivered strong profitable growth. I’m also happy to say that the decisions we’ve made and actions taken over the last year to restructure our business are helping to drive strong top line growth producing the plans strong and we believe sustainable improvements and profitability. Summary results for Q2 include 31% revenue growth 27% core revenue growth 36% growth in premium and adjusted EBITDA margin expansion of 900 basis points to 33%. These results underscore the strength of our strategy and quality of our execution focused tightly on the distribution link in the value chain with a powerful choice model. Our 20 years in business we’ve seen many challenging circumstances. But each time we’ve applied the same maniacal external focus on our clients and the market. While our competitors circle the wagons, wring their hands with worry and focus internally, we’ve been aggressive and externally focused on capturing share. One example of our proactive approach to industry turbulence is broadening our product portfolio. While reduced product access is a headwind in some regions. Our choice model allows us to seek out carriers that are looking to gain share and distribute through us at scale. So far this year, we’ve on boarded 24 new carriers to our platform. Our technology, scale, quality control, and unique human capital make us an attractive partner for any carrier looking to grow. Our agents remain completely engaged in acquiring new referral partners and penetrating deeper with their existing relationships to bolster lead flow. Because of this laser focus, we have agents today hitting all time new business production highs not withstanding external challenges. While we’re not unaffected, we are significantly insulated from market volatility than that an underwriter, or a single carrier product platform is experiencing today. When a single product platform decides to pull out of a market, their agents are left with nothing to sell. Most carriers continue to struggle with the impacts of the COVID Black Swan event, and the plague of inflation driving higher claims costs. We are hopeful that the Fed consumed completed its job of taming inflation. The decision we made long ago to avoid entering the business of holding risk is paying off powerfully now. While we acknowledge the challenges we’re facing, we don’t allow them to become an excuse for weak performance. Market turbulence only serves to magnify our competitive advantages. The restructuring of our corporate sales team has yielded extraordinary results. Productivity is up 57% in the quarter compared to Q2 2022. And this growth is despite the fact that we launched seven new franchises in the quarter from among our most productive corporate agents. In June, we began onboarding new agents primarily from college campuses, restarting capacity growth again. Feedback from the corporate sales management team has been this group of new agents may be the strongest in corporate history. The class that completed training in June this year is outpacing the results of their counterparts from 2022 by more than 65%. We’re moving into the later innings of the restructuring work of our franchise business, our focus has been to move unproductive franchises out of the system. So we can devote our finite resources to those that are likely to produce the best yield. We still have some more work to do in this regard through the remainder of the year. We also want to be fair to people and that process takes some time. That being the case, I think we can safely say that the heaviest lifting is now done and will continue to clean up work over the next few quarters. There are three key levers that drive future franchise capacity growth, adding new franchises, recruiting producers into strongly performing agencies and converting corporate agents into franchisees. Franchise developments team is the first priority is the first lever, adding new franchises and they’ve been focusing on specific high priority geographic areas where we believe new franchises can be the most successful and help our carriers gain share in markets they want to grow. With each passing quarter we become more effective and efficient in developing strategies to attract the right candidates. That coupled with our improved digital marketing strategy has generated a much more cost-effective go-to-market strategy. This strategy is resulting in fewer but higher quality new agencies launched that we believe will be significantly more productive and onboard producers more quickly. Lever number two, adding producers to successful franchises that are ready-to-scale is proceeding nicely and according to plan. While the removal of underperforming agencies has had a muting effect on the growth of total producer count, the average producer for agencies is climbing. And as a reminder to what we’ve said in the past, these producers have tended to be almost twice as productive as an average new franchise. Lever three conversion of corporate agents to franchises is also going according to plan and we intend to launch about 30 franchisees this year from corporate. It is important to remember that these have performed like new agencies on steroids. They continue to produce at much higher levels than an externally recruited franchise. This source of the most capable franchise candidates is an example of a very deep competitive moat that is exceptionally difficult for competitors to mimic because nobody has a large super productive corporate agency like ours. Momentum for the longer term is very strong in this channel of candidates. Our recruiting pitch on campus is powerful as we describe the account executive job as essentially a paid apprenticeship that can lead to a candidate opening their own Goosehead franchise just a few years out of college. We expect this to become a very long lever over time. While we’re pleased with the progress we’ve made on average franchise productivity, the gap between a corporate producer and a franchise producer would indicate there is still significant upside in franchise productivity. We will continue to attack this with more robust training programs, investment in client and agent facing technologies, launching more agencies out of our highly productive corporate agents, managers and hands on culture building activities in the field. With our emerging Quote to Issue technology becoming a reality, we anticipate that corporate partnerships will become another channel with extraordinary growth potential over time and be highly scalable. Mark Miller will talk more about this opportunity in a minute. We’ve made significant progress with our QTI efforts through the second quarter and expect to launch travelers nationwide and clear cover auto products during the third quarter. As we launch additional carriers, our agents are able to be more efficient, as QTI significantly reduces the time it takes to buying a policy. During the second quarter, we announced our partnership with Vivint Smart Homes as a new lead source to supplement our existing go-to-market strategy and to leverage QTI over time. Mark Miller will also provide more details on this exciting opportunity. Our business continues to generate significant cash flow. And we take that an additional $10 million of our term loan during the quarter with cash flow from operations. Mark Jones Jr will address some of our balance sheet management opportunities in his section of this call. We are incredibly pleased with the results our teams have been able to deliver in both a slow housing market and a challenging product environment. We believe that both of these headwinds are temporary. And when we come out the other side, we expect to be a tightly coiled spring, with significant future revenue and earnings growth embedded. With that I’ll turn the time over to President and Chief Operating Officer, Mark Miller. Mark Miller: Thanks, Mark, and good afternoon, everyone. As I look back on the past year, I’m proud of the business decisions we made and the speed with which our team has executed. Maximizing revenue and profitability has required us to focus intensely on productivity of a corporate and franchise agents. The core of our strategy was simply to drive quality across the organization. I believe we’ve made meaningful progress in driving quality in almost every aspect of the business. But there is no area more apparent of this progress that in corporate sales. Last fall, we raised productivity expectations across the corporate sales team. As a result, many agents significantly increased their productivity levels. Agents that could not meet these expectations exited the company. These were not easy decisions. But they allowed us to focus on sharpening the skills of our best team members and driving material productivity improvement. Net-net we dramatically increased productivity per agent and maintain overall production levels with much less cost. From a productivity perspective, these efforts are already starting to yield significant dividends. Productivity for corporate agent is increased by 57% since this time last year meeting record levels of productivity were achieved while transferring approximately 25 of our highest producing corporate agents to franchise ownership. While we’re optimizing corporate sales productivity, we’re also preparing for growth by strengthening and refocusing our recruiting function and reestablishing the hiring standards that historically set Goosehead apart. Now that we’ve built a healthy and thriving corporate sales organization, we’re once again geared to hire agents rapidly over the next several years. This summer, we’re quickly adding back top-tier college recruits to the corporate sales team. These hires all met our new rigorous hiring standards. This fall, we are now planning to accelerate our recruiting efforts on 12 college campuses to bring in even more high caliber talent. We anticipate ending the year at approximately 320 corporate sales agents. It’s an exciting time to be part of this refreshed high octane corporate sales environment, which gives us confidence in our ability to successfully absorb and ramp these agents. I could not be more pleased with the progress that Brian Pattillo and his team of talented leaders have driven in a very short period of time. On the franchise side of the business, we’re also making great progress. Overall, we’re pleased with the health of our franchise community. But there are a few areas where we would like to focus on and strengthen. Much like we do on the corporate side of the business, we have positioned the company for long-term sustainable growth. To achieve this, we’re being much more selective in the franchise recruiting process and targeting particular geographies with low penetration and favorable market opportunity. We’re removing existing franchise owners that fail to follow the model and put in full-time members. We’re also helping existing successful owners with hiring and scaling their businesses and converting some of our best corporate agents to franchise ownership. We made strong progress in removing underperforming agents from our system, but there is still more work to be done over the next several quarters. Our new initiative of recruiting producers for franchises is evolving quickly and starting to take shape. We ended the quarter with eight recruiters and one manager fully dedicated to this effort. And we will expand this team as demand continues to grow. During the quarter 190 agents were added to the existing franchise network through a combination of in house recruiting efforts and franchise direct hires. We have the demand. Now we’re focused on hiring velocity. Additionally, we remain very excited about our efforts to convert highly productive corporate agents to franchises. We converted seven agents to franchises in the quarter, and they continue to launch at much higher productivity levels than traditional franchises. To give an example, I’d like to highlight [indiscernible] a high caliber corporate agent, who is based in our Columbus office will be in Goosehead for 17 months and averages around 100 new policies per month. He has mastered our model by having 25 active referral partners that send him over 50 leads a month. Paired with a high close rate Kobe consistently delivers new business revenue results of over $30,000 per month. Kobe has been approved to launch a franchise in September, releasing Kobe from corporate to launch a franchise is not only good for him, it’s also good for us. For Kobe, he will generate higher commission splits and have tremendous career opportunity being a business owner and having a clear runway to a seven figure income. For us, it will extend the life of Kobe’s career with Goosehead and it will also highly incentivize him to replicate himself many times over by hiring his own producers, which we believe will yield significant and accelerated growth. We look forward to seeing what Kobe accomplishes over the next several years. Now turning to technology for just a moment. Auto policies for three major carriers will be QTI-enabled for all states in the third quarter. We expect this momentum to continue into the fourth quarter with additional carrier implementations for both home and auto lines of business. As a reminder, QTI drastically reduces the time required to quote and bind policies, which will enhance the productivity of our agents while significantly improving the purchasing experience for our clients. Additionally, we integrated ChatGPT into Aviator our internal rater to assist agents with general insurance questions and state specific guidelines. As we continue to observe the outcomes of our sales and service agents, we may expand this functionality toward the client to help them navigate the complexities of the insurance market. In the second quarter, we also initiated the Vivint partnership and completed the purchase and integration of their existing book of business. Converting high volume enterprise leads is a new and exciting sales motion for Goosehead. To fully capitalize on this opportunity, we’re building new technological capabilities that allow us to manage and convert leads at much higher levels than we have historically experienced. We’re continuing to operationalize the Vivint partnership nationally. And we will expect to have lead flow and conversion rates optimized later this year and into 2024. I’m also excited about the existing pipeline of potential partnerships we’re currently working and look forward to providing more information on future. I’m confident the changes we are implementing will lead to stronger, more sustainable revenue growth and increasing levels of profitability in 2024 and beyond. I want to thank our entire team for the tireless efforts as we continue to harden our processes and operating platform for the future. Now I’ll turn the call over to Mark Jones Jr., our Chief Financial Officer. Mark Jones Jr.: Thanks, Mark. We’re very pleased to be delivering exceptional top and bottom-line results then increasingly challenging operating environment. I’m incredibly proud of the discipline and grit of our team as they navigate through the unprecedented P&C product challenges. We have continued to gain share, but our runway remains massive. We will still be under 1% market share of this $390 billion industry by year-end. We’ve done a great job expanding our lead flow and gaining market share in this tough environment. The current state of the P&C product market is more than offsetting the benefits we’re getting from higher rates as carriers intentionally slow new business in favor of profitability. Importantly, we believe all the actions we have taken to address the product availability and continued real estate headwinds are making us a significantly stronger company and will be a tightly coiled spring for growth as macro factors improve. Just to highlight a few of our operating improvements that will provide ongoing benefits. Our agents have improved sales processes and activated new referral partners at an unprecedented rate. We expect to see tremendous benefit when the real estate market volume reaccelerates and product options expand. We currently account for about 4.4% of new mortgage real estate transactions in the U.S. up from 3.7% a year ago. While premium increases will likely level-off as market conditions improve, we should be writing a higher volume of business at increased premium levels, further enhancing productivity and profitability. We proactively slow talent addition select states such as California and Florida to align productivity and opportunity for producer growth once our product is reopened in those locations. We’ve worked diligently to add new viable carriers that help offset the pullback and underwriting appetite from some of our larger existing carriers. This increased product will further enhance our ability to serve clients as the market improves. Our agents are using the current market conditions to generate new lead flow and gain access to their clients earlier in the home closing process. The value proposition of our choice platform has never been stronger versus our competitors. Moving to our results, we’ve been delivering exactly what we set out to do a year ago. We have significantly improved profitability and agent productivity. While there’s more work to be done particularly on franchise productivity, we’re now in a position to add producer capacity as evidenced by our strong recruiting class in June, and expected hires to the balance of the year. Our deliberate actions over the past year along with the current product environment, while as expected result in a temporary slowdown in our premium and revenue growth numbers through the third and fourth quarters. What we should continue to see very strong earnings and cash generation as a result of our expense discipline and focus on quality. As we add back to our producer count and continue to drive productivity improvement, we expect to see a reacceleration of revenue and premium growth throughout 2024. We expect to be achieving these top-line results on a much higher and still improving profitability base. We remain confident in our ability to deliver roughly 30% premium CAGR through 2027 and EBITDA margin in the range of 30% between 2025 and 2027. Over the longer term, we maintain the belief that our margins can be in the range of 40% as the business matures and the renewal book becomes a larger portion of total premium. Our premium in the second quarter, the leading indicator of our future revenue increased 36% to 767 million over the prior year period. This includes franchise premium of 588 million up 40% and corporate premiums up 180 million, up 22% from a year ago. Our policies enforced at quarter end were 1.4 million up 21% from a year ago. Total revenue for the quarter was 69.3 million, an increase of 31% from the year ago period. This includes core revenue of $61 million up 27% driven by continued high client retention, improved productivity per agent and pricing tailwinds. As we continue to launch more corporate agents into franchises, this creates a near term trade off on revenue growth because of the differences in revenue recognition, but significantly benefits longer term revenue and profitability as the productive life of the agent increases and they duplicate themselves through producer hiring. Contingent commissions in the quarter were 4 million compared to 1.9 million a year ago as the timing of growth-based contingencies are typically more uniform as compared to underwriting profitability contingencies. We continue to expect full year contingencies to be around 40 basis points of premium for the full year. In the franchise network, operating franchises were steady in the quarter as we continue to average of the [indiscernible] by removing underperforming franchises and replacing them with those of significantly higher quality. Our best franchise agents have similar productivity to our top corporate agents and the agencies we are removing from the system contribute almost nothing to new business production. Total franchise producers at the end of the quarter was at 2069 up 3%. We expect both operating franchise and producer accounts to trend flat to moderately down year-over-year through the balance in 2023, and then accelerate in 2024, as we finish our restructuring work in the franchise business and focus on greater franchise productivity gains. Importantly, the productive capacity of our agent workforce should increase at a rate faster than the total producer count. As we are adding back higher quality producers to the system versus those that are being removed. We fully expect the combination of producer growth, productivity improvement and retention will support the longer term premium growth objectives. Shifting to expenses, we continue to perform well as we focus on expense, discipline and reinvestment for growth. Total operating expenses, excluding equity-based compensation, and depreciation and amortization were $46.2 million, an increase of 14% compared to the year ago quarter. Compensation and benefits excluding equity-based compensation increased 19% driven by our investments and partnerships, technology, marketing and service functions, partially offset by right-sizing our producer account versus a year ago. Other G&A expense excluding one-time impairment charges was $13.7 million, up 11% from a year ago. Bad debts improved to 900,000 from 1.7 million as we have substantially improved the quality of our signed but not yet launched pool of franchises. During the quarter, we consolidated some of our existing Office Space resulting in a one-time non-cash impairment charge of $3.6 million. We have continued to improve the margin profile of the company generating five consecutive quarters of EBITDA margin expansion and seven consecutive quarters of EBITDA margin expansion excluding contingent commissions, a fantastic accomplishment for the whole team. Adjusted EBITDA in the quarter was $23.1 million, up 85% from the year ago quarter, while adjusted EBITDA margin increased to 33% from 24% in the year ago period. For the remainder of the year, we expect more modest margin improvement as we ramp investments for growth in a number of areas including corporate agent headcount, marketing and technology. As of June 30 2023, we had cash and cash equivalents of $19.1 million. Our unused line of credit was 49.8 million, and total outstanding term notes payable balance was $81.3 million at quarter end as we paid down an additional $10 million in principle. We’re managing our balance sheet very conservatively given the insurance market conditions. As the market re normalizes over what we expect will be the next 12 to 18 months. We will be evaluating options to make our balance sheet more efficient by increasing our debt to a reasonable but conservative level. Our guidance for the full year 2023 is as follows. Total written premiums placed for 2023 are expected to be between 2.89 billion and 2.98 billion representing organic growth of 30% at the low end of the range, and 35% at the high-end of the range. Total revenues for 2023 are expected to be between 260 million and 267 million representing organic growth of 24% in the low-end of the range, and 28% on the high-end of the range. We expect full year adjusted EBITDA margin to expand over the full year 2022. Again, thanks to our team for their hard work and focus in delivering such strong financial results as we continue our journey to industry leadership. With that, let’s open the line up for questions. Operator? Q&A Session Follow Goosehead Insurance Inc. (NASDAQ:GSHD) Follow Goosehead Insurance Inc. (NASDAQ:GSHD) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions]. Our first question comes from the line of Matt Carletti with JMP. Your line is open. Matt Carletti: Just have a quick one, you guys were covered a lot of what I had on my mind was very thorough commentary. But I guess what I want to ask is a little longer term. You touched on the digital agent and some of the Quota to Issue, progression has been made. As you look forward, kind of how do you see the digital agent evolving? I mean, I know we’re not expecting Superbowl commercials and things like that. But as we think forward as a tool for you guys to use. How do you how do you envision it as more kind of large national carriers get on Quote to Issue? It’s a 24 to 36 months sort of question not a next quarter question? Mark Miller: You start. I will add on. Mark Jones: Yes. So I think there’s a lot of ways that that can evolve over time. Right now, it’s a fantastic marketing resource for our existing agents to hand out to RPs to generate new lead flow. And we’re getting a substantial amount of leads through the digital agents. It’s about optimizing that process and creating an inbound sales motion, our team right now is very, very good at hunting and generating new lead flow, which means that they’re not as good at handling an inbound lead as they could be in the future. So there’s plenty of room for us to go with that respect. The carrier product environment, right now, as well as carriers are not necessarily looking to make investments in generating new leads and new distribution networks. They’re focused all on underwriting profitability. As that changes over time, we should see significantly more speed and ramp in the QTI projects as well. Very pleased with the way our technology team has been able to add carriers onto the platform, even in today’s market really is a good tool for agent productivity over time that could develop to be a very profitable distribution network. Mark Miller: Yes. Great answer, Mark. This is Mark Miller, I would just say along the same lines, right now we’re trying to work the technology aspects of it out, we had to back off of it a little bit, kind of rebuild the foundation that QTI runs on. We’re really proud of the team for being able to put three new carriers on this quarter. And we’ll kind of see where it goes from there. But I think about it in the short-term is really being an automation tool for our agents and moving its way into service and other areas. We’ll see where it goes longer term. I want to see how many carriers we can get on it. But the carriers what I’m really happy about is the carriers are really leaning in and helping right now. Matt Carletti: That’s great. Super helpful color. Thank you very much and congrats on a nice quarter. Operator: Thank you. Please stand back for our next question. Our next question comes from the line of Michael Zaremski with BMO. Your line is open. Michael Zaremski: I guess just stepping back, I took a lot of notes, gave a lot of great color and a lot of positive momentum, which we can clearly see in most of your KPIs. And you did use the term of the prepared remarks towards the end, I think ramp growth. So just curious, cognizant that growth was a little slower than maybe some expected this quarter. But because is it, why wouldn’t you guys take up kind of your growth rate into the back half of the year, if it feels like there’s just a lot of momentum, including you said, spending a bit more money to grow as well. This is a naïve question, or do you feel like you’re embedding some conservatism? Mark Jones: I think we’re doing exactly what we set out to do for 2023, which was get our corporate team as productive and profitable as possible and make it incredibly healthy. So that when we add new agents into the system, they’re set up for much, much more success. So we’ve increased the recruiting standards, increased the accountability on the team, Brian Pattillo, who leads that organization is doing a phenomenal job maximizing every single ounce of productivity. So we’re generating a lot of profitability on new business, we’re in the point now where we’re adding agents back into that system who are significantly more productive than agents we’ve ever added into the system before. So we feel very good about the long-term growth of the corporate channel. On the franchise side, as we talked about, we’re still working through some of the agencies that are underperforming. But we feel great about the progress that we’ve made there. We’re seeing more agencies hire, and the people that they’re hiring are continuing to deliver very good profitability and productivity. We just going to need to let that burn in for the rest of 2023. And we should see growth reaccelerate in 2024. Michael Zaremski: Okay. And if we — you said to invest a little bit more near term, which could kind of cause less of uplift in the year-over-year margin, you correct me if I’m wrong. But can you just — I know there’s lots of investments, are there other a couple you’d like to highlight? Or is it mostly just, is one of the big ones hiring folks out of college that are just inherently going to be way less productive, or anything you’d like to call out there? Mark Jones: Yes. We’ll be onboarding a significant amount of individuals over the next. We started that in June and over the next several months, but as well investments in the marketing function to drive inbound lead flow for new franchises as well as new policies, it’s significantly more efficient than having an outbound motion with hundreds of people pounding the phones. So that takes a little bit of setup on the front end but pays off very nicely on a back end, you’ll also get a more highly qualified candidate who understands the opportunity a little bit better. And you can pre-qualify them with some of the information and they submit. That takes some infrastructure, build out, some technology build that to continue to operationalize the Vivint partnerships, so we can maximize and get as much out of that as possible. As well as just continuing to grow the rest of the back office to scale the entire organization that we saw very substantial margin improvements over the last six months, we continue to expect to see margin improvement over next six months, but probably just not at the same rates as the first half of the year. Michael Zaremski: Okay. That’s helpful. And maybe lastly, also kind of on the macro level, there’s very hard kind of market pricing on the personalized side, clearly, and that’s probably going to persist. But those are my words. But just curious so, when we’re asked to think about that dynamic versus you talked a lot about the challenging real estate market and also just less capacity. To those three macro elements kind of net out to be a wash ultimately? Currently, because it sounds like, eventually you’re talking about — eventually if the real estate market opens up more. It sounds like you’re saying there could be even if hard market pricing falls a bit there still net-net going to be some positives in the outer years. Mark Jones Jr.: No, I would say that the product challenges in the P&C environment today are more of a drag than any of the tailwinds we’re seeing from pricing. Housing, certainly we would prefer it to be running super hot, but our agents do a really good job of just taking share, when the housing market contracts like it is today. We don’t expect that to continue forever. So that will be a tailwind eventually, again, in the future product is the thing that we’re dealing with the most right now and a significant amount of our agents are in areas where there’s very real product challenges that will alleviate our expectation at some time over the next 12 to 18 months. It’s not necessarily up to us. But we’re doing a really good job of pivoting and finding new partners to distribute with as well. We mentioned in our prepared remarks, we added 24 carriers onto the platform so far this year, I really think our choice platform shines in this environment better than anywhere else. But ultimately, I wouldn’t say it’s a net wash or even a positive I’d say we’re doing a good job of fighting through an incredibly challenging environment today. Michael Zaremski: And I promise, this is the last follow up. How does — you’ve talked about a lack of capacity a number of times. Can we see any of that showing up in any of the KPIs? Or is it more of a soft like you just know that your producers could produce even more if they had more options? Mark Jones Jr.: Yes. We have a bunch of KPIs that we look at internally that can point to product challenges are hamstringing productivity a little bit, which makes the productivity gains we’re making today all that more impressive. So we’re trying to be cognizant and not measure productivity on a dollars basis but on a unit basis. Are we selling more policies today than we were previously per agent? And the answer is yes, our agents are becoming even more productive in an environment where they have less products to sell. So that will eventually switch from being a headwind to a tailwind? The carriers just need some more rate to take hold. Operator: Our next question comes from the line of Meyer Shields with Keefe, Bruyette, and Woods. Your line is open. Tommy McJoynt: This is Tommy McJoynt on for Meyer. My question is on contingent commissions. Obviously, we saw some good growth there in the quarter. And you mentioned that there’s contribution from both the growth side and the underwriting profitability side. Could you just put a finer point on how much of that contingent commission growth was driven by the growth side versus the profitability side? Mark Jones Jr.: Yes. It’s really a de minimis amount related to profitability-based contingencies. The reason why it looks more in this quarter comparatively is, the ones that are mainly volume based or more uniform throughout the year. Just logistically, the way the revenue recognition works for GAAP. So we don’t expect to have a gangbusters contingency year we mentioned again in the prepared remarks you should expect somewhere in the neighborhood of 40 basis points of total written premium which that is around all time lows. So I wouldn’t look at the second quarter contingencies and think, yes, we should continue to model that level of growth going forward. Tommy McJoynt: Got it. Thanks. And then my second question is, is just thinking about this hard market cycle and P&C, to the extent that rate adequacy from the personal line carriers takes longer than some expect, does that in any way temper your sort of growth expectations? Or are you guys pretty committed at this point, with your sort of recruiting a new franchise initiatives that you have for the rest of the year? Mark Jones Jr.: I’d say we’re pretty committed. I mean, I’m not certainly wouldn’t say I’m satisfied with the levels of productivity that we’re seeing. But I’m incredibly pleased with our agents ability to continue to make productivity gains even in this challenging market. So if it continues to persist for a while, okay, our agents will get the increased paycheck on renewals, they’ll continue to have to fight through this environment from a new business perspective. But it will eventually come back the other way. So it’s about patience. It’s about being long term greedy, and not short term greedy. Operator: Our next question comes from the line of Mark Hughes with Truist Securities. Your line is open. Mark Hughes: You suggest that the margin improvement ought to be more modest through the balance of the year but the coming off of a 10-point gain more modest could be two points, or it could be eight points, or something else? I wonder if you could maybe provide just a little more clarity on that? Mark Jones Jr.: Yes. So historically, we haven’t been incredibly specific on margin guidance, really to give us the freedom to make decisions that may impact timing of when some expenses may flow through. And so we’ll continue to keep that level of, I would say specificity on margin guidance. We’ve got some projects that we need to do to secure future growth as well. And those require investment and, whether that falls in Q3 or Q4, I wouldn’t want to get too specific on that. Mark Hughes: Okay. And then, did you give the number for how many franchises you onboarded in the quarter? Mark Jones Jr.: Yes. So we onboarded 72 agencies in the quarter. Mark Hughes: And then, when some of the corporate agents switch over to franchises, do they take some of the renewal economics with them? Do they go from a flat start or is there some amount of commission volume that they take that might switch from the corporate channel to the franchise channel? Mark Jones Jr.: No. They are starting over. Operator: The next question comes from the line of Paul Newsome with Piper Sandler. Your line is open. Paul Newsome: Congrats on the quarter. Sorry, if I’m just confused here, but I was hoping you could help me understand a little bit about the timing of both the other corporate agent ads with new recruitment. Is all the folks that you hired through the summer essentially showing up in June numbers, or do they get added on in July and August as well. And so I’m just trying to think about the timing of what you’ve been talking about onboarding people, compared with what their numbers you see on a quarterly basis? Probably I’m not clear here. Mark Miller: Now, that’s very close. This is Mark Miller. They will continue to onboard throughout the summer, and we will continue to recruit all the way into the fall. So we have expectations of a certain amount of recruits. I won’t get into that. But I will say that in my prepared remarks, we said that we wanted to be at about 320 by the end of the year. That’s what we’re targeting. Now, it depends somewhat on what attrition levels are there. Our attrition levels are very low right now. So it’s easier to hit the number based on where we are but I can’t control where attrition goes from here but that’s about what we expect it to be. Paul Newsome: Interesting. Any thoughts on this impacted distribution outside of your company specific. Imagine a lot of franchise recruitment employment depending upon what’s been happening with other agency systems especially at nationwide, getting an independent agent from. Just like your broader thoughts on, what you think is happening with distribution in general. Mark Jones Jr.: Yes. I would say we’ve probably had the best carrier portfolio out there of any independent agency. And I don’t know that for 100% fact. But I don’t imagine there’s anybody with a team as strong as ours out there acquiring new product as aggressively as we are. So I don’t like it when a carrier shuts down, state farm shutting down in the state of California, hopefully that helps California in their DOI, understand some of the challenges that they’re imposing on the consumer. But it is one less competitor for us out there to work against. But it is an incredibly challenging market out there for anybody trying to distribute personal lines insurance, I think we have the best offering. So it does help us from a recruiting standpoint, when we can say look at the number of carriers we’ve onboarded in your specific region that can help you out compete anybody else that would be trying to operate an independent agency or be a single product platform out there. So it’s definitely not necessarily a net positive, but I think we’re doing it better than anybody else. Operator: Our next question comes from the line of Katie Sakys with Autonomous Research. Your line is open. Katie Sakys: I wanted to dig a little bit deeper on some of the questions about producer economics. So I guess first, it looks like the producer count is only up about 3%, year-over-year. I was curious if you guys have a bogey as to where that might end the year. And what are some potential opportunities to exceed that mark? Mark Jones Jr.: Yes. So we said in our prepared remarks that it would be flat to moderately down. And importantly, the follow up to that is the agents that are exiting the system are doing close to if not zero, and the agents we’re adding back into the system are much more productive than anybody we’ve added in for. So while the agent count may be going in the direction that is inconsistent with the actual revenue generation. So the productive capacity of that workforce is continuing to increase, even if the total number doesn’t look that way. Mark Jones: I think it’s also important to remember that we have just gone through a major restructuring exercise with our corporate sales force, and you would expect it to be down in conjunction with that effort. As we said, on the call earlier, that restructuring is now complete. And we’re seeing extraordinary productivity for the new people, I said in my remarks, it’s over 65%, it’s actually about 70%. That our June — the class that went through in June training is producing 70% more than their counterparts were a year ago. So we’re adding back real high-quality people. So I think that’s important context on the actual number of buds and seeds. Mark Jones Jr.: Yes. So just to be clear, as a follow up to that makes no confusion. Corporate sales ended the quarter at 280, which was up from Q1, down significantly from last year. We expect corporate sales to be ending the year around 320. Total franchise producers, we are expecting to trend flat, to moderately down in the second half. Mark Jones: That restructuring process is still ongoing. Mark Jones Jr.: But the ones we’re taking out are not very productive, the ones we’re adding in are much more productive. So you can average up the productivity level per agent. Katie Sakys: That makes perfect sense. Thank you so much for the clarification there. And as a quick follow-up, it looks like you guys are still growing your tenured agents in Texas a little bit faster than those that are outside of Texas geography. I’m kind of curious, do you anticipate that to continue to be a trend going forward? Or do you anticipate having a bit more growth outside of Texas as you guys continue to look at hiring and transitioning agents from the corporate channel into the franchise segment? Mark Jones Jr.: That’s a great question is exactly what we’re trying to do which is spread the franchise agents out more geographically across the United States. It doesn’t mean that we wouldn’t support our franchises in Texas, if they want to grow, we help them hire on their behalf, we bring candidates to them. However, when we’re looking for new franchises, our candidates to be franchise owners, we’re paying particular attention right now to geos where we’d have — we’re under penetrated. So yes, I would think if you look at the map of where our franchises are, you’d see more growth outside of Texas in a year from now than you do today. Katie Sakys: Thank you. I’m sorry. One quick follow-up to that. I mean, we’ve heard quite a bit about, particular states where personal lines underwriters are no longer writing new business. I’m kind of curious of those underpenetrated states that you guys can see on your own maps. Are there any particular states that you guys would call out as growth opportunities for Goosehead, keeping in mind that these are also markets maybe where underwriters are no longer open for any business? Mark Jones: We’re specifically prioritizing a way for markets, where are the underwriters are risk-off. So like for example, Florida, California, where we’re only responding to inbound calls out of Florida, and I don’t think — I think we’re completely shut off all of our recruiting activity in the state of California. So what we’re trying to do is focus our franchise development efforts on the most attractive markets for our carriers, and the most attractive markets for us. And because we’ve been in Texas for 20 years, we have a big business in Texas, and all the carriers want us to give them, not Texas. Operator: Our next question comes from the line of Scott Heleniak with RBC Capital Markets. Your line is open. Scott Heleniak: I had a question on cross-selling. I’m just wondering what kind of traction you’re getting there in terms of customers that have multiple products this includes some of your ancillary products that are being flood and renters’ condo. I know those are smaller, but just any kind of update in terms of what you’re seeing on the cross-selling part and customers buying multiple products from you, versus where it had been trending. Mark Jones Jr.: Yes. That’s a best practice that we preach with our agent workforce, as you want to try and capture full share of wallet get as many lines of business as you can with a client as possible. I think our agents do that best-in-class, probably better than any of the other insurance agents out there. But I would say it remains high. We haven’t seen a material change. And I think in any direction on that. That’s a good retention lever having another line of business as multiple years to the clients’ life. So not a lot of news to report on that. But I believe our agents do it better than anybody else. Scott Heleniak: Okay. And then this is sort of along the lines, but just curious to how much increase in shopping activity that you’re seeing just because of where rates are in auto and home. And I imagine a lot of people are — more people are coming your way. If you can comment on that and I’m also just curious how many people that you’re seeing are actually switching that they come across the Goosehead agent, the typical person. Just any kind of trends there? Mark Jones Jr.: Yes. We are seeing a significant increase in shopping behavior from clients, which if you look at our client retention numbers remaining at 88% is strong credit to our service team for being able to deliver phenomenal client experience in the environment where some people have premiums going up 20%, 30% So I’m very proud of our team and the way they’ve been able to deliver incredible service throughout this. It’s certainly not a tailwind for us shopping behavior you would expect potentially, more clients are leaving their existing insurance agent but it also means that our entire book is continuing to ask for reshot as well. Scott Heleniak: Okay. That’s helpful. And just the last one too. I was just curious if you had anything or you could comment on in terms of the franchisee restructuring. Are we kind of 18% to 19% done or is there is any more context you can offer on that? Mark Jones Jr.: Yes. We talked about the majority of it is done so that we’re over the 50% line. And it does just take a little bit longer for that to work through the system, given the way that the franchise law works, we need to give those agents a little bit more time to cure than you would a W2 employee. So the second half of the year, there’s still going to be a significant number of terminations, but we do believe we’re nearing the finish line. Operator: Our next question comes from the line of Pablo Singzon with JPMorgan. Your line is open. Pablo Singzon: My first question was a numbers question. Are you able to share written premiums for the corporate and the franchise channels? Mark Jones Jr.: Sorry, what was that publisher or what for – Pablo Singzon: Written premium, sorry, just a breakdown between corporate and franchise/ Mark Jones Jr.: Yes. That was included in the prepared remarks. Pablo Singzon: Okay, sorry. All right. Next question. So as I look at policy in force, or new business revenue growth, those metrics are still [indiscernible] right, but seems like you’re willing to refine distribution, you’re ramping up recruitment, on the corporate side? Would it be reasonable to expect those metrics to start picking up, a second half of this year, maybe in certainly in 2024? Mark Jones Jr.: Yes. We certainly are expecting policies enforced growth to reaccelerate in the direction of 30%, I would not expect that number to have a three handle in front of it in 2024. But we are gearing the organization around achieving a 30% policy enforced growth rate. Mark Jones: And we’ve managed extraordinary high levels of growth in the past. I mean, this is something that is not theoretical to us. This is something we’ve demonstrated a very high degree of proficiency. And as we complete our restructuring efforts, we’ll be sort of turning on the gas all the way. Pablo Singzon: Yes. Understood. And that’s actually a good segue into my next question. So as we think about your long-term premium growth target of, I think you said 30% CAGR? Can you walk through the different components that build up to that growth rate? And I’m thinking of number of agents productivity and the National benefit from yearly premium increases, I think, if you look at your premium growth, pre-COVID, the number of agents has always grown faster than written premiums. And it sort of makes sense, right? If you think about the ramp up and those sorts of things, but I guess for this new model, now, how will those different components build up to that 30% CAGR premium growth. Mark Jones Jr.: It’s a combination of productivity improvements, as well as increases in the number of sellers in the field. So that I don’t believe the number of sellers in the field needs to increase at a 30% rate as we generate more accumulated experience, we will be getting more productive over time. And we’re continuing to invest in technology and tools that make our agents more productive. And, again, that’s not theoretical either. We are really seeing that in real-time agents are getting better, every single month that is incredibly impressive to generate a 30% premium CAGR over the next five years, you don’t need 30% producer growth, you need some producer growth, but really you need productivity gains, you need the productive capacity to continue to increase. And so that’s how we’re structuring the business. Mark Jones: And also there’s three elements of producer growth, right, and some are more productive than others. So the traditional agency, we know historically how productive they are, we should expect that to increase because we’re just bringing on better people now. But secondly, this whole motion of adding producers to successful franchisees is relatively new. But those people for every producer, we add into a successful franchise, they produce 1.6x or 1.7x the new business that an entire new average franchise would produce. So that channel is super leveraged, and then the one that is just the channel on like nuclear steroids is converting corporate agents into franchisees. Those guys crank it out. And they’re there much more productive — they’re as productive as many traditional franchises. So we’re working and part of the restructuring that we did in our corporate channel was to make sure that we could provide sort of volume inputs to see the franchise channel with new high-quality franchisees. So it’s different than kind of the arithmetic you would have seen in the past, just because we have these other new channels that are either very productive on the case of adding a producer to an existing franchise are unbelievably productive. If you’re converting a corporate agent into a franchise. Pablo Singzon: That’s clear. Thank you. And then, the last one for me. Maybe for Mark Jones Jr., I think in the past, when you talked about margins, you had sort of reference that you think the improvements will be readable over your long-term target, right? And I think you’d said 3%. So I suppose in the context of a really good margin, quarter, right, I think X contingency your margins are 29%, right? Pretty good, then, in fact your target already? Is it still reasonable to assume that from here, over the next couple of years, we should sort of have a steady upward march towards your long-term targets? And clearly, you’re saying that 29% is not sustainable. But just thinking about the cadence from a year and how you get to long-term targets? Mark Jones Jr.: And we continue to expect to see margin expansion and improvement year-over-year, quarter-over-quarter. We don’t believe that 29% is an unsustainable level. Now, that may not happen every single quarter, some quarters have better margin profiles than others given the way that seasonality works, someone hiring works and then raises work. But I certainly don’t believe that 29% is a cap for us. We continue to expect strong margin expansion every year. Operator: Thank you. I’d now like to turn the call back to CEO Mark Jones for closing remarks. Mark Jones: Thanks, everyone. For your questions on the call. We appreciate your attention and have a good day. Operator: Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation. You may now disconnect. Follow Goosehead Insurance Inc. (NASDAQ:GSHD) Follow Goosehead Insurance Inc. (NASDAQ:GSHD) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Truist Financial Corporation (NYSE:TFC) Q2 2023 Earnings Call Transcript July 20, 2023 Truist Financial Corporation misses on earnings expectations. Reported EPS is $0.95 EPS, expectations were $1.01. Operator: Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation’s Second Quarter Earnings Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session […] Truist Financial Corporation (NYSE:TFC) Q2 2023 Earnings Call Transcript July 20, 2023 Truist Financial Corporation misses on earnings expectations. Reported EPS is $0.95 EPS, expectations were $1.01. Operator: Greetings, ladies and gentlemen, and welcome to the Truist Financial Corporation’s Second Quarter Earnings Call. Currently, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this event is being recorded. It is now my pleasure to introduce your host Mr. Brad Milsaps, Head of Investor Relations, Truist Financial Corporation. Brad Milsaps: Thank you, Tarren, and good morning, everyone. Welcome to Truist’s second quarter 2023 earnings call. With us today are our Chairman and CEO, Bill Rogers; and our CFO, Mike Maguire. During this morning’s call, they will discuss Truist’s second quarter results, share their perspectives on current business conditions and provide an updated outlook for 2023. Clarke Starnes, our Vice Chair and Chief Risk Officer; Beau Cummins, our Vice Chair; and John Howard, Truist Insurance Holdings ‘ Chairman and CEO are also in attendance and are available to participate in the Q&A portion of our call. The accompanying presentation as well as our earnings release and supplemental financial information are available on the Truist Investor Relations website ir.truist.com. Our presentation today will include forward-looking statements and certain non-GAAP financial measures. Please review the disclosures on slides two and three of the presentation regarding these statements and measures as well as the appendix for appropriate reconciliations to GAAP. With that, I’ll now turn it over to Bill. Bill Rogers: Thanks, Brad, and welcome to the team. Good morning, everybody, and thank you for joining our call today. I don’t think it’s a surprise to anybody on this call that the increasing levels of uncertainty in our economy, the impact of interest rates on funding cost, and a new sort of post-March operating environment for our industry are impacting our results and plans. Truist was specifically built to increase our flexibility to respond to any condition to fulfill our purpose and commitment to all stakeholders. Capital and liquidity have taken on an increased focus and although Truist is currently well-positioned. We’re also intensely building future flexibility. This environment also challenges us to move faster with greater intensity to tighten our strategic focus and rightsize our expense chassis to reflect the new realities. We also have flexibility in strengthening our balance sheet to support our focus on our unique core client base and market opportunity. These decisions are less incremental and more time-bound than the ones previously made during our shift from integrating to operating. Mike will highlight some of these decisions in his comments and I’ll close with some of the underlying momentum. While these changes will be manifested over time, this is not business as usual and reflects an important and significant pivot for Truist and for our leadership team. We’ll provide more details about these topics and our second quarter results throughout the presentation. Before we do that, let me start where I always do on slide four on purpose mission and values. Truist is a purpose-driven company dedicated to inspiring and building better lives and communities. I’d like to share some of the ways we brought that purpose to life last quarter. In May, we announced the launch of Truist Long Game, our mobile app that leverages behavioral economics to reward clients for building financial wellness at a high-level user set goals, save money and earn rewards that are deposited into a Truist account as they make progress towards their savings goals. Based on early data, users tend to play four to five times a week with strong retention and we’ve seen positive trends towards new client acquisition. This is also the first product from our Truist Foundry, our very own start-up tasked with creating digital solutions to help meet clients where they are. Truist has also highlighting small-business owners through a small-business Community Heroes initiative which is all about focusing on the small-business owners who worked tirelessly to serve our neighbors, create jobs and build our communities and help drive our economy. Our branch teammates are visiting and connecting with tens of thousands of small business clients to say thank you and have a carrying conversation to assist with their unique needs. The response so far has really been excellent and our outreach efforts have helped drive a 31% increase in net new small business checking accounts during the second quarter alone. Lastly, I want to thank our teammates, who dedicated more than 16,000 hours during the second quarter to volunteer in their communities. I’m really proud of the good work our company and our teammates are doing to live out our purpose and to make a difference in the lives of their clients, teammates and communities. So let’s turn to the second quarter performance highlights on slide six. Second quarter results were mixed overall. Net income available to common in the second quarter was $1.2 billion or $0.92 a share. EPS decreased 16% relative to the year-ago quarter, primarily due to a higher loan loss provision and noninterest expense partially offset by higher net interest income. EPS decreased 12% sequentially as higher funding costs pressure net interest income. Total revenue decreased 2.9% sequentially, consistent with our revised guidance, and a 6.1% decrease in net interest income was partially offset by 2.6% increase in fee income led by record results at Truist Insurance Holdings. Adjusted expenses were within our existing guidance range although we are actively working to manage cost even more intensely. Loan balances were relatively stable and we’re pleased with the initial progress we’ve made to reposition the balance sheet for higher return core assets, especially in consumer, though there’s always additional work to do. Average deposits were down 2% largely due to client activity in March, the overall deposit trends have stabilized significantly since that time frame and our conversations with our clients and our pipelines have improved. We’re also prudently increasing our provision and allowance due to increased economic uncertainty. At the same time, our CET1 capital ratio increased 50 basis points driven by organic capital generation and the sale of a 20% stake in our insurance business. These same factors drove a 5% increase in tangible book value per share for March 31st. Our stress capital buffer increased from 250 basis points to 290 basis points higher than we think our steady state business model warrants, but still a good performance as Truist had the fourth lowest loan loss rates among traditional banks that participate in the stress test reflecting again our conservative credit culture and diverse loan portfolio. We also announced plans to maintain our strong quarterly common stock dividend at $0.52 a share subject to Board approval. Strategically, we continue to optimize our franchise and focus our resources on our core clients and businesses, which is why we made the strategic decision to sell a $5 billion non-core student loan portfolio at net carrying value which has no upfront P&L impact. We’re also making solid progress toward shifting our loan mix towards higher return core assets. As we adapt to the current environment, we’re highly focused on doubling down on our core franchise, simplifying where it makes sense, rationalizing our expenses, and building capital, all of which will address later in the presentation. So moving to the digital and technology update on slide seven. Digital engagement trends remain positive, reinforcing the importance of continued investment in digital due to its close association with relationship primacy client experience and account growth. As a proof point, we recently enhanced our digital on-boarding experience through a series of platform enhancements resulting in higher conversion rates for new applications, faster funding and higher average digital account balances. Our growing mobile app user base is also driving increased transaction volumes. Digital transactions grew 5% sequentially and now account for 61% of total bank transactions. Zelle transactions increased 12% compared to the first quarter and now account for one-third of all-digital transactions at Truist, which underscores the importance our clients place on our payments and money movement capabilities. Retail digital client satisfaction scores have also returned to their pre-merger highs. We are proud of our third-place ranking in the Javelin 2023 Mobile Banking Scorecard. From an overall client experience and technology perspective, we continue to enhance our capability set that includes recent improvements to our cloud-based self-service digital assistant Truist Assist since implementing these enhancements several months ago, Truist Assist has hosted over 500,000 conversations with more than 380,000 clients and is connected clients to live agents to support more than 100,000 complex needs via LiveChat. Photo by Towfiqu barbhuiya on Unsplash Over time, increased utilization of Truist Assist should lead to lower volumes in our call centers. We’re also delivering on our commitment to T3, through the launch of our Truist Insights to our small business heroes earlier this month. Truist Insights on power small businesses by providing actionable insights about financial activities, including cash flows, income and expense and proactive balanced monitoring. We first piloted Truist Insights in 2021 and this year alone have generated over 200 million financial insights for more than 4.5 million clients, who are now delivering the best valuable tool to small businesses. This is just one more way we’re bringing touch and technology together to build trust and to help our small business clients bank with confidence, where and how they want. Overall, I’m highly optimistic that our investments in innovation and digital and technology will enhance performance and further improve the client experience. Let me turn to loans and leases on slide eight. Loan growth continues to be correlated with the solid progress we’ve made to shift our loan mix towards more profitable portfolios and core clients while intentionally pulling back from lower-yielding and certain single-product relationships. Average loan balances were stable sequentially as growth in our commercial portfolio was largely offset by lower consumer balances. Commercial loan growth was driven by seasonality and mortgage warehouse lending and continued growth in traditional C&I which is a core area for us. The decline in average consumer balances was primarily due to indirect auto where we’ve intentionally reduced production, home equity, residential mortgage and student loan balances also declined and I’ll provide more details about the sale of the student loan portfolio in a few moments. At the same time, we’re seeing strong results from our Service Finance and Sheffield businesses where second quarter production grew 34% and 21% respectively from the year ago quarter. Service Finance continues to perform very well and take market share and consistent with our balance sheet optimization we’ll increase our loan sale opportunities to help support its growth. As I mentioned, we made the strategic decision to sell our $5 billion non-core student loan portfolio, which had been running off at a pace of approximately $400 million per quarter. We sold the student loan book in late June and net carrying value with no upfront P&L impact. Proceeds from the sale were used to reduce other wholesale funding. The transaction will modestly hurt NII, but boost NIM and balance sheet efficiency, exactly what we should be doing in an environment where cost of capital and funding has increased meaningfully. Moving forward, we’ll continue to better focus our balance sheet on Truist clients who have broader relationships while limiting our exposure to single product and indirect clients as well as evaluate ways to increase the velocity overall of our balance sheet. Now let me provide some perspective on overall deposit trends on slide nine. Average deposits decreased $8.7 billion or 2.1% primarily due to seasonal tax payments and outflows that occurred late in the first quarter and were consistent with industry impacts of quantitative tightening. We continue to experience remixing within our deposit portfolio as noninterest-bearing deposits decreased to 31% of total deposits from 32% in the first quarter and 34% in the fourth quarter of 2022. Interest-bearing deposit costs increased 55 basis points sequentially and our cumulative interest-bearing deposit beta was 44%, up from 36% in the first quarter due to the continued presence of higher rate alternatives and the ongoing shift from noninterest-bearing accounts to higher-yielding products. We continue to remain a balanced approach in the current environment being attentive to client needs and relationships while also striving to maximize value outside of rate paid. Our continued rollout of Truist One and ongoing investments in treasury and payments are the bullseye of our sharpened strategic focus and will remain critical as we look to acquire new relationships, deepen existing ones and maximize high quality deposit growth. Now let me turn it over to Mike to discuss our financial results in a little more detail. Mike Maguire: Great. Thank you, Bill, and good morning, everybody. I’ll begin with net interest income on slide 10. For the quarter, taxable equivalent net interest income decreased 6.1% sequentially as higher funding costs more than offset the benefits of higher rates on earning assets. Reported net interest margin decreased 26 basis points to 2.91% due primarily to an acceleration of interest-bearing deposit betas and mix-shift out of DDA into other high cost alternatives. The lower net interest margin also reflected our liquidity build late in the first quarter, while liquidity remained elevated throughout April and May, it has normalized by June and will provide some modest boost in NIM going forward. On a year-over-year basis, net interest income is still up 7.1%, and core net interest margin is up 13 basis points. This reflects the cumulative benefit we’ve seen from the rising rates during the cycle, particularly throughout 2022, but now we are losing some of that benefit in 2023. Moving to fee income on slide 11. Fee income rebounded 2.6% relative to the first quarter. Insurance income increased $122 million sequentially to a record $935 million, demonstrating the strength of Truist Insurance Holdings. Year-over-year organic revenue grew by 9.1%, the highest in four quarters, driven by strong new business growth, improved retention and a favorable pricing backdrop. Other income increased $65 million primarily due to higher income from our non-qualified plan and higher other investment income. In contrast, investment banking and trading income decreased $50 million, reflecting lower bond originations, loan syndications and asset securitizations as well as lower core trading income from derivatives and credit trading. Finally, mortgage banking income increased or may decreased $43 million, with most of the decrease related to prior quarter gain on sale of a servicing portfolio. Turning to non-interest expense on slide 12. Adjusted noninterest expense increased $67 million or 1.9% sequentially. The increase in adjusted expenses reflected a $75 million increase in personnel costs due to higher variable compensation and non-qualified plan expense and a $38 million increase in professional fees associated with enterprise technology and other investments. These increases were partially offset by a $41 million reduction and other expenses due to lower operational losses during the quarter. As a company, we have substantial opportunities to operate more efficiently and are committed to generating expense reductions. On the April earnings call, we discussed a strategic realignment within our fixed-income sales and trading business in which we discontinued certain market making activities and services provided by middle-market fixed-income platforms that had an unattractive ROE. We also identified various expense reduction activities that had already been underway, including realigning our LightStream platform to our broader consumer business and ongoing capacity adjustments to market-sensitive businesses such as mortgage. We’re actively working to identify and accelerate additional actions that could be implemented over the course of the next 12 to 18 months to generate cost reductions to reflect efficiency opportunities and changing conditions. These actions include taking a much more aggressive approach towards FTE management, realigning and consolidating businesses to advance our long-term strategy, rationalizing our tech spend to drive more efficient and effective delivery and optimizing our operations and contact centers, which will help us transform Truist into a more effective and efficient company. Taken together, we believe these actions will increase our focus, double down on our core, simplify our business, bend the expense curve, and enhance returns for our shareholders. Moving to slide 13, asset quality metrics reflected continued normalization during the second quarter. Nonperforming loans rose 11 basis points primarily due to increases in our CRE and C&I portfolios, though they remain manageable at 47 basis points. While the increase in CRE, nonperforming loans, include some office, these loans are generally paying as agreed. Our net charge-off ratio was 54 basis points inclusive of a 12 basis point impact from the sale of the student loan portfolio, excluding the student loan sale, net charge-offs were 42 basis points up 5 basis points sequentially. We’d also note that the student loan sale had no impact on our provision expense this quarter as the charge-offs taken in conjunction with the sale was essentially equal to the allowance on the portfolio. During the quarter, we also increased our ALLL ratio 6 basis points to 1.43% due to greater economic uncertainty. Consistent with our commentary last quarter, we have tightened credit and reduced our risk appetite in select areas though we maintain our through-the-cycle approach for high-quality long-term clients. Next, I’ll provide more details on our CRE portfolio, which takes us to slide 14. On June 30th, CRE, including commercial construction represented 8.9% of loans held for investment, while the office segment comprised only 1.6%. We maintain a high-quality CRE portfolio through disciplined risk management and prudent client selection. We typically work with developers and sponsors we know well and have observed their performance through multiple cycles. Our larger exposures tend to be associated with sponsors that have strong institutional ownership and we have actively managed less strategic exposures out of the portfolio since the close of the merger. Looking at office in particular, the chart at the lower right provides a breakdown of our office portfolio by tenant and Class. Our office exposure tends to be weighted towards multi-tenant Class A properties that are situated within our footprint. All factors that we believe will drive outperformance. In addition, we have a strong CRE team that is highly proactive in working with clients to get ahead of the problems. During the second quarter, we completed a thorough review of the majority of our CRE office exposure. We considered current conditions and client support in our risk rating approach. As a result, a handful of loans were moved to non-accrual, though the preponderance of the clients in exposure are paying as agreed. We believe our actions are prudent in light of current market dynamics and demonstrate our commitment to proactive and early identification and resolution of credit risk. While problem loans have increased in recent months, we believe overall issues will be manageable in light of our laddered maturity profile, conservative LTVs, and reserves which for office totaled 6.2% of loans held for investment. Turning to capital on slide 15. As you can see from the capital waterfall, Truist is well-capitalized and has significant flexibility to respond to potential changes in the risk and regulatory environment. Beginning on the left, CET1 capital increased 50 basis points to 9.6% at June 30th. This was driven by organic capital generation and the completion of the sale of the 20% stake in Truist Insurance Holdings. I would also point out that at 9.6%, we’re well above our new regulatory minimum of 7.4% which takes effect on October 1st. We expect to achieve an approximate 10% CET1 ratio by year-end through a combination of organic capital generation and disciplined management of RWA growth. This view does contemplate the headwind from the pending FDIC assessment. On top of this, Truist has more than 200 basis points of additional flexibility given the residual 80% ownership stake in Truist Insurance Holdings. As we look beyond ’23, we do expect regulatory and capital requirements to become more stringent and potentially require us to deduct AOCI from our CET1 ratio, while the final form of any regulatory changes remains to be seen Truist is well-positioned to respond due to our strong organic capital generation and the likely phasing periods of any potential new requirement. Specifically, and as shown on the right-hand side of the slide, based on estimated cash flows and assuming today’s forward curve, we would expect Truist AOCI to decline by 36% by the end of 2026. Assuming our current rate of organic capital generation remains constant, Truist should generate sufficient capital to offset the estimated remaining impact of AOCI on CET1 over this time period while maintaining the strategic capital flexibility with Truist Insurance Holdings. And now I will review our updated guidance on slide 16. Looking into the third quarter of 2023, we expect revenues to be down 4% due to seasonally lower insurance revenue and slightly lower loan balances, which will lead to continued pressure on net interest income, albeit at a slower pace relative to the decline we experienced in the second quarter. Adjusted expenses are anticipated to decline zero to 1% as seasonally lower insurance commissions and our efforts to bend the expense curve will offset several seasonal headwinds like marketing and employee benefits that should change the tailwinds in the fourth quarter. For the full year 2023, we now expect revenues to increase 1% to 2% compared to 2022. The decline from our previous outlook for 3% growth is primarily driven by lower net interest income due to higher deposit betas, slower loan growth and lower investment banking revenue. Adjusted expenses are expected to increase 7%, which is at the upper end of our previously guided range due to continued investments in enterprise technology and other areas. This excludes the anticipated FDIC surcharge. This is a number that is higher than where we’ve been targeting, but as we’ve discussed, we are pursuing a number of actions to reduce costs. In terms of asset quality, our expectation is for the net charge-off ratio to be between 40 and 50 basis points, which includes the impact of the student loan sale. Finally, we expect an effective tax rate of 19% or 21% on a taxable equivalent basis. Now Bill, I’ll hand it back to you for some final remarks. Bill Rogers: Great. Thanks, Mike. So let’s conclude on slide 17. We’re on the right path and I’m highly optimistic about our ability to realize our significant post-integration potential as summarized in our investment thesis. Our goal financially is to provide strong growth and profitability and to do so with less volatility than our peers. Our strategic pivot from integrating to operating is well underway. And while the financial benefits of our pivot have been masked by the rapid increase in funding costs and related revenue pressure, we’ve made significant strategic progress over the past year and showing up in a number of operating metrics across our business. In our Consumer Banking and Wealth segments, Retail and Small Business Banking net new checking production has been positive during four last five quarters, reflecting the success of Truist One and improved retention associated with our increasing client service metrics. Truist One also has many features that appeal to millennials and Gen Z represent 70% of the new client applications. Our Wealth Trust and Brokerage business continues to build momentum as net organic asset flows, which exclude the impact of market value changes have been positive eight of the last nine quarters. We’ve also steadily improved client satisfaction through the distinctive service provided by our branches and care agents as well as improvements to our digital processes and procedures that originated in our client journey rooms. As a result, our client satisfaction scores were stable to improving across most of our channels during the second quarter, but have been consistently rising over the past year since the integration. In Corporate and Commercial, we continue to focus on left lead loan transactions and the synergies between our CIB and CCB businesses. During the first half of the year, 25% of the left lead transactions closed by Truist were with our CCB clients. We’re also making inroads with new CCB clients as 65% of the CCB left leads I just mentioned were new relationships. In equity capital markets, transaction economics have improved approximately 300 basis points on average since the merger. And in wholesale payments, our pipeline is the highest it’s been since the merger. Each of these data points reflects our increasing strategic relevance with our clients. In addition, our IRM program, integrated relationship management is off to a great start this year as we’ve already delivered nearly 50% more IRM solutions year-to-date than during the same period a year ago. Our strong progress demonstrates what is possible post-integration when our teammates can focus their undivided attention on caring for their clients and deepening those relationships. However, just as we’re shifting our focus from integrate to operate, the economic landscape shifted from favorable to more challenging. As a result, we too much shift and make tough decisions to fit the realities of today’s economic environment and tomorrow’s regulatory requirements. This means being more disciplined about where we choose to compete and deploy our capital, whether businesses, clients or products and looking deeper and more — more structural cost opportunities that exist at Truist. These opportunities exist, but not the primary focus during the integration period where the focus was on creating the best transition possible for clients and teammates. Mike highlighted many of the specifics earlier while the details are critically important, what will ultimately matter to stakeholders is our absolute expense base and growth, and our teams are aligned internally on changing that trajectory. I’m really truly optimistic about the future of Truist as our unwavering foundation of purpose, our talented teammates, leadership in growth markets and diverse business model will continue to drive our momentum and fulfill our potential. So Brad, let me turn it back over to you for Q&A. Brad Milsaps: Thank you, Bill. Tarren, at this time, will you please explain how our listeners can participate in the Q&A session, as you do that, I’d like to ask the participants to please limit yourselves to one primary question and one follow-up in order that we may accommodate as many of you as possible today. See also 12 Most Dangerous Countries in Central and South America and 10 Best Sporting Goods Stocks To Buy Now. Q&A Session Follow Truist Financial Corp (NYSE:TFC) Follow Truist Financial Corp (NYSE:TFC) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] We’ll take our first question from Ken Usdin with Jefferies. Please go ahead. Ken Usdin: Thanks. Good morning, everyone. So I just wanted to follow-up, of course, it makes sense that the funding cost and slower loan growth is part of the change in the revenue outlook. I’m just wondering as you look forward and you think about that deposit mix and deposit cost trajectory as far as funding cost looking past the second quarter, how do you see that affecting the NII trajectory within that new revenue guide for the third and fourth? Thanks, guys. Mike Maguire: Hey, good morning, Ken. It’s Mike. I’d say as we think about the rest of the year, the same factors that have been driving, I’d say just Average Balance QT primarily in the second quarter, we had a little bit more of an impact from tax payments will continue. The mixing has been pretty consistent too from a noninterest-bearing demand perspective into higher-cost alternatives. We saw a little bit of an acceleration in the first quarter as you’ll recall, but this quarter that stabilized a bit. We were down about 5.5% on those balances and remix from I guess 32% to 31%. We would expect that trend to continue as well. I think really the factor as we think about NII trajectory for the third and the fourth quarter has much more to do with sort of the Fed policy track, right, where we had about call it close to 50 basis points average increase in the Fed funds rate in the second quarter which really did have an impact on our betas, in our funding costs, we would expect that to be about half that in the third quarter and further moderating from there. Ken Usdin: And just on the follow-up, what do you think that means for kind of the view of where you think terminal interest-bearing beta might land? Mike Maguire: It’s tough. We’re at 44% today, that’s higher than where we expect it to be. I think we — as recently as a month or so ago expressed an expectation that maybe mid-to-high 40s would be the case. I think certainly piercing 50%, but really hard to pick a number at this point, Ken, to be honest with you, a lot of it I think has to do with how long we’re higher for longer. Ken Usdin: Yeah. That makes sense. Okay, thank you. Operator: We will take our next question from Ebrahim Poonawala with Bank of America. Please go ahead. Ebrahim Poonawala: Good morning. I guess maybe the first question, Mike, just following up on what — your response to Ken around just the change in deposit beta expectations even relative to last month. Are they — like when we think about what you said on deposit beta outlook, are there any real signs that are suggesting that deposit trends are in fact slowing down and the likelihood of the beta — deposit beta update you provided today is more likely to play-out versus having to change this again next month. I’m just wondering are you seeing any tangible signs on the ground that suggest things are getting better? Mike Maguire: You know it’s — we look at it on a weekly, monthly basis, Ebrahim. And so, I think, yeah. I mean I think history would say that as we approach and reach this terminal policy rate, we should start to see some moderation in the beta creep. We’re starting to see that a little bit, but a month or a few weeks the trend does not make, and so, just being very cautious on the outlook there. I mean at 5.25 going to 5.50, the degree of rate awareness across our client set is very, very high across the industry is very, very high. And so, look I — and I think that’s probably as much as anything driven the miss on betas for the sector so far......»»

The Allstate Corporation (NYSE:ALL) Q1 2023 Earnings Call Transcript May 4, 2023 Operator: Thank you for standing by, and welcome to Allstate’s First Quarter 2023 Earnings Conference Call. As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Mr. Mark Nogal, Head of Investor Relations. Please […] The Allstate Corporation (NYSE:ALL) Q1 2023 Earnings Call Transcript May 4, 2023 Operator: Thank you for standing by, and welcome to Allstate’s First Quarter 2023 Earnings Conference Call. As a reminder, today’s program is being recorded. And now, I’d like to introduce your host for today’s program, Mr. Mark Nogal, Head of Investor Relations. Please go ahead, sir. Mark Nogal: Thank you, Jonathan. Good morning. Welcome to Allstate’s first quarter 2023 earnings conference call. After prepared remarks, we’ll have a question-and-answer session. Yesterday, following the close of the market, we issued our news release and investor supplement, filed our 10-Q and posted related material on our website at allstateinvestors.com. Our management team is here to provide perspective on these results. As noted on the first slide of the presentation, our discussion will contain non-GAAP measures for which there are reconciliations in the news release and investor supplement, and forward-looking statements about Allstate’s operations. Allstate’s results may differ materially from these statements, so please refer to our 10-K for 2022 and other public documents for information on potential risks. As some of you know, this will be my final earnings call as the leader of our Investor Relations team, and I will be transitioning to a new role in our P&C finance area supporting National General. I’m leaving Investor Relations in the capable hands of Brent Vandermause, who will be a great partner for all of you going forward. And now, I’ll turn it over to Tom. Tom Wilson: Good morning. We’re excited for Mark, and we’re completely confident that Brent is going to give you everything you need to help you decide how and why you want to invest in Allstate. So good morning. We appreciate the investment of your time in Allstate today. Let’s start with an overview results, and then Mario and Jess are going to walk through the operating results and the actions that we’re taking to increase shareholder value. So let’s start on Slide 2. Allstate’s strategy, as you know, has two components, increased personal property-liability market share and expand protection services. Those are shown in the two ovals on the left. If you go to the right-hand side of the slide, you can see a summary of the results for the first quarter. We had a net loss of $346 million in the first quarter, which reflects a property liability underwriting loss which was only partially offset by strong investment income and profits from protection services and health and benefits. We’re making good progress on executing the comprehensive plans to improve auto insurance profitability, and of course, we’ll have a substantive discussion on that today. Not to be overlooked, we also continue to advance Transformative Growth plan, which is to execute the top oval there, which is to increase Property-Liability market share. At the same time, Allstate Protection Plans in the lower oval continues to expand its product offering and geographic footprint. Let’s review the financial results on Slide 3. Revenues of $13.8 billion in the first quarter increased 11.8% or nearly $1.5 billion as compared to the prior year quarter. The increase was driven by higher average premiums in auto and homeowners insurance, resulting in Property-Liability earned premium growth of 10.8%. In the auto insurance line, higher insurance premiums and lower expenses were essentially offset by increased loss costs, so the profit improvement plan has not yet returned margins to historical levels. The auto insurance line had an underwriting loss of $346 million in the quarter. In homeowners, the story is really about $1.7 billion of catastrophes, which led to an underwriting loss of $534 million. The total underwriting loss was just under $1 billion. Net investment income of $575 million benefited from higher yields, which mostly offset an income decline from performance-based investments. Protection Services and Health and Benefits generated adjusted net income of $90 million in the quarter. As a result, the adjusted net loss was $342 million or $1.30 a share. Now let me turn it over to Mario to discuss Property-Liability results. Mario Rizzo: Thanks, Tom, and good morning, everybody. Let’s flip to Slide 4. The chart on the left shows the Property-Liability recorded and underlying combined ratio since 2017. As you can see, Allstate has a long history of generating strong underwriting results though the current operating environment is challenging, with combined ratios over 100 last year and into the first quarter. The underlying combined ratio of 93.3 for the first quarter was slightly below the full year 2022. The second chart compares the full year 2022 recorded combined ratio for all lines of business to the first quarter of this year, which removes the influence of intra-year severity changes that occurred throughout 2022. The first red bar shows the underlying loss ratio was essentially unchanged as higher premiums were offset by increased loss costs. The second red bar on the left shows most of the increase in the combined ratio was driven by higher catastrophe losses, reflecting the widespread severe weather in the first quarter of this year. Expenses were lower by 1.9 points of premiums and minimal non-catastrophe prior year reserve reestimates also had a positive impact. Let’s move to Slide 5 to review Allstate’s auto insurance profitability in more detail. As you can see from the chart on the left, which shows the auto insurance recorded and underlying combined ratios from 2017 through the current quarter, we have a long history of sustained profitability in auto insurance as we successfully leveraged our capabilities and pricing sophistication, underwriting and claims expertise and expense management to generate excellent returns in the auto insurance business. Since mid-2021, loss costs have increased rapidly, driving combined ratios above our mid-90s target. The profit improvement plan is designed to address these significant loss cost increases, and we’re making good progress. The chart on the right compares the recorded combined ratio of 104.4 in the first quarter to full year 2022 results. Starting on the left, higher average earned premiums drove a 5.7 point favorable impact, which is shown in the first green bar. The first red bar reflects a 6.5 point increase in underlying loss cost due to increased accident frequency and severity for the 2023 report year, with severity currently projected in the 9% to 11% range above the full prior report year. A lower expense ratio reflects expense reductions and higher earned premiums. The remaining difference was due to catastrophes and prior year reserve reestimates. All in, both the recorded and underlying combined ratios of 104.4 and 102.6, respectively, improved in the first quarter of 2023 compared to the full year of 2022. Slide 6 provides an update on the execution of our comprehensive approach to increase returns in auto insurance. There are four focus areas, raising rates, reducing expenses, implementing underwriting actions and enhancing claim practices to manage loss costs. Starting with rates. Following increases of 16.9% in 2022, the Allstate brand implemented an additional 1.7% of rate increases in the first quarter. We will continue to pursue rate increases in 2023 to restore auto insurance margins. Reducing operating expenses is core to Transformative Growth. We have also temporarily reduced advertising to reflect a lower appetite for new business. We implemented more restrictive underwriting actions on new business in locations and risk segments where we have not yet achieved adequate prices for the risk. As we move through 2023, it is likely that some of these restrictions will be removed where there are profitable growth opportunities. Enhancing claim practices in a high inflation environment is key to delivering customer value. This includes leveraging strategic partnerships and scale with repair facilities and parts suppliers to mitigate the cost of repairing vehicles. In addition, settlement of pending bodily injury claims has been accelerated to avoid continued increases in costs and settlements. Transitioning to Slide 7. Let’s discuss progress in three large states with a disproportionate impact on auto profitability. The table depicts Allstate brand auto new business production and rate actions for California, New York and New Jersey. As a result of implemented profitability actions, new issued applications from the combination of California, New York and New Jersey declined by 40% compared to the prior year quarter. The decline in these three states meaningfully contributed to the 22% decline countrywide. The right-hand portion of the table provides rate increases either taken or needed to improve margins. In California, we just received approval for a second 6.9% rate increase implemented in April, which will be effective in June. We continue to work closely with the California Department on the best path forward to getting rates to an adequate level and expect to file for an additional increase in the second quarter, which will reflect the balance of our full rate need. In New York, we filed for additional rate in the first quarter that is currently pending with the Department of Financial Services. In New Jersey, we attained a 6.9% rate increase in the first quarter and expect to pursue additional filings in the second quarter. As mentioned earlier, we anticipate implementing additional rates across the country into 2023 to counteract persistent loss cost increases. Slide 8 dives deeper into how we are improving customer value through expense reductions. The chart on the left shows the property liability underwriting expense ratio over time and highlights drivers of the 2.9 points of improvement in the first quarter compared to the prior year quarter. The first green bar on the left shows the 2 point improvement impact from advertising spend, which has been reduced given a limited interest in new business at current rate levels. The last two green bars show a decline in operating and distribution costs mainly driven by lower agent and employee-related costs and the impact of higher premiums. Shifting to our longer-term target on the right, we remain on pace to reducing the adjusted expense ratio to 23 by year-end 2024 as part of transformative growth. This metric starts with our underwriting expense ratio excluding restructuring, coronavirus-related expenses, amortization and impairment of purchased intangibles and advertising. It then adds in our claims expense ratio, excluding costs associated with settling catastrophe claims because catastrophe-related costs tend to fluctuate. Through innovation and strong execution, we’ve driven significant improvement relative to 2018, with first quarter adjusted expense ratio of 24.9. We expect to drive additional improvement, achieving an adjusted expense ratio of approximately 23 by the end of next year by represents a 6-point reduction compared to 2018. The increase in average premiums certainly represents a tailwind, however, our intent in establishing the goal is to become more price competitive. This requires a sustainable reduction in our cost structure, with future focus on three principal areas, including enhancing digitization and automation capabilities, improving operating efficiency through outsourcing, business model rationalization and centralized support, and enabling higher growth distribution at lower costs through changes in agency compensation structure and new agent models. Now let’s move to Slide 9 to review homeowner insurance results, which incurred an underwriting loss in the quarter despite favorable underlying performance due to elevated catastrophe losses. We have a superior business model that includes differentiated product, underwriting, reinsurance and a claims ecosystem that is unique in the industry. As you can see by the chart on the left, this approach consistently generates industry-leading underwriting results despite quarterly or yearly fluctuations in catastrophe losses. The chart on the right shows key Allstate Protection homeowners insurance operating statistics for the first quarter. Net written premium increased 11.1% from the prior year quarter, predominantly driven by higher average gross written premium per policy in both the Allstate and National General brands and a 1.4% increase in policies in force. The first quarter homeowners combined ratio of 119 increased by 35.1 points compared to the prior year quarter, reflecting higher catastrophe losses primarily related to five large wind events in March. These accounted for more than 70% of catastrophe losses in the quarter. The first quarter catastrophe loss ratio was significantly elevated compared to the prior year and 10-year historical average by 36.2 and 30.5 points, respectively. The underlying combined ratio of 67.6 improved 0.4 points compared to the prior year quarter, driven by higher earned premium and a lower expense ratio partially offset by higher claim severity. Slide 10 provides an update on Transformative Growth. Transformative Growth remains a focus and is being executed in parallel with our profit improvement actions. We continue to make good progress on this multiyear initiative that spans five main components: improving customer value, expanding customer access, increasing sophistication and investment in customer acquisition, modernizing the technology ecosystem and driving organizational transformation. The bottom half of the slide highlights recent progress by intended outcome. Providing the lowest cost insurance through expense reductions, broad distribution and pricing sophistication is key to growth. Our Allstate brand relative competitive position has deteriorated recently as rate increases have exceeded some competitors. We expect that those competitors will eventually raise rates, improving our competitive position and growth prospects. Distribution has been expanded by launching middle market and preferred products through independent agents under the National General brand. These products are currently available in approximately 25% of the U.S. market, with a plan to be in nearly every market by the end of next year. Our new affordable, simple and connected auto product creates a differentiated customer experience, which is expected to become available in approximately one-third of the U.S. through the direct distribution channel by the end of this year, deploying a new technology stack, integrating technology across brands and retiring legacy technology applications provides increased agility and lowers costs. This will be reflected in the sunset of the Esurance and Encompass technology platforms next year. We believe transformative growth will lead to increased market share, and hence, higher company valuation multiples. And now, I’ll turn it over to Jess to discuss the remainder of our results. Jess Merten: All right. Thank you, Mario. Let’s start with Slide 11, which covers results for our Protection Services and Health and Benefits businesses. Chart on the left shows Protection Services revenues excluding the impact of net gains and losses on investments and derivatives, which increased 7% to $671 million in the first quarter compared to the prior year quarter. Increase reflects growth in Allstate Protection Plans and Allstate Dealer Services, partially offset by a decline in Arity. By leveraging the Allstate brand, excellent customer service, expanded product offerings and partnerships with leading retailers, Protection Plans continues to generate profitable growth, resulting in a 17% increase in the first quarter compared to the prior year quarter. In the table below the chart, you will see that adjusted net income of $34 million in the first quarter decreased $19 million compared to the prior year, primarily due to higher appliance and furniture claim severity and a higher mix of lower-margin business as we invest in growth at Allstate Protection Plans. We will continue to invest in these businesses which provide an attractive opportunity to meet our customers’ needs and create value for shareholders. Shifting to the chart on the right, Health and Benefits provide stable revenues and is consistently profitable while protecting more than 4 million customers. Revenues of $583 million in the first quarter of 2023 increased by $3 million compared to the prior year quarter as an increase in group health and other revenue was partially offset by a reduction in individual health and employee benefits. Health and Benefits operating systems are being rebuilt to lower costs and support growth, which will leverage the Allstate brand and customer base to generate shareholder value. Adjusted net income of $56 million was in line with the prior year quarter. Effective January 1, 2023, we adopted the FASB guidance, revising the accounting for certain long-duration insurance contracts in the Allstate Health and Benefits segment using the modified retrospective approach to the transition date of January 1, 2021. This had an immaterial impact on our results. Now let’s move to Slide 12, which depicts trends in our investment portfolio allocation. Our active portfolio management includes comprehensive monitoring of markets, sectors and individual names, and we proactively reposition based on our views of economic conditions, market opportunities and the risk return trade-off. Asset class holdings are shown on the left. Our $63.5 billion investment portfolio includes a large allocation to high quality interest bearing assets, which has increased in recent years. In response to increasing recession risks, we defensively position the portfolio in 2022 by reducing our exposure to below investment grade bonds and public equity. We maintain this defensive position in the first quarter with additional reductions in our public equity exposure. Our performance based portfolio shown in green and gray enhances long-term returns and is broadly diversified with more than 400 assets. The portfolio is largely U.S. exposure that span vintage years, sponsors and sectors. Exposure to real estate and commercial mortgage loans is modest at $2.8 billion or 4% of the portfolio and is focused on more resilient sectors such as industrial and multifamily. We hold only $230 million in office properties for mortgages. In addition to real estate, we have selective exposure to the banking sector totaling about $4.5 billion and consists primarily of investment-grade, fixed income securities issued by large financial institutions. We hold $240 million of exposure to regional banks, primarily larger regional banks, and we did not realize significant losses related to recent bank failures. Our high-quality portfolio provides flexibility to take advantage of investment opportunities as economic conditions evolve while providing substantial liquidity to protect our customers. Let’s shift from investment allocation to performance on Slide 13. As shown in the table at the bottom of the chart on the left, total return on our portfolio was 2.4% in the first quarter and 1.2% over the last 12 months. Net investment income, shown in the chart on the left, totaled $575 million in the quarter, which is $19 million below the first quarter of last year. Market-based income of $507 million, shown in blue, was $184 million above the prior year quarter following the proactive decision to reposition the market-based portfolio into higher market yields and an increase in fixed income funded by our reduction in public equity. Performance-based income of $126 million, shown in black, was $180 million below a strong prior year quarter. Volatility from quarter-to-quarter on these assets is expected. Our portfolio management and the allocation of risk capital to investments is highly integrated with the assessment of risk-adjusted return opportunities across the enterprise. As you’ll recall, in response to declines in auto insurance profitability, last year, we defensively positioned the portfolio against rising rates and reduced our exposure to recession sensitive assets. As market rate grows, we began to increase the duration in the fourth quarter and ended the first quarter at four years. This duration extension locks in higher yields and income for longer while positioning the portfolio to benefit from potential future reductions in interest rates. The chart on the right shows the fixed income earned yield continues to rise and was 3.4% at quarter end. Our portfolio yield is still below the current intermediate corporate bond yield of approximately 5.1%, reflecting an additional opportunity to increase yields if rates stay at these levels. To close, let’s turn to Slide 14 to discuss Allstate’s strong financial position and prudent approach to capital management. In light of recent financial events impacting the banking industry, let’s start with an overview of Allstate’s liabilities. As you can see in the chart on the left, our liabilities primarily consist of property casualty claim reserves and unearned premiums that are not subject to unpredictable or immediate demand for repayment. Our sophisticated economic capital framework quantifies enterprise risk to establish capital targets by business, product, geography and investment while also providing additional capital for stress events or contingencies. The framework incorporates regulatory capital standards, proprietary econometric modeling, I struggled with that, rating agency criteria and other external assessments. It’s used through the company from individual product and state-based decisions to establishing the appropriate amount of capital for each company and the overall corporation. Allstate’s capital of $19.2 billion exceeds our target capital based on this framework. Our ratings remain strong, with S&P and Moody’s assigning an issuer credit rating of A minus and A3, respectively, to our recent senior debt offering. Holding company assets of $4.2 billion as of the end of the first quarter represent approximately 2.5x our annual fixed charges. We returned $377 million to shareholders in the quarter through dividends and share repurchases. As a sign of our financial strength and commitment to shareholder returns, the common dividend was increased by 4.7% in the first quarter and paid in early April. With that as context, let’s open up the line for questions. Q&A Session Follow Allstate Corp (NYSE:ALL) Follow Allstate Corp (NYSE:ALL) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: And our first question comes from the line of Gregory Peters from Raymond James. Your question please. Gregory Peters: Well, good morning, everyone. 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? Tom Wilson: I’ll get Mario to dig in on claim expenses. When you look at the 5.7%, I’ll remind you — first, good morning, Greg. I’ll remind you that remember, this is a number that’s been trending up as the rates that we took in ’21 and ’22 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. Mario Rizzo: Yes. Good morning, Greg. 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. 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. Gregory Peters: Right. On Slide 7, 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. Mario Rizzo: 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 2 6.9% 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, 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 two 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. Tom Wilson: So Greg, I think embedded in your question is, will you be challenged on something above 6.9%? The strategy that 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. Gregory Peters: Got it. In New York, New Jersey? Mario Rizzo: Yes. 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. Gregory Peters: Got it. Thank you for the answers. Operator: 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. Paul Newsome: Good morning. I was hoping you could give us a little bit more additional color on the risk 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 guard. Tom Wilson: 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. Mario Rizzo: Yes. 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. Paul Newsome: 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? Tom Wilson: 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. 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. Paul Newsome: No, that’s helpful. I always appreciate the help, and I’ll let some other folks ask questions. Thank you very much. Operator: Thank you. One moment for our next question. And our next question comes from the line of Elyse Greenspan from Wells Fargo. Your question please. Elyse Greenspan: 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? Tom Wilson: Elyse thanks for the question. Let me provide a little overview and then Jess will jump into the specifics. The headline would be, we don’t just look at RBC. And so as Jess 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. 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 it 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, Jess, do you want to talk about how you think about capital and where we’re at? Jess Merten: 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 I know it’s 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 and RBC basis. 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. Tom Wilson: 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 will be happy to talk about it if somebody wants to go through. But we think we have plenty of capital on this business. Elyse Greenspan: Thanks. And then my second question, your personal auto underlying loss ratio did improve sequentially, right? There are 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 when we put this altogether and you guys you 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? Tom Wilson: 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, 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’ll return 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. Yes, 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. 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. Elyse Greenspan: Thank you. Operator: Thank you. One moment for our next question and our next question comes from the line of Yaron Kinar from Jefferies. Your question please. Yaron Kinar: Thank you. Good morning. May be 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? Tom Wilson: Yaron, I’m not exactly sure. Maybe you can give me another layer down in the question so we can get specific for you? Yaron Kinar: Sure. So I think you’re talking about, what, roughly $4 billion of liquidity or access about the holdco 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? Tom Wilson: Yes. No, it’s a good point. Let me get John to answer that. I’ll give you a little overview . First, I would just say analytics everywhere. It counts for everyone despite. So whether that’s using sophisticated models is that where they toll the car 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 and – 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. 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 it’s fixed – investment-grade fixed income market is completely shut down, we would still probably be fine. Right now probably we would be fine, because we’re 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. John Dugenske: Yes, Yaron, thank you so much for the question. Just a piece of data, if we can trade a security, we’ve had $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 quantitative framework across the enterprise. So I answered this question, I feel confident that scores of people on the investment team could 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. 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 and fire, right? So we really aim a lot as we think about our investment profile. Yaron Kinar: 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 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? Tom Wilson: Where is, the plan at the beginning of the year. So maybe I’ll give an overview, Mario, with an analogy and you can bear. 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 so warmed up and ready to run if we need to be. Mario Rizzo: Yes. 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. 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, I’m going to 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. Yaron Kinar: Thanks and good luck, Mark, with the new role. Mario Rizzo: Thank you. Operator: 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. Andrew Kligerman: 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 kind of 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 – of projected severity increase or could it be materially higher as we look out in the year? Mario Rizzo: 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. 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. In terms of the risk going forward, I think, yes. 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. Andrew Kligerman: 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 to — for policy growth and doing so profitably? Tom Wilson: 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. And so they’ve – 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. 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. Andrew Kligerman: Awesome, thank you. Operator: 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. Josh Shanker: Yes, 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? Tom Wilson: 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. 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 in front, 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. 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. 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, so — and give yourself any kind of good estimate on the current view because a couple of things have changed. 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 14% 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 shutdown 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. 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 for them. 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 put – it’s a great business model. Mario can talk about what we’re doing to grow that business. Mario Rizzo: 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 a temp. 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. 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. 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. Josh Shanker: 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? Mario Rizzo: Yes, 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. Josh Shanker: Thank you for the detailed answers. Operator: Thank you. One moment for our next question. Our next question comes from the line of Brian Meredith from UBS. Your question please. Brian Meredith: Thanks. A couple of questions here for you. First one, I’m just curious, I saw your expense ratio is down about 1 point x 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? Mario Rizzo: Yes, Brian, this is Mario. Thanks for the question. 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 23 by the end of 2024. 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. 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. 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 over time 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. 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. Tom Wilson: 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. 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. Brian Meredith: 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? Tom Wilson: 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 Fed and 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 economy, 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 more 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. 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. Tom Wilson: 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 going to make money in auto insurance and continue to leverage our superior position in homeowners 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. Operator: Thank you, ladies and gentlemen, for your participation in today’s conference. This does conclude the program. You may now disconnect. Good day. Follow Allstate Corp (NYSE:ALL) Follow Allstate Corp (NYSE:ALL) We may use your email to send marketing emails about our services. Click here to read our privacy policy......»»

Polestar Charges $17.50 Per Horsepower For Boost Package As Microtransactions Invade Car Industry We've come across what could be another automotive company intentionally detuning engines so it can offer performance packages to customers via an over-the-air update.  Swedish EV car company Polestar, a subsidiary of Volvo and Geely, is charging customers $17.50 per horsepower in an over-the-air software update for the long-range, dual-motor variant of the 2, reported Autoblog.  The upgrade adds 68 horsepower and 15 pound-feet of torque that boosts the 2's dual-motor powertrain from 408hp and 487 lb-ft of torque to 476hp and 502 lb-ft. It will cost a one-time fee of $1,195. What is intriguing about Polestar's performance boost package blocked behind a paywall is that the power is already there and may suggest the company is intentionally detuning the vehicles to milk the customer for every last cent.  Polestar isn't the only one doing this. Just weeks ago, Mercedes-Benz unveiled the "Acceleration Increase" package for its EV Mercedes-EQ models, which costs $1,200 for a yearly subscription and will boost horsepower.  And it gets worse. BMW recently sparked social media uproar by charging an $18 monthly subscription in some countries for owners to use heated seats already installed in the vehicle.  So far, Polestar, Mercedes, and BMW have embraced microtransactions, which force customers to make in-car purchases to enhance or unlock features.      Tyler Durden Tue, 12/06/2022 - 20:55.....»»

Concentrix Corporation (NASDAQ:CNXC) Q3 2023 Earnings Call Transcript September 27, 2023 Concentrix Corporation misses on earnings expectations. Reported EPS is $2.71 EPS, expectations were $2.76. Operator: Thank you for standing by and welcome to Concentrix Fiscal Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the […] Concentrix Corporation (NASDAQ:CNXC) Q3 2023 Earnings Call Transcript September 27, 2023 Concentrix Corporation misses on earnings expectations. Reported EPS is $2.71 EPS, expectations were $2.76. Operator: Thank you for standing by and welcome to Concentrix Fiscal Third Quarter 2023 Financial Results Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] I would now like to hand the call over to Vice President, Investor Relations, David Stein. Please go ahead. David Stein: Thank you, Latif, and good evening. Welcome to the Concentrix Corporation Third Quarter Fiscal 2023 Earnings Call. As a result of the combination earlier this week, we now operate as one Concentrix Webhelp. This call is the property of Concentrix Webhelp and may not be recorded or rebroadcast without written permission. This call contains forward-looking statements that address our expected future performance and that, by their nature, address matters that are uncertain. These uncertainties may cause our actual future results to be materially different than those expressed in our forward-looking statements. We do not undertake to update our forward-looking statements as a result of new information or future events or developments. Photo by Redd on Unsplash Please refer to today’s earnings release in our most recent filings with the SEC for additional information regarding uncertainties that could affect our future financial results. This includes the risk factors provided in our annual report on Form 10-K and subsequent SEC filings. Also during the call, we will discuss non-GAAP financial measures, including free cash flow, non-GAAP operating income, adjusted EBITDA, non-GAAP EPS and adjusted constant currency revenue growth. A reconciliation of these non-GAAP measures is available in the news release and on the company Investor Relations website under Financials. With me on the call are Chris Caldwell, our President and Chief Executive Officer; and Andre Valentine, our Chief Financial Officer. Chris will provide a summary of our operating performance and growth strategy, and Andre will cover our financial results and business outlook. Then we’ll open the call for your questions. Now I’ll turn the call over to Chris. Chris Caldwell: Thank you, David. Hello, everyone, and thank you for joining us today for our third quarter earnings call. We are thrilled to have you with us as we discuss our performance in the third quarter and the exciting news that we have closed our transformative combination with Webhelp. We’re pleased that we executed to deliver revenue and profit growth with strong cash flow in the third quarter. We experienced continued stable demand for high-value and technology-infused services, achieved solid new business signings, and our continued focus on business mix drove margin expansion. We entered the fourth quarter with a strong pipeline of opportunities that we believe will continue to drive our growth into 2024. We reported revenue in the third quarter was $1.63 billion. On an organic constant currency basis, revenue grew 1.7%. Our third quarter non-GAAP operating income increased to $231 million and adjusted EBITDA increased to $269 million, both growing by over 4% compared with last year. Solid execution yielded 10 basis point improvements in both our non-GAAP OI and adjusted EBITDA margins over last year. Our non-GAAP EPS was $2.71 per share compared with $2.95 per share last year, largely reflecting the impact of expected higher interest rates. Given our continued organic growth, strong free cash flow generation and the accretive Webhelp combination, we are pleased to raise the quarterly dividend by 10%. This increased quarterly dividend translates to $1.21 per share on an annualized basis. We continue to grow in each of our strategic verticals, which more than offset continued volume softness with a few select large clients as we discussed last quarter. From a Catalyst perspective, we gained experience — we again experienced sequential quarterly revenue growth with our digital CX solutions. Our unique digital IT service capabilities with thousands of staff able to design, deploy and integrate technology-infused solutions at scale differentiates us significantly from our traditional CX peers. From a sales perspective, we continue to focus on our [indiscernible] one approach with our combined Catalyst and CX operations, design, build and run services. During the quarter, we saw steady demand across multiple geographies and verticals as clients continue to look for differentiated ways to service their customers while managing their cost structure. While clients are still signing smaller deals that ramp more slowly, we are pleased with the higher complexity work that we will be performing with these new wins. We also see a strong pipeline of opportunities as a combined Concentrix Webhelp organization that we would not have been able to pursue prior to the combination. From an operating perspective, we are delivering exceptional service with record client attainment scores this quarter. Our focus remains on being the best partner for our clients’ relationships and winning more opportunities within each account. The more technology-infused services we provide to our clients the stickier our relationships become. Notably, we’ve accelerated our progress in the quarter deploying generative AI solutions, both internally and with select clients. From an internal productivity perspective, our AI and Alex-based recruiting platform now supports 8.6 million career site visits and processes 3.3 million applications already this year. It has already allowed our team to scale more cost effectively and we see additional benefits as we continue the roll out across our enterprise. Our AI-based workforce management solution optimizes concurrent scheduling and peak management for now over 115,000 of our staff where we see better utilization and user experience for the team. This again will have additional benefits as we scale up to the rest of our workforce. Our most widely used proprietary AI smart assist product improves productivity through automation for over 190 team members now to easily access the tools and provide visibility to the information required to the performs of their jobs every day easier. From the ability for AI to enhance our client services, we use an AI-based quality automation platform to drive insights from 100% of our customer interactions were deployed. Now across tens of thousands of seats, the platform has reviewed 129 million interactions to date, delivering 20% to 30% improvements in audit efficiency and insights into customers, clients that see high value. Our proprietary learning bot utilizes AI to simulate real-world customer scenarios for over 60,000 team members during training, establishing better speed to proficiency, reducing new higher average processing time and improving effectiveness by 5% to 10% in the ramp period. And our cognitive AI bots developed for client-specific implementation will handle over 900 million customer interactions by the end of this year, delivering significant value for our clients and a higher margin service for us. We are actively investing in additional generative AI solutions to further enhance workforce productivity and improve the quality of interactions with customers. We are on track to deploy our AI tools across nearly 80% of our legacy operations business by year-end and start wide deployment of the tool within our new clients from our combination with Webhelp shortly. Turning to AI with our clients. We are also collaborating with some of the world’s largest companies to design, build and run generative AI in few solutions across the services value chain. Working with one of our large technology clients in the key project this quarter, we use generative AI to power 35% efficiency gains and deliver releases 30% faster than traditional methods in their software development life cycle. During the quarter, we also delivered a proof-of-concept for generative AI knowledge management that builds 3D modeling and augmented reality solutions for a global retail client that couldn’t cost effectively be done before. Catalyst also launched its first deployment of our new generative AI-infused offering AnyPaaS that we have been developing for close to two years. For our first implementation, we seamlessly transitioned the entire CCaaS tech staff of a health care client in less than eight hours, enabling fully automated generative AI experiences for patients and advisers with our generative AI intelligence insights and reporting capabilities. Historically, this would have taken weeks to months to transition. This has resulted in substantial savings for our clients and a new revenue opportunity for our business. For another key client, we are now working exclusively to train and test a generative AI tool in advance of it becoming customer-facing. Using a combination of automation and humans and our unique knowledge of the customer base and domain knowledge, we are building hundreds of thousands of different subject matter conversations to train the AI across multiple categories with a plan to increase the scope to 1 million conversations in the next six months. With all of these examples and with many more we have deployed and are working on, I hope it is evident that we see opportunity to grow revenue and be more efficient with AI and see this as a net benefit to our industry. Now let’s turn our attention to the Webhelp combination that sets the stage for a new chapter in our business offering evolution. This combination is a historic milestone in our industry. As a combined organization, Concentrix Webhelp possesses distinct strategic advantages that we believe increases our differentiation and will drive our success as a transformative force in the industry. This combination brings new expertise such as know your customer and anti-money laundering and payment services for our financial clients, IT services at scale in EMEA, deeper domain expertise in a number of our core verticals and helps create a robust footprint spanning 70-plus countries, enabling us to offer tailored solutions on a global scale. We also gained over 1,000 new clients that we believe have the ability to spend on services and capabilities that Concentrix historically has offered. Our commitment to nurturing a supportive and inclusive workforce is further reinforced by the harmonious integration of our cultures, which are globally renowned for their excellence and workplace practices and commitment to ESG. We have a clear path to positive financial returns from the combination with Webhelp. We are well on track to achieve enhanced revenue growth, profitability and non-GAAP EPS accretion within the first year. We expect double-digit accretion in non-GAAP EPS in the second year, further underscoring the financial strength of the combination. In addition to these compelling benefits, our integration process is on schedule, and we are confident that we will achieve cost synergies of $120 million by the third year, including $75 million in the first year post-close with substantial progress made already. Since the announcement, we have been able to spend more time with the Webhelp team, which has given us great confidence that this transaction is the right investment. We expect the integration work to be completed within 12 months, and I would like to welcome all of our new game changers to the Concentrix Webhelp team. I would also like to welcome our two new Board members, Olivier Duha, Webhelp Co-Founder and CEO, who becomes Vice Chair of our Board of Directors; and Nicolas Gheysens, a GBL Partner and Director. Finally, I would like to thank our exceptional staff for their commitment to execution, our clients for their trust, our talented Board of Directors for their support and mentorship and our investors for your continued support. We look forward to an exciting and prosperous year ahead. And now I’ll turn the call over to Andre. Andre? Andre Valentine: Well, thank you, Chris, and hello, everyone. We’re excited to have closed our combination with Webhelp earlier this week. Adding Webhelp’s talented global staff strengthens our value proposition and solidifies our position as a leading global CX solutions company. Before I provide additional details on the completion of the transaction, I’ll first review our third quarter results then I’ll conclude with guidance for the fourth quarter, including anticipated contributions from Webhelp. In the third quarter, revenue increased and non-GAAP profit improved, reflecting continued strong execution. Both our organic constant currency revenue growth rate and our non-GAAP operating income came in within our guidance ranges, with non-GAAP operating income exceeding the midpoint of our guidance. Additionally, our strong cash flow generation reinforces our confidence in achieving our full year expectation of generating over $500 million in free cash flow, not including contributions from Webhelp. The 3.4% increase in reported revenue in the quarter included a 1.7 point positive year-over-year impact from the acquisition of ServiceSource in July 2022. There was no meaningful impact from currency fluctuations on reported revenue growth in the quarter. On an organic constant currency revenue basis, revenue grew 1.7%, reflecting a continuation of themes from the prior quarter. Strong growth in health care, banking, financial services and insurance, e-commerce and travel, offset by continued volume softness with a few large clients in the communications and consumer electronics industries. Revenue increased in each of our four strategic verticals in the quarter, with growth from health care clients leading the way, up approximately 17% on both an as reported and organic constant currency basis. Revenue from retail, travel and e-commerce clients posted 8% growth as reported and 7% on a constant currency organic basis, including double-digit growth with travel clients. Revenue from banking, financial services and insurance clients grew by 5% on a reported basis and 6% on an organic constant currency basis. Revenue from technology and consumer electronics clients grew 6% as reported and about 1% on an organic constant currency basis. Revenue from communications clients decreased by 8% as reported and 9% on an organic constant currency basis. Revenue from clients in our other vertical decreased 9% as reported and about 8% on an organic constant currency basis in the third quarter. Turning to profitability. Non-GAAP operating income was $231 million in the third quarter compared with $222 million last year. Our non-GAAP operating margin was 14.1%, up 10 basis points from 14% in the third quarter last year. Adjusted EBITDA was $269 million compared with $258 million in the third quarter of last year. Our adjusted EBITDA margin was 16.5%, up 10 basis points from 16.4% in the third quarter last year. Third quarter interest expense was $49 million, up $29 million from the prior year quarter. Included in the increase was approximately $14 million of interest costs related to the Webhelp combination. This included a charge of approximately $11 million in fees associated with our bridge financing for the Webhelp transaction. It also includes approximately $3 million in interest expense on our senior notes that were issued on August 2nd, net of interest earnings on the invested proceeds. The remainder of the increase in interest expense was due to higher interest rates as expected. Other expense of approximately $6 million in the third quarter included a $2 million mark-to-market adjustment related to the purchase price currency hedge for the Webhelp transaction. The remainder of this line item in the P&L relates to foreign currency losses. The non-GAAP tax rate for the quarter was 26.3%. Non-GAAP net income in the third quarter was $141 million compared with $154 million last year. The decrease primarily reflects higher interest expense and the change in other income expense, which more than offset the increase in non-GAAP operating income. Earnings per share were $2.71 on a non-GAAP basis compared to $2.95 in the third quarter of last year. GAAP operating results for the third quarter included $40 million of amortization of intangibles, $18 million of expenses related to acquisition-related and integration expenses and $11 million of share-based compensation expense. Turning to cash flow. Our third quarter cash flow from operations totaled $211 million and capital expenditures were $44 million. This resulted in record third quarter quarterly free cash flow of $167 million. We continue to expect free cash flow for the full year to exceed $500 million, excluding the cash flow contribution of Webhelp in the fourth quarter and transaction and integration costs. During the quarter, we paid a quarterly dividend of $0.275 per share. As Chris mentioned, our Board has raised our quarterly dividend to $0.3025 per share to be paid during the fourth quarter. This increase to our quarterly dividend reflects our financial strength, our confidence in the future and our commitment to disciplined capital deployment. Share repurchases resumed in the quarter after our proxy statement filing related to the Webhelp transaction. We repurchased 320,000 shares of our stock for approximately $27 million in the third quarter. Repurchased in the third quarter were made at an average price of approximately $84 per share. At the end of the quarter, we had $312 million remaining on our share repurchase authorization. Moving to the balance sheet. At the end of the third quarter, cash and cash equivalents were $2.11 billion and total debt outstanding was $3.97 billion. Net debt was $1.86 billion at the end of the third quarter, a decrease of $117 million from the end of the second quarter and a decrease of $218 million since the beginning of the year. At the end of the third quarter, the elevated cash level reflects funds on hand to complete the Webhelp transaction. The balance — the debt balance at the end of the quarter includes $2.15 billion of senior unsecured notes issued to partially fund the Webhelp transaction and $1.85 billion outstanding on our term loan. Our $1.04 billion revolving credit facility was undrawn at the end of the quarter, and there were no borrowings outstanding on our $500 million accounts receivable securitization facility. At the end of the third quarter, net leverage was 1.7 times on a trailing four quarters pro forma basis. On Monday, we executed on the closing of the Webhelp combination. To complete the combination, we paid approximately $525 million to Webhelp shareholders, paid off Webhelp debt of approximately $1.9 billion, issued 14.9 million shares to Webhelp shareholders and incurred a EUR700 million two-year note payable to Webhelp shareholders bearing interest at 2%. After the closing, we had cash and cash equivalents totaling approximately $440 million and gross debt of approximately $5.3 billion. Net debt upon closing was $4.85 billion, which represents net leverage of approximately 3.2 times on a pro forma adjusted EBITDA basis. The primary components of our gross debt on the balance sheet post-closing were $2.15 billion in senior notes, $2.14 billion in term loan borrowings, approximately $750 million in notes payable to Webhelp shareholders and $215 million in borrowings outstanding under our accounts receivable securitization. Our revolving credit facility remained undrawn. The issuance of shares to Webhelp shareholders increased our outstanding share count to approximately 66.6 million shares. Regarding the $2.15 billion of senior notes, on the day the combination closed, we entered into cross-currency swap arrangements for a total notional amount of $500 million of the notes. The arrangements effectively convert $250 million each of the 2026 and 2028 notes in the synthetic euro-based debt at lower prevailing interest rates. In addition to aligning the currency of a portion of our interest payments to the organization’s euro-denominated cash flows, the swaps also reduced the weighted average interest rate of the $2.15 billion notes from approximately 6.70% to approximately 6.36%. As we said when we announced the Webhelp transaction, the combination of our strong free cash flow generation and adjusted EBITDA growth gives us a clear path to reducing leverage, and we’re committed to reducing our net leverage to about two times adjusted EBITDA within two years after the transaction closed. Regarding our capital allocation priorities, our focus is on organic growth, the successful integration of Webhelp, realizing the planned synergies and repaying debt. We are committed to investment-grade principles. We will prioritize paying down debt and reducing our net leverage while continuing our dividend and disciplined share repurchases to offset the dilution of equity grants. Now I’ll turn my attention to the business outlook for the fourth quarter, including anticipated contributions from Webhelp. The Webhelp contribution in the fourth quarter guidance includes forecasted financial performance for a period of slightly more than two months. For the fourth quarter, we now expect reported revenue to be in a range of $2.19 billion to $2.215 billion based on current exchange rates. Our fourth quarter expectations reflect approximately 2% to 3% of pro forma constant currency growth for the combined organization if the combination had occurred at the beginning of the fourth quarter of 2022. Excluding the effect of the Webhelp combination, our expected constant currency growth in the fourth quarter would be consistent with the prior guidance for the full year. Our profitability expectations for the fourth quarter include non-GAAP operating income in a range of $330 million to $340 million. At the midpoint of our guidance, this equates to a non-GAAP operating income margin of approximately 15.2%, an increase of 10 basis points over the prior year. Excluding the effect of the Webhelp combination, our expected non-GAAP operating income in the fourth quarter will be consistent with the prior guidance for the full year 2023. We expect net interest expense in the fourth quarter to be approximately $72 million with an effective tax rate of 26% and a weighted average diluted share count of approximately 62 million shares. Note that the average diluted share count for the fourth quarter is less than the 66.6 million outstanding shares post-close as a result of the mid-quarter timing of the close. Accordingly, we expect non-GAAP EPS for the fourth quarter to be in a range of $3.03 per share to $3.15 per share. This expectation for non-GAAP EPS assumes no impact from other income and expense due to the unpredictability of future foreign currency movements. We continue to expect the business to generate robust cash flows with free cash flow for the combined organization to be in the range of $200 million to $225 million excluding any transaction and integration costs in the fourth quarter. Our business outlook does not include transaction and integration costs associated with the Webhelp combination or any future acquisitions. Also not included in the guidance are impacts from future foreign currency fluctuations. We continue to expect the Webhelp operations to generate approximately $3 billion of revenue and approximately $500 million of adjusted EBITDA for the full year 2023, with the combined organization yielding nearly $9.6 billion in revenue and nearly $1.6 billion in combined EBITDA on a pro forma basis for the full fiscal year 2023. We expect earnings per share accretion of mid to high single-digits in the first full year after close and double-digit appreciation — accretion in the second year. We also expect to realize $75 million in synergies in the first year after closing, growing to $120 million in synergies in year three. We plan to provide guidance for 2024 on our fourth quarter results call. In closing, the Webhelp combination has joined two leading CX providers into a global platform for growth and value creation, bringing clients from growing markets, further diversifying our marquee client list and significantly increasing our presence in Europe, Latin America and Africa. Our range and global reach of high-value services and additional capabilities have been expanded enhancing support for clients that both companies couldn’t adequately serve independently. We have a strong track record of success integrating prior combinations, which will make the combination and integration more seamless. And we believe this highly complementary union creates a unique customer engagement offering that will keep our business resilient through business cycles. We’re excited about the combination with Webhelp. We look forward to the growth and value it will create in the future. At this point, Latif, please open the line for questions. See also Hedge Funds Selling Energy Stocks: 10 Most Sold Clean Energy Stocks and World’s Top 25 Richest Soccer Clubs Based on Revenue. Q&A Session Follow Concentrix Corp (NASDAQ:CNXC) Follow Concentrix Corp (NASDAQ:CNXC) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] Our first question comes from the line of Ruplu Bhattacharya of Bank of America. Ruplu Bhattacharya: Hi. Thanks for taking my questions. Andre, if you can — I was wondering if you can kind of simplify what the contribution is from Webhelp for fourth quarter revenues, operating margin and EBITDA? You gave a lot of details, but I’m not sure I got all of that. So can you please specify how much is the revenue contribution, operating income contribution? And what is the core business doing in the fourth quarter? Andre Valentine: Yes. So happy to do that, Ruplu. So I’ll start with revenue. So from a revenue perspective, the legacy Concentrix operations pre-Webhelp are very much in line with the prior guidance. So the prior guidance for the full year, Ruplu, was to grow 2% to 3% for the full year. And so that will be the contribution from the Concentrix operations will be in line with that guidance. So that kind of covers that. Webhelp certainly accretive to the overall growth rate as we expected, and it will be here in the fourth quarter. So that’s that. From a margin perspective, really, if you go back to when we announced the transaction, the margin profiles of the two businesses were very, very close, both from an EBITDA perspective and a non-GAAP OI perspective. And so included in the guidance, you can pretty much, at the midpoint, that 15.2% non-GAAP OI margin, you can pretty much apply that to both sides. Depreciation is a little bit — we’ve talked about this in the past for Webhelp a little bit higher as a percentage of revenue. So you might see 10, 20 basis points or so higher adjusted EBITDA margin coming from the Webhelp side, but again very complementary from a margin perspective in Q4. And then I expect significant margin improvement as synergies start to roll in, in earnest as we move into 2024. Ruplu Bhattacharya: And again, just to clarify, I mean, based on what you just said, would that imply like about $500 million on the revenue contribution from Webhelp in fiscal 4Q? And then can you talk about the below-the-line items like below operating income? Can you remind us what the interest expense is going to be in the fourth quarter as well as are there any other expenses? I think you said there was also integration costs. What is the estimate for that for the fourth quarter? Andre Valentine: Yes. So integration costs in a quarter are a little hard to give an exact estimate on. So overall, the integration costs what we said about those is they will be one for one matching the synergy number. So $120 million total in integration costs, somewhat front loaded with roughly $80 million or so in the first year, I believe, and $40 million in the second. So think of that, that $80 million, think of — will that equate to in two months, and you’re probably in line there. The other part of your question, I missed it, oh, the revenue contribution. I think you’re a little low at $500 million. The contribution from Webhelp is higher than that. Ruplu Bhattacharya: Okay. And maybe for my last one, maybe I’ll ask one to Chris. So you talked about working on some AI — generative AI projects. So Chris, when we think about this, I mean, based on the experience you have now, clients want to understand the impact of generative AI. Do you think — I mean, in the past, you said like 10% to 15% of volumes can get impacted. I mean how has your thought changed if at all now that you’re doing more of these projects? And do you think that impact varies by end market use case? And how should we think about that? I mean, any way to quantify this at this point in the cycle? Thank you. Chris Caldwell: Hi, Ruplu. So a couple of different points there. I think when we talk about 10% to 15% of transactions can be automated, that’s what we’re doing on a yearly basis, regardless of generative AI or RPA or anything else that’s coming along with it. And what we’ve talked about is that generative AI can probably increase that by a little bit, but not dramatically more than that from what we’re seeing as we deploy these practices. What’s offsetting that is the new revenue streams that we’re seeing by deploying these new technologies, both from design, implementation and running the new technologies and curating the content that goes along with it. And as we kind of talked in some of the prepared remarks, even net new areas that we’re deploying our own platforms where we’re getting net new revenue flows that are coming in for that. So that clearly is what we’re focused on offsetting any revenue headwinds as well as taking more share within the clients. I think what we’re seeing right at the moment is that we are able to deploy generative AI faster than some of our clients can actually deploy it. And so we’re seeing the benefits in our operating cost structure and scalability that we called out a number that are starting to get to scale. And hopefully, we’ll see additional benefits from those as we get them to — across the entire enterprise, including the new Webhelp combination, which I think offsets any kind of cost mitigation that we might have from any impact from a revenue perspective that’s coming in from automation, if that makes sense. Ruplu Bhattacharya: Thanks for all the details. Appreciate it. Chris Caldwell: No problem. Thank you. Operator: [Operator Instructions] Our next question comes from the line of Oliver Davies of Redburn Atlantic. Oliver Davies: Yes. I guess a couple of questions. Just firstly, in terms of you kind of held the revenue growth guidance for the Concentrix legacy business. So can you just talk about what you’re seeing in terms of underlying volumes? And new client decision, I guess, it looks like health care kind of accelerated in the quarter as most of the other sectors were look pretty similar to the last quarter. And I guess following on from that you know a client is still looking to offshore where possible or has anything changed on that front? Chris Caldwell: Hi, Oliver. So to answer your first question, what we’re seeing is kind of continued consumer, I’ll call it, budgeting for new consumer electronic devices, subscription spending, other things that are somewhat discretionary. So we continue to see those volumes depressed across some of our larger clients. But the volume is now becoming more steadily depressed if that makes sense. It’s more stable versus what we saw at the beginning of the year where it tends to fluctuate. We are seeing growth in the strategic verticals that we’ve called out, primarily because of net new wins and net new services we’re putting into those verticals, such as the health care vertical, banking, financial services. And even travel, we’re doing quite well at......»»

FactSet Research Systems Inc. (NYSE:FDS) Q4 2023 Earnings Call Transcript September 21, 2023 FactSet Research Systems Inc. misses on earnings expectations. Reported EPS is $2.93 EPS, expectations were $3.49. Operator: Good day, and thank you for standing by. Welcome to the FactSet Fourth Quarter Fiscal 2023 Earnings Call. At this time, all participants are in […] FactSet Research Systems Inc. (NYSE:FDS) Q4 2023 Earnings Call Transcript September 21, 2023 FactSet Research Systems Inc. misses on earnings expectations. Reported EPS is $2.93 EPS, expectations were $3.49. Operator: Good day, and thank you for standing by. Welcome to the FactSet Fourth Quarter Fiscal 2023 Earnings Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to your speaker today, Kendra Brown, Senior Vice President, Investor Relations. Please go ahead. Kendra Brown: Thank you, and good morning, everyone. Welcome to FactSet’s fourth fiscal quarter 2023 earnings call. Before we begin, the slides we will reference during this presentation can be accessed via the webcast on the Investor Relations section of our website at factset.com and are currently available on our website. A replay of today’s call will also be available on our website and via phone. After our prepared remarks, we will open the call to questions from investors. This call is scheduled to last for one hour. To be fair to everyone, please limit yourself to one question. You may re-enter the queue for additional follow-up questions, which we will take if time permits. Before we discuss our results, I encourage all listeners to review the legal notice on Slide 2, which explains the risk of forward-looking statements and the use of non-GAAP financial measures. Additionally, please refer to our Forms 10-K and 10-Q for a discussion of risk factors that could cause actual results to differ materially from these forward-looking statements. Our slide presentation and discussions on this call will include certain non-GAAP financial measures. For such measures, reconciliation to the most directly comparable GAAP measures are in the appendix of the presentation and in our earnings release issued earlier today. Joining me today are Phil Snow, Chief Executive Officer; and Linda Huber, Chief Financial Officer. We will also be joined by Helen Shan, Chief Revenue Officer, for the Q&A portion of today’s call. I will now turn the discussion over to Phil Snow. Phil Snow: Thank you, Kendra, and good morning, everyone. Thanks for joining us today. I’m pleased to share our fourth quarter and full year results. We ended fiscal 2023 with organic ASV plus professional services growth of 7%, and we delivered annual revenue of $2.1 billion and adjusted EPS of $14.55. In 2023, we grew our business on the strength of our enterprise offerings that drove large strategic wins across several workflows. We expanded our presence with existing clients, while adding new logos and new users, both on and off platform. On the buy side, our industry-leading analytics and middle office solutions drove a significant performance deal, as asset managers and asset owners rely on FactSet to serve more of the portfolio lifecycle. Additionally, a large real-time deployment at an institutional asset manager underscored growing demand for cloud-native market data services. On the sell side, deep sector drove a key banking deal in the fourth quarter and continue to be a deciding factor in renewals, situating us well to increase market share in banking. Our strategy to deliver the leading open content and analytics platform continues to resonate and drive growth. But the pace of change is accelerating. While we have been innovating with machine learning and AI for a long time, the recent advances in generative AI have made it possible for us to step up our development. In the second half of 2023, we began moving significant resources to GenAI in anticipation of directing further investment to this area in fiscal 2024, putting it among our top initiatives. FactSet’s content refinery provides us with a real competitive advantage. We have one of the most extensive suites of proprietary and third-party data in the industry, and we continue to invest in new categories of data to further power the workflows of our clients. On top of our content refinery, we are reimagining the FactSet user experience and actively exploring innovative solutions. For example, a conversational user interface that allows bankers to ask questions, discover and source information, and initiate tasks. Generative AI will also help us evolve our productivity suite, further deepening our competitive moat. Second, on the buy side, we are enhancing our portfolio manager bot to answer questions in conversation with asset managers. Thirdly, in the front office, we are harnessing generative AI to create code in FactSet’s programmatic environment, reducing the need to know Python. This will make the power of that programmatic environment available to more users. For wealth managers, we are developing solutions to drive the next best action and to create portfolio summaries for proposal generation and client engagement, and we are establishing GenAI-ready data bundles, allowing clients to augment their own large language models, or LLMs, with our connected auditable data. We also see significant opportunity for cost savings as a result of GenAI projects targeting our efficiency. In fiscal 2023, we began to pilot AI coding initiatives to improve the productivity of our technologists. We also started using our agent assist bot to help with client queries and we are accelerating the collection of unstructured data across our content refinery with our recent acquisition of idaciti, giving us industry-leading expertise. As we enter fiscal 2024, we will build on our strategic investments in content, generative AI, and technology to drive growth and forge deeper client relationships. On the buy side, we intend to use our leading portfolio analytics and middle office solutions to grow our front office market share. We expect our new portfolio manager workstation and open programmatic environment to drive growth. We also see opportunities for FactSet to provide some targeted managed services based on our years of experience. On the sell side, we believe that deep sector and private markets offerings will drive workstation wins across banking, corporate, and private equity and venture capital clients. We see an opportunity to capture additional seats in underpenetrated areas with solutions for senior bankers and investor relations professionals, and we expect increased adoption of Cobalt, an anchor product for private equity and venture capital funds. In wealth, we anticipate capturing more market share as we focus on portfolio management, proposal generation, and intelligent prospecting to expand our addressable market. Our open and flexible platform will power business development and reporting solutions to connect advisors with clients seeking new sources of insight. Finally, we expect the demand for our off-platform solutions to continue to drive growth across firm types. Turning now to our fourth quarter results. Growth was driven by Analytics & Trading and CTS, with improved expansion across most firm types. Asset owners continue to have momentum with new logos, transactional revenue from Portware and data feeds. While macro uncertainty continue to contribute to elongated sales cycles and slower decision-making across all firm types, our sales team successfully executed on several large wins and renewals as we ended the fiscal year. And looking across our regions, organic ASV growth in the Americas was 7%. Performance was driven by asset owners and CTS wins among partners and hedge funds. This was offset by weakness among asset and wealth management clients where retention remained under pressure and expansion was lower. As expected, we also saw lower seasonal banking hiring, which was a common theme across all regions. In EMEA, our organic ASV growth was close to 8%. We saw growth in asset owners, driven by analytics, middle office solutions. Wealth growth was also driven by Wealth Workstation and Advisor Dashboard wins. Gains were partially offset by softer expansion in banking and asset management. Finally, Asia Pacific delivered organic ASV growth of 8%, driven by strong growth in Japan, where we saw an increase in large deals, analytic wins, and strength in channel partners. However, muted expansion in Australia and India from fewer asset management wins and lower seasonal hire in banking were headwinds to growth. Turning now to our workflow solutions. Analytics & Trading organic ASV grew by 9%. Growth among asset owners accelerated the most, driven by middle office solutions, workstations, and feeds. CTS, which is now part of Data Solutions, grew fastest, with organic ASV growth slightly over 9%. Performance was driven by channel partners and asset management clients, although partially offset by lower professional services and decreased retention in banking. Our data management solutions, company data, and real-time offering were the major contributors to growth. CGS also contributed to performance with healthy expansion and new business. Among asset managers, workstation erosion was offset by analytics and CTS wins, coupled with a higher price increase. Research & Advisory grew organic ASV by 5%. In banking, workstation and deep sector wins were offset by increased erosion. Private equity and venture capital clients continued their track record of double-digit growth despite market headwinds that offset improved pricing realization. For corporates, reduced client budgets were an obstacle. Looking ahead, we are focused on diversifying our solutions for our corporate clients. And finally, in wealth, we saw strong execution on several renewals in the face of clients’ cost-cutting exercises. As discussed last quarter, we have reorganized our business by firm type to better align our operations with those of our clients. As of September 1, Analytics & Trading has become our institutional buy side organization, focusing on asset managers, asset owners, and hedge fund workflows. Also, as of September 1, Research & Advisory has become our dealmakers and wealth organization, focusing on banking and sell side research, wealth management, corporate and private equity and venture capital workflows. And we’ve combined our Content and Content & Technology Solutions groups to create one Data Solutions organization. Going forward, we will also be aligning our partnerships in CUSIP Global Services organizations for the purposes of discussing ASV, as they are both key parts of our growth strategy. You can find ASV and ASV growth rates from the perspective of our realignment in the appendix of today’s presentation. As we look ahead to fiscal 2024, we expect the year will be a tale of two halves. Unlike previous years, where clients had higher budgets to spend before the calendar year-end, we expect continued caution for the rest of 2023. Starting in the new calendar year, we expect an improved operating environment to drive a strong second half. As such, we are guiding to organic ASV growth of 7% for fiscal 2024. Linda will provide more detail on guidance shortly. Looking forward, we have started seeing green shoots of market recovery, particularly in new business. New logos in the fourth quarter showed an improvement over the reduced deal volumes seen earlier in the fiscal year. We expect this trend to continue as the new business pipeline and potential ASV for wealth management, private equity and venture capital clients and partners are all outpacing the pipeline at the same time last year. As client sentiment improves and markets stabilize, we believe we are in a great position. Our new structure, best-in-class solutions and content sets us apart as the partner of choice for our clients. I’ll now turn it over to Linda to take you through the specifics of our fourth quarter and full year performance. Linda Huber: Thanks, Phil, and hello to everyone. As you’ve seen from our press release this morning, we delivered Q4 organic ASV plus professional services growth of $145 million. With 43 consecutive years of top-line growth, FactSet has a proven history of stability during market volatility, which is clearly demonstrated in our performance. I’ll now share additional details on our fourth quarter and full year performance. As Kendra noted, a reconciliation of our adjusted metrics to comparable GAAP figures is included at the end of our press release. The 7% growth rate for organic ASV plus professional services was in line with our most recent guidance for the year. Our sales team executed well, building on a strong first half and a higher price increase across a larger client base. However, during the second half of the fiscal year, the team had to deal with increased erosion, softer expansion, and a slight decrease in new business. Turning to revenue. Our full year revenue of $2.1 billion was also within our guidance range of $2.08 billion to $2.1 billion. To help offset the weaker top-line, we carefully and thoughtfully trimmed our headcount, which helped to expand our adjusted operating margin by 230 basis points to 36.2%. This increase exceeded the top end of our guidance range of 36% and our previous medium-term outlook goal of 36% by the end of FY ’25. Finally, both GAAP and adjusted EPS were impacted by a one-time charge of $6.8 million and an approximately $20 million provision for confirmed and expected unrealizable tax assets. This higher tax rate provision had a $0.68 negative impact on fiscal ’23 adjusted EPS, resulting in an adjusted EPS growth of 8.3% to $14.55. Without this one-time adjustment, adjusted EPS would have been approximately $15.25, or 13.6% growth. I’ll provide more detail during the tax discussion later in the call. Turning now to our fourth quarter results, as Phil noted, we grew organic ASV plus professional services by 7% year-over-year, as higher price increases offset erosion and new business began to pick up. We also continue to improve pricing discipline, which is driving stronger price realization. For the quarter, GAAP revenue increased 7% to $536 million. Organic revenue, which excludes any impact from acquisitions and dispositions over the last 12 months and foreign exchange movements, increased 7% to $535 million, driven primarily by Analytics & Trading. For our geographic segments, organic revenue grew by 6% in the Americas, 9% in EMEA, and 10% in Asia Pacific. Growth was primarily driven by Analytics & Trading and Research & Advisory in the Americas and Asia Pacific, and by Content & Technology Solutions and Analytics & Trading in EMEA. GAAP operating expenses increased 14% year-over-year to $419 million, driven by higher facilities impairment expense and restructuring costs. Compared to the previous year, GAAP operating margin decreased by 460 basis points to 22%, primarily due to those non-recurring charges and higher technology costs, partially offset by lower third-party content costs and lower FX impact. Excluding both non-recurring costs, GAAP operating margin was about 800 basis points higher than the prior year. On an adjusted basis, operating expenses grew 4%, driven primarily by technology expense, which increased 26% year-over-year. This was mainly due to higher amortization of internal-use software, increased third-party software costs, and accelerated cloud spend as part of our hybrid cloud strategy. We also invested in our content refinery expansion and other strategic areas, such as generative AI. We have continued to invest in technology to drive growth, with technology costs now representing 9% of revenue, consistent with our medium-term outlook of these costs being 8.5% to 9.5% of revenue. People expense grew 3% year-over-year, primarily due to increased salaries for existing employees. As a percentage of revenue, our people expense was 168 basis points lower than the prior year, driven by a lower bonus accrual, partially offset by higher salary expenses. We ended fiscal 2023 with a bonus pool of $105 million and with 67% of our employees operating in our Centers of Excellence. Adjusted operating expense growth was partially offset by a reduction in our third-party content costs, which decreased 4%. Our team continues to do a stellar job proactively managing and negotiating contracts. As a percentage of revenue, growth in third-party content costs was 57 basis points lower year-over-year. Finally, our efforts to right-size our real estate footprint resulted in a 7% decrease in facility expense year-over-year. As a percentage of revenue, this was 50 basis points lower than the previous year. Overall, adjusted operating margin improved by 210 basis points to 33.6%. You’ll find an expense walk from revenue to adjusted operating income in the appendix of today’s earnings presentation. As a percentage of revenue, our cost of services was about 75 basis points lower than last year on a GAAP basis and 85 basis points lower on an adjusted basis, largely due to personnel costs, expenses related to CGS, and technology costs. And SG&A as a percentage of revenue was 385 basis points lower year-over-year on a GAAP basis and about 125 basis points lower on an adjusted basis, primarily due to decreases in professional services, partially offset by increased personnel costs. Facilities impairments as a percentage of revenue were around 440 basis points higher year-over-year on a GAAP basis. Turning now to tax. Our tax rate for the quarter was 39.9%, compared to last year’s rate of 10.3%. This increase was due to several factors. First, we had higher pre-tax income, which increases the overall tax rate, as credits related to R&D and foreign earned income are less impactful. We also saw a diminishing benefit from tax incentives in our Centers of Excellence. Finally, the finalization of prior-year returns came into play. Our fourth quarter results include an out-of-period adjustment related to an ongoing review and analysis of certain tax positions, resulting in a one-time charge of $6.8 million and $20 million provision. We believe this $20 million provision represents the maximum remaining amount of net unrealizable tax assets. Upon completion of our review and prior to filing our Annual Report on Form 10-K, we plan to take a one-time charge with respect to this provision to reflect the confirmed actual amount of net unrealizable tax assets. The final amount of this charge is not expected to differ significantly from the current $20 million provision. At this time, we’ve concluded that this adjustment is not material to the current period financial statements. The adjustment relates to the accounting of tax balance sheet accounts, including deferred tax assets and liabilities. All local, federal, and foreign taxes payable have been paid in a timely manner, subject to normal audits of open years. The increase in tax provision was partially offset by higher benefits from stock option exercises and refunds from amended returns. Looking ahead, we expect that higher pre-tax income will increase our overall tax rate. In addition, our foreign tax rate is expected to be higher due to the increase in the UK statutory rate. We’ve taken strategic measures intended to offset our overall rate and are guiding to 17% to 18% effective tax rate for fiscal ’24. GAAP EPS decreased 37.5% to $1.68 this quarter versus $2.69 in the prior year, driven by non-recurring charges and the higher tax provision, which had a $0.68 impact. On an adjusted basis, EPS decreased 6.4% to $2.93. Adjusted EBITDA increased to $172 million, up 8.6% year-over-year, due to higher income tax add-backs and impairment charges, partially offset by lower net income. And finally, free cash flow, which we define as cash generated from operations less capital spending, was $156 million for the quarter, an increase of 15% over the same period last year. This was primarily driven by the timing of income tax payments, partially offset by higher capital expenditures. For the fourth quarter, ASV retention remained greater than 95% and client retention was 91%, which speaks to the stickiness of our solutions. We ended the quarter with almost 8,000 clients with 383 new logos added year-over-year. And user count increased by about 10,000, primarily within banking, corporate and private equity and venture capital firms. For the quarter, we repurchased 264,400 shares for $109.6 million at an average price of $414.63. At the end of fiscal ’23, we had $4.5 million available for share repurchase. As a result, our Board authorized a new share repurchase program of up to $300 million, which became effective on September 1. We intend to continue our share repurchases in FY ’24 with a target to repurchase $250 million spread ratably throughout the year. We remain disciplined in our buyback program and committed to returning long-term value to our shareholders. Combining our dividends and share repurchases, we returned $315.3 million to our shareholders over the last 12 months. As a reminder, we also increased our dividend by 10% in the third quarter, marking the 24 consecutive year of dividend increases. And finally, turning to our guidance for fiscal 2024, as Phil discussed earlier, we expect a weaker first half of fiscal ’24 and a stronger second half, driven by improved client sentiment. As client budgets reset at the turn of the calendar year. We expect to execute on our existing pipeline. Given these expectations, we are guiding to incremental organic ASV plus professional services of $130 million to $175 million, reflecting 7% growth at the midpoint. And with respect to modeling income and expenses for the year, please note that for the full year, we expect interest expense to be $60 million to $65 million and capital expenditures are expected to be in the range of $90 million to $95 million. We expect adjusted operating margin of 36.3% to 36.7%. At the midpoint, this provides 30 basis points of continued margin expansion. While we have already met our adjusted operating margin medium-term outlook of 36%, we are committed to balancing continued sustainable margin expansion with investments to drive top-line growth. Finally, adjusted EPS is expected to range from $15.65 to $16.15, which represents 9% growth at the midpoint. In closing, we are encouraged by the opportunities before us. In 2024, we anticipate that our investments in generative AI, connected refined content and digital solutions will drive expanded market share and increased retention. We are equipping our teams to harness the rapid pace of innovation to remain the partner of choice for our clients. We’re now ready for your questions. Operator? See also 15 Best Dividend Aristocrat Stocks To Buy Now and 10 Best Infrastructure ETFs. Q&A Session Follow Factset Research Systems Inc (NYSE:FDS) Follow Factset Research Systems Inc (NYSE:FDS) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. [Operator Instructions] Our first question comes from the line of Seth Weber with Wells Fargo. Your line is now open. Seth Weber: Hi, good morning, and thanks for taking the question. I wanted to ask for a little bit more color on the wealth business, if you could. I saw the ASP was really strong, up 9%. But then I thought I heard in your comments some comments about some client cost cutting. So, I’m just trying to understand really what the message is there. And if you could just give any more detail on larger accounts versus smaller and the broader competitive environment? Thank you. Phil Snow: Sure. Hey, Seth, it’s Phil. I’ll start, and I’m sure Helen has some additional comments. So, we’re very bullish on the wealth space. As we’ve talked about before, we think there’s a lot of opportunity and a lot of addressable market for us. We’ve been very successful with our core FactSet offering for advisors. We’ve layered on Advisor Dashboard. And we believe the bigger opportunity moving forward is to get into some adjacent workflows in the wealth space that traditionally we haven’t served. So, we view it as a good opportunity. I’ll start with that. I would say across most firm types this year we did see more pressure. Wealth was not excluded from that. So, I think we grew wealth probably close to 13% last year and maybe 9% this year. So, we still grew well. We didn’t get as many new logos as we had. I don’t think there was as new — as much new firm creation in this environment. And we may not have had one of those mega deals that we might have had in previous years. But overall, we feel good about the space. And Helen, do you want to add on to that? Helen Shan: Yeah. No, thank you for that. Phil is exactly right. I mean, we do have a pretty healthy pipeline, and it is a mix. We have some very large opportunities with full deployments and then we’ve got smaller ones, which may be more seat-driven. If you compare it to 2022, where there was a lot more hiring going on, that’s a bit of the difference. And as noted, we didn’t have a mega deal this year per se, but there’s a lot of opportunity in the pipeline that supports that. So, we feel very strongly about wealth. And quite frankly, if you look at where a lot of the clients are focused on, they’re all focused on their wealth businesses also. Seth Weber: Okay. And do you feel like you’re gaining share there? Is that still the opportunity as well? Phil Snow: Yeah, absolutely. We feel like we’re gaining market share, yeah. Most of the wins are displacements of other competitors, yeah. Seth Weber: Perfect. Okay. Thank you very much. Operator: Thank you. Our next question comes from the line of Manav Patnaik with Barclays. Your line is now open. Manav Patnaik: Thank you. Linda and Phil, I was hoping you’d just help with the ’24 guidance a bit, particularly your comment that you assume that budgets improve in the second half. Let’s just say they don’t improve, I guess, how much of the impact is that that you’ve assumed in guidance? And if you could just clarify within the 6% to 8%, the confidence level and what the pricing assumption is? Phil Snow: Yeah, we feel good about the 6% to 8%, Manav, that’s why we put it out there. I think if we break it down by firm type, we anticipate doing about the same level of growth on the buy side as we did this year. And as you know, we’ve been evolving into more of a solutions provider for our clients. So, despite headcount pressure, which we certainly did see on the buy side, we still think there’s a great opportunity to take market share. We are anticipating slower growth within banking. There are some things in the pipeline that I think Helen might be able to speak to. But we’re not anticipating a blockbuster hiring here in banking as part of our algorithm. We just spoke about wealth, so we’re definitely anticipating some acceleration on the wealth side. And then, in the partners part of our business, which we’re now separating out a bit, we’re expecting a more constructive environment there. We actually had — it wasn’t a great year for us in that part of the business. I’m not talking about CGS, CUSIP, I’m talking about the rest of the partners business. So, Helen, do you want to give some more commentary on the pipeline? Helen Shan: Yeah. You made a — Manav, hi. You had a question around pricing. I mean, we continue to have and been making good progress on capturing the value that our clients are receiving for our solutions. In ’23, we actually improved our price realization across our workstation packages by over 100 basis points through the renewals in our new sales. So, we’re continuing to resonate well there. And as you know, our annual price increase takes place in January for Americas and April for outside of the Americas, with contractual base of higher CPI of 3%. So, with inflation moderating and a larger book, we would expect some impact from price increases to be less than ’23, but still a healthy contributor. So, we’ll report more on — out on that when we get to Q2 and Q3, as we’ve done in the past. Operator: Thank you. Our next question comes from the line of Jeff Silber with BMO Capital Markets. Your line is now open. Jeff Silber: Thank you so much. In your prepared remarks, you mentioned that the adjusted operating margin guidance for ’24 is already ahead of where you thought you’d be in 2025. I’m not going to ask you about your 2025 numbers. But maybe just longer term, how do you get that margin expansion going forward? What kind of levers can you pull? Linda Huber: Yeah. Hi, Jeff, it’s Linda. We have made very good progress and we’re quite proud of that. As we move forward, we feel that our workforce — our people is a big potential contributor to this. So, as we said for FY ’24, we think the growth in that bucket will be about 3% to 4%; real estate, probably 3%; and third-party growth — data growth of about 3% to 4%. So, all of those are pretty modest numbers and we feel like we’ve made really good progress. On technology, it’s a different story. We are a technology company. We’re driving harder for AI. And so, we had talked about a 24% increase in the technology budget for FY ’24. A lot of that is the increase in amortization for third-party — for our own software, increased third-party data purchases and, most importantly, increases in cloud expense as we have some facilities now on-prem and we’re getting ready for increased usage for GenAI......»»

United Natural Foods, Inc. (NYSE:UNFI) Q4 2023 Earnings Call Transcript September 26, 2023 United Natural Foods, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $-0.47. Operator: Good morning. My name is Rob and I’ll be your conference operator today. At this time, I would like to welcome everyone to the UNFI Fourth Quarter […] United Natural Foods, Inc. (NYSE:UNFI) Q4 2023 Earnings Call Transcript September 26, 2023 United Natural Foods, Inc. beats earnings expectations. Reported EPS is $0.25, expectations were $-0.47. Operator: Good morning. My name is Rob and I’ll be your conference operator today. At this time, I would like to welcome everyone to the UNFI Fourth Quarter Fiscal 2023 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Steve Bloomquist, Vice President of Investor Relations, you may begin your conference. Steve Bloomquist: Good morning, everyone, and thank you for joining us on UNFI’s fourth quarter fiscal 2023 earnings conference call. By now you should have received a copy of the earnings release issued earlier this morning. The press release and earnings presentation, which management will speak to, are available under the Investors section of the company’s website. We’ve also included a supplemental disclosure file in Microsoft Excel with key financial information. Joining me for today’s call are Sandy Douglas, our Chief Executive Officer; and John Howard, our Chief Financial Officer. Sandy and John will provide a strategy and business update, after which we will take your questions. Before we begin, I’d like to remind everyone that comments made by management during today’s call may contain forward-looking statements. Nejron Photo/Shutterstock.com These forward-looking statements include plans, expectations, estimates, and projections that might involve significant risks and uncertainties. These risks are discussed in the company’s earnings release and SEC filings. Actual results may differ materially from the results discussed in these forward-looking statements. And lastly, I’d like to point out that during today’s call, management will refer to certain non-GAAP financial measures. Definitions and reconciliations to the most comparable GAAP financial measures are included in our press release and the end of our earnings presentation. I’d like to now ask you to turn to Slide 6 of our presentation, as I turn the call over to Sandy. Sandy Douglas: Thanks, Steve. We appreciate everyone joining us for our fourth quarter call. In my remarks this morning, I’ll provide a brief overview of our results, the operating environment, and then provide an update on the actions that we’re taking to continue to reset and restore our profitability and improve the value we create for our customers, suppliers and in parallel, our shareholders. As you saw in our release, our fourth quarter results for sales and capital expenditures were in line with the updated outlook we provided in June, while adjusted EPS and adjusted EBITDA finished towards the high end of their respective ranges. UNFI has not been immune to the post-COVID post-inflation challenges that the entire food industry is facing. Despite these challenges, we remain confident in our multi-year value-creation opportunity and our plan to create and capture it. We are seeking to build upon our strengthening foundation and market leadership position by investing in the necessary capabilities to create a differentiated technology-enabled food retail services company that generates sustainable growth, profitability, and shareholder value. To this end, this morning, we also announced a refreshment of our Board, adding three new members with deep food industry, business transformation, and investment stewardship experience, who we believe will be highly valuable in guiding our customer and supplier-focused multi-year transformation plan in a disciplined manner that generates compelling shareholder returns. UNFI has a strong industry leadership position with an expansive supply chain as the largest wholesale grocery distribution and value-added food retail services provider in North America with nearly 11,000 suppliers and manufacturers serving over 30,000 retail outlets, and the long-term growth opportunity in pipeline we see it in our core business remains significant within a $140 billion total addressable market for our core wholesale business. However, considerable progress remains to be made, modernizing and unifying our technology and network platforms as previous plans have taken longer than expected as the company faced the onset of the COVID pandemic, unprecedented inflation, and supply chain disruptions over the past few years. These events and their enduring consequences have brought cost increases across our total customer service system as we serve our large, diverse, and growing customer base. In previous quarters, we’ve outlined a four-part plan to transform and realize the full value of our platform, including details on how we plan to strengthen our supply chain for our retailers and suppliers through distribution network automation and optimization, introducing smarter technology systems, and investing in operational excellence and efficiency. We believe that we will further differentiate UNFI from our peers by complementing our profitable growth strategy with our operational transformation, and specifically, we expect to execute our transformation in a manner that restores and grows our profitability to sustainably improve shareholder value-creation. We see significant sales and profit growth opportunities. So significant, that we are unwilling to be incremental in our approach, as we drive change and investment. Our transformation agenda is challenging and it will take time. In the meantime, our management team is focused on working through the near-term environmental challenges, resetting the business, and taking action to turn profitability around, while simultaneously investing in the business to sustain and significantly accelerate profitable growth over time. While we lay the groundwork for our transformation, the management team is also taking decisive action to revamp and lower our sustaining cost structure in the near term. The benefits from these more easily executable profitability drivers that I outlined on our last call will largely go towards offsetting higher operating costs that include additional labor and supply chain costs, and the acceleration of work on our transformation initiatives. We also believe this transformation, including our planned investments to modernize and optimize our infrastructure will help us to create a more nimble, streamlined, and responsive company. Let me briefly report on the near-term actions I previously outlined. Since our third quarter call, we’ve captured nearly $100 million of benefits on a run-rate basis from work around our organizational structure, SG&A spending, and wholesale efficiency initiatives. Having completed a deeper dive, we now believe a greater opportunity exists than we previously thought to continue to improve and become more efficient. As such, we are increasing the near-term value-creation benefit from $100 million, called out in June to nearly $150 million. These amounts do not include the potential opportunity from improving our shrink rate which as I mentioned on our last call is meaningfully higher than the pre-pandemic run rate and which we expect to improve over the course of the year as we operationalize process improvements. These value-creation initiatives are expected to benefit fiscal 2024 which will be an important year for UNFI as we take action to reset and begin to accelerate and expand our transformation program, including critical investments to our supply chain and technology infrastructure. Let me provide some more details on our transformation program progress and our plan going forward. Let me point you to Slide 6, which includes a summary of our transformation plan to truly leverage the power of our competitive advantages through what we’re calling One UNFI. We’re working to modernize and unify our technologies, infrastructure, and processes to drive better service for our customers and suppliers, as well as improve our internal analytical capabilities to guide the company and help us be as dynamic and responsive as possible. Slide 7 shows a broad roadmap of the key work streams we’re pursuing over the next few years under the four transformation pillars that we previously identified. First is the work we’re doing around our supply chain, what we’ve called network automation and optimization. We formally announced that Centralia, Washington will be the first location where Symbotic’s automation technology will be installed. On our last call, we also stated that we’d begun the design phases for the next two installs and expect to be running up to four of these projects simultaneously as we further expand the automation levels in our distribution system. We will take learnings from Centralia to fine-tune the implementation of ensuing projects prior to completion and expect to accelerate the pace of installs as we gain confidence in our processes and the intricacies of the system. Collectively, when we complete, these projects are designed to increase our capacity, improve our service levels, enhance the customer experience, make for a safer workplace and importantly, create meaningful operating efficiencies. We’re also continuing our evaluation of fast and slow moving facilities and regional DCs and how best to migrate our network in a way that will further enhance our capacity, lower our cost structure and optimize DC footprints and working capital levels. Next is our work around commercial value creation, which aims to enable us to generate more profitable and scalable growth for UNFI, and a more streamlined experience for our customers and suppliers. We see significant potential to increase the visibility of profitable growth opportunities and data-driven real-time insights across our ecosystem. Said simply, our suppliers want to see our customers and their shoppers better so they can make productive investments in sales, merchandising, and marketing opportunities across the 30,000 plus retail locations that make up our customer base. Our customers want them to do so and UNFI’s opportunity is to build the capabilities necessary for this to happen seamlessly. We’re also focused on building-related capabilities and streamlining legacy processes to help customers and suppliers grow faster and more profitably together and to ensure that UNFI is rewarded appropriately for the value created. Over time, our goal is to evolve our go-to-market programs to reduce complexity, and drive accelerated supplier brand growth with and for UNFI customers. The third area of our transformation focus is enhancing our digital offering, which is another way that we can more effectively connect our customers and suppliers to grow their businesses collectively and profitably. Digital transformation is the key enabler to fully activate the commercial opportunities in our ecosystem, opportunities that many of the large retail chains are activating now. While we will be providing more specifics as we progress in digital, let me give you a quick example of early progress in this area to help illustrate how important elements of this plan are coming to life. Our newest value-added supplier program UNFI Insights, powered by Crisp, provides suppliers with a granular understanding of sell-through data across natural and conventional channels directly through the myunfi.com supplier portal. The UNFI Insights team is dedicated to uncovering the latest data into actionable intelligence, so suppliers and customers can see each other and their shoppers and drive mutual benefits. We have seen solid early adoption and positive initial feedback from suppliers of this early stage program. And finally, our fourth transformation program is the work of technology infrastructure unification and modernization, where we plan to reduce the number of systems used to run the business across areas such as finance, warehouse management, procurement, promotions, and data management. We’re planning for our first go-live implementation of a common warehouse management system, accompanied by what we are calling hyper support to ensure success, which will serve as the pilot for the continued rollout of a single solution. As we’ve talked about before, this is consistent with our goal to simplify the business model, to lower our cost structure, and improve the customer experience. Common platforms are expected to lead to enhanced efficiencies, more uniform datasets, and improved business management. Similar work streams are moving forward in other parts of the business guided by executive leaders and cross-functional teams. While we expect our transformation program to be a multi-year endeavor, we’re already making progress, adding incremental growth and profit accretive drivers to our business, while also making long-term structural improvements to our efficiency processes and cost base. So in summary, I want to make sure that I leave you with three things. First, fiscal 2024 is an important year as we emerge from three years of unprecedented volatility and look to reset our profitability in the near term while investing in critical foundational skills, infrastructure, and capabilities that we believe will accelerate growth in sales and profitability for UNFI, our customers, and our suppliers. Second, there have been and continue to be challenges that impact the entire food industry. But we are taking decisive action to strengthen the business and drive improved performance. We run a complex business and know the path forward will take time, tenacity, and discipline, and that will need to be adaptable along the way. But we also know the way to fully realize our vision and maximize shareholder value-creation is through a proactive combination of near-term action and the multi-year transformation path that I’ve outlined. And finally, with the steps we are taking to continue to strengthen both our leadership team and our Board, we are positioning our company to capture the significant profitable growth opportunities that lie ahead. We look forward to updating you on our progress along the way. And let me now turn the call over to John for his insights on our financials. John Howard: Thank you, Sandy, and good morning, everyone. As Sandy noted, we finished the year toward the upper half of the outlook provided on our third quarter call, and our focus continues to be on driving improved capabilities, operational efficiencies, and near-term profitability. Today, I will provide commentary on fourth quarter results, our balance sheet and capital structure, and our outlook for fiscal 2024. With that, let’s review our Q4 results. Turning to Slide 9. Fourth quarter net sales grew by 2% and totaled more than $7.4 billion, primarily reflecting inflation and new business wins, which more than offset a decline in unit volume. Sales from our three primary wholesale channels grew by nearly 3%, including the impact of inflation of nearly 6% with supernatural growing the fastest at over 9%. This includes incremental volume from new customers added over the last year, additional categories and new-store openings in supernatural, and increased item and category penetration with existing customers. Unit volumes remained negative, but improved sequentially by about 100 basis points from Q3 and were slightly better than Nielsen’s total U.S. food volume changes which is representative of performance for the grocery industry as a whole. Retail sales declined 2% compared to last year’s fourth quarter, primarily driven by lower unit volumes, partly offset by higher average unit retail prices. We’ve continued to experience pressure across our retail footprint primarily located in the Minneapolis-Saint Paul market, due in large part to tightening consumer demand, reductions in government support programs, and more intense competition on price. Flipping to Slide 10. Adjusted EBITDA for the fourth quarter totaled $93 million, which was at the top half of the implied range we provided in June. This compares to $213 million in the year ago fourth quarter. As we indicated would be the case with our updated outlook, the biggest driver for the decline in Q4 year-over-year profitability was lower levels of procurement gain opportunities resulting from decelerating inflation. This resulted in a reduction in our gross profit rate prior to the LIFO charge in both years of approximately 175 basis points or more than $100 million. We also experienced higher levels of shrink compared to last year’s fourth quarter, which we are actively addressing. Our fourth quarter operating costs as a percent of sales were flat to last year. However, last year included approximately $14 million in higher performance based incentive compensation expense compared to this year. Excluding this performance based incentive compensation expense, our operating expense rate increased by about 25 basis points. A good portion of this came from higher health benefit costs driven by a higher level of claims, representing a more normalized run rate as associates returned to more pre-pandemic medical visits. Within our retail segment, adjusted EBITDA decreased to $4 million, primarily due to margin investments intended to drive traffic and basket size improvements, as well as higher-than-normal costs associated with recently opened stores. During the quarter, we opened one new store, bringing total stores opened during fiscal 2023 to six stores. Our GAAP EPS for Q4 was a loss of $1.15, which included $0.90 in after-tax costs and expenses composed primarily of LIFO, restructuring, and business transformation. Our adjusted EPS totaled a loss of $0.25 compared to $1.27 of income in last year’s fourth quarter. This decline is primarily attributable to the lower adjusted EBITDA compared to last year as well as lower non-cash pension income and higher D&A, which was driven by elevated levels of investment, which is expected to continue. Moving to Slide 11, we finished the quarter with total outstanding net debt of just under $1.95 billion, a $70 million decrease compared to last quarter. This is our lowest net debt balance since the October 2018 closing of our Supervalu acquisition, reflecting our strong efforts to prioritize debt reduction over the past several years. Our net debt to adjusted EBITDA leverage ratio finished fiscal 2023 at 3.0 times. Turning to Slide 12. Let’s move to our outlook for fiscal 2024, which will be a 53-week year. From a reporting perspective, our fourth quarter will have one additional week, making it a 14-week quarter. We expect fiscal 2024’s full-year net sales to grow approximately 3% or $900 million at the midpoint of the $30.9 billion to $31.5 billion range we have provided. This includes an approximate $600 million, or 2% benefit from the 53rd week. Our growth will include the addition of new business from customers added in fiscal 2023 we have yet to cycle, the continued growth of selling more products to existing customers, new customer wins, and anticipated strong growth within services. We expect full-year inflation to continue to moderate and be in the low to mid-single digits, which is a decline compared to the over 9% reflected in our fiscal 2023 results. We’re also expecting ongoing near-term volume headwinds as consumers continue to adapt to higher costs across their household budgets. We expect fiscal 2024’s full year adjusted EBITDA to be in $450 million to $550 million range. This decline primarily reflects approximately $125 million in lower anticipated procurement gains, primarily in last year’s first and second quarters, resulting from the continued decline in the number of supplier price increases compared to the first half of fiscal 2023. It also includes normalized performance-based incentive compensation accrual of approximately $62 million. This compares to fiscal 2023 when no material performance based incentive compensation was paid to eligible associates. Partly offsetting these items is the estimated contribution of $9 million from the 53rd week, as well as the near-term profitability drivers Sandy discussed earlier, with nearly half of the actions addressing profitability from cost savings, including our recent regional reorganization and other SG&A and operating expense rationalization, and the remainder being driven by SKU rationalization and contract review benefits. Additionally, as Sandy mentioned, we expect there could be some upside from shrink improvement as we operationalize and scale process improvements during fiscal 2024. From a cadence perspective, we would expect our first quarter to be the lowest of the year in absolute adjusted EBITDA dollar terms and likely to be similar to the adjusted EBITDA level we generated during Q4 2023. Our first quarter is expected to have the largest percentage decline compared to last year, as we cycle last year’s elevated level of procurement gains and further build the benefits of our near-term profitability initiatives. Finally, we expect fiscal 2024’s full year adjusted EPS to be in the range of $0.88 loss to $0.38 of adjusted net income. This primarily reflects lower adjusted EBITDA, as well as lower non-cash pension income and higher D&A. It also includes about $21 million of higher net interest expense, primarily resulting from higher expected interest rates and ABL balances during the year and an additional week of interest expense. More than 65% of our debt is currently fixed rate, taking into account our approximately $800 million of hedges in place as well as our senior notes. We expect to invest approximately $400 million in the business in fiscal 2024 with our primary driver of the increase compared to fiscal 2023 being investments in our transformation agenda, with the largest component going towards network optimization and automation. This also includes investments to improve critical infrastructure, as well as drive higher profitability and growth in the future. Turning to the summary on Slide 13. We expect fiscal 2024 will be a pivotal year for our transformation into a more modernized technology-enabled partner for our customers and suppliers. While we expect this will be a multi-year endeavor, we are committed to making progress as quickly as possible and look forward to updating our shareholders on this path. We are confident we’re taking the appropriate actions to best position UNFI for improved efficiency and profitability, enhanced growth, and long-term success. We strongly believe that combining a more dynamic and nimble UNFI with our industry-leading position will enable us to drive meaningful and sustainable shareholder value-creation. With that operator, please open the lines for questions. See also What are Golden Visas and 10 Countries that Hand Them Out? and 18 Highest Paying Countries for ESL Teachers. Q&A Session Follow United Natural Foods Inc (NASDAQ:UNFI) Follow United Natural Foods Inc (NASDAQ:UNFI) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: [Operator Instructions] And your first question today comes from the line of Mark Carden from UBS. Your line is open. Mark Carden: Good morning. Thanks so much for taking our question. So looking to 2024, you’re lapping a few quarters of lower inventory gains beginning in 2Q, Your cost savings sound like that they’re falling nicely into place. Still, your guidance is assuming a meaningful step-down in profitability. So what’s changed the most relative to where your expectations may have been three months ago? How much of it is macro-driven? And to what extent are you building in some conservatism just given all the initiatives that you have in place? Sandy Douglas: Yeah, Mark. This is Sandy. Thanks for your question. I guess we’re looking at several factors. If you look at the fourth quarter and consider the momentum of the business, the addition back of performance incentives for executives, you get to a fairly low run rate. You add back then the actions that we’ve taken most of which we’ve already captured and you get sort of in the range of our mid-point. The external environment continues to be pretty soft. So I think we’re going to manage our way this year and we’re taking a number of initiatives to try to optimize the results. But the net of all of those factors gave us the range that we provided today. Mark Carden: Got it. That’s helpful. And then what are you seeing from your independent grocer base? Would you expect the pace of customer migration to mask the pickup in 2024 and further pressure the channel? And if so, how does that typically impact demand for value-added services and private label? Sandy Douglas: Yeah. I mean, you can’t really generalize about independence. There is some incredibly strong and vibrant ones, and then some they’re struggling. This community is the focus of our whole product service makeup. I mean, it’s our job to help them succeed. I think broadly compared to independents in syndicated data, our customers are outperforming the market by a small margin. But we’ve got a lot of programs and you mentioned two of them, brands and services that are designed to provide independents with a great owned brand program at multiple price points and then services that help them save money and compete better. In the end, their success is the most important priority we have. Mark Carden: Great. Thanks so much. Good luck guys. Sandy Douglas: Thanks. Operator: Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is open. John Heinbockel: Hey, Sandy. Maybe talk to what procurement gains were pre-COVID in a normal environment, right? It looks like, I don’t know, maybe they got up to $250 million or $300 million at the peak, right? Was that all just gains on stuff that was in your inventory or was there a lot of forward buy, right, that went along with that? And when you think about that, does that then — what you had earned right over the past couple of years, right, sort of an EBITDA margin in the upper two’s, is that no longer attainable anytime, right, or over a very long period of time because those inventory gains are just going to — going to be very de-minimis the next couple of years. Sandy Douglas: John, it’s Sandy. Let me come at this a couple of ways, and then I’ll ask John Howard to add to my comments. Definitely, we saw an out-of-pattern increase in procurement gains beginning in January of ’22 and that lasted (ph) for a year before the year-over-year disinflation started and that generated numbers in line with your estimates. And that was the out-of-pattern part. You’ve got really two things going on there. You’ve got actual price increase events both the frequency and depth, and then you have promotions. And we saw a decline in promotions while prices were going way up. What we expect to happen is that as price increase events decline, we expect promotions to come back, although they’ve done so very slowly. But as we look forward and we see units continuing to be soft, the consumer to be stressed, and inflation now returning to lower levels, we definitely expect consumer products companies to start promoting more. They’ll need to in order to drive sales and so we’ll see a positive there. The out-of-pattern high number of price events have kind of returned back to more normal levels. We’re still cycling the higher ones as John mentioned in his comments. But net-net-net from a run rate perspective, we’d expect that to be slightly positive as promotions come back. John, do you want to add anything? John Howard: No. I think that’s spot-on. The only thing just to put some numbers around that ’23 to ’24 impact, it’s going to be about $125 million that we’ve, of course, factored into our guidance. And most of that is going to be in the first two quarters of FY ’24 as we cycle those gains that were still happening in the first half of FY ’23. John Heinbockel: Great. And then maybe second thing right, so leverage is going to go from 3 times to 4 times returns this year. You’d say that’s temporary. Yeah, I think there was some commentary with the — with the Board changes of strengthening the balance sheet. So do you feel a need to do that urgently? And then what do you do? I know you securitized receivables before. I don’t know if you want to do that. I don’t know if you want to sell retail at a low level. I don’t know what the options are, right, to strengthen the balance sheet short term. Sandy Douglas: Hey, John. I’ll answer that strategically, and I’ll let John pick apart the pieces. The refreshment of our Board from our point of view is going to strengthen our offense. We have a transformation plan and the strategy that we’re investing in and that we are excited about and confident that it’s going to make a significant difference. Now, we’re in the investment phase. So it is obviously out there in the future that the benefits will come. But I think as a Board, new members and old members alike, we are aligned on the importance of that. With the financial review with the new Board and the new skill sets, it’s just going to help us make sure that we’re sweating every decision we make in the most detailed way to ensure that not only are we driving the transformation strategy, but we’re also maximizing returns to shareholders on a strong basis. We have strong liquidity. We have the resources we need to invest in the plan, but we want to make sure that every stakeholder of ours, customers, suppliers, and shareholders are getting the best possible return. John?.....»»

In a recent profile in the New Yorker, Altman compared his vision of AGI — artificial general intelligence — to a "median human." OpenAI CEO, Sam Altman.Sven Hoppe/picture alliance via Getty ImagesOpenAI CEO Sam Altman and others often talk about the "median human."Altman has said his vision for artificial general intelligence was equivalent to a median human. The terminology, used by many in the tech bubble, has been raising eyebrows.Tech bros aren't always known for their sensitivity.In a recent profile in the New Yorker, OpenAI CEO Sam Altman compared his vision of AGI — artificial general intelligence — to a "median human."He said: "For me, AGI…is the equivalent of a median human that you could hire as a co-worker."It's not the first time Altman has referred to a median human. In a 2022 podcast, Altman said this AI could "do anything that you'd be happy with a remote coworker doing just behind a computer, which includes learning how to go be a doctor, learning how to go be a very competent coder."Altman's company happens to be one of the current frontrunners for achieving AGI.Although a disputed term, AGI or artificial general intelligence has been defined as an AI model that surpasses average human intelligence or can achieve complex human capabilities like common sense and consciousness.The comparison with median human intellect isn't new. As writer Elizabeth Weil notes in her Altman profile, the term is used by "many in the tech bubble." The term is used by AI insiders on Reddit, Twitter, and on blogs.An August report from McKinsey adopted similar benchmarks, including a graph of technical capabilities where generative AI is expected to match the "median level of human performance" by the close of the decade.Still the term, especially when it's used by those in charge of powerful AI models like OpenAI's GPT-4, has been raising eyebrows."Comparing AI to even the idea of median or average humans is a bit offensive," Brent Mittelstadt, director of research at the Oxford Internet Institute, told Insider. "I see the comparison as being concerning and see the terminology as being concerning too.""It's interesting to use the term median human — that's importantly different from average human," Henry Shevlin, an AI ethicist and professor at the University of Cambridge, told Insider. "It makes the quote sound more icky.""There is an argument for thinking that Sam Altman could be more sensitive around this stuff," he added.However, Shevlin said the profile wasn't intended to be a scientific paper and some level of quantification was needed in the complex field."One thing that current AI architectures and models have shown is that they can achieve basically typical human-level performance. That's not problematic in itself," he said. "I feel when we get into things like intelligence people are more touchy, and there are some good reasons for that."One reason is that the practice of trying to quantify intelligence has been marred by scientific racism although, Shevlin added, it's not inherently problematic in itself.How tech bros are defining this idea of median human intellect is open to question.Mittelstadt said the link was rarely backed up in terms of a "concrete measurable comparison of human intelligence."He said: "I think it's an intentionally vague concept as compared to having a very specific grounded meaning.""There's all these different benchmarks that are used to evaluate the performance of language models or AGI," he said. "They might be referring to IQ, for example, but then there's all sorts of problems with that."Traditional measurements for comparing AI and human intelligence have tended to focus on capabilities rather than general intellect."A lot of the classic benchmarks have involved things like the ability to play chess, the ability to produce good code, or the ability to pass as a human," Shevlin said.But comparing AI with human intelligence at all can be ethically murky and potentially misleading, according to Mittelstadt."The problem is that that you're directly equating the performance of these systems with human capabilities or with human intelligence," he said. "That is a hugely problematic leap to make because all of a sudden you're assigning agency, comprehension, cognition, or reasoning to these mechanistic models."Read the original article on Business Insider.....»»

In a recent profile in the New Yorker, Altman compared his vision of AGI — artificial general intelligence — to a "median human." OpenAI CEO, Sam Altman.Sven Hoppe/picture alliance via Getty ImagesOpenAI CEO Sam Altman and others often talk about the "median human."Altman has said his vision for artificial general intelligence was equivalent to a median human. The terminology, used by many in the tech bubble, has been raising eyebrows.Tech bros aren't always known for their sensitivity.In a recent profile in the New Yorker, OpenAI CEO Sam Altman compared his vision of AGI — artificial general intelligence — to a "median human."He said: "For me, AGI…is the equivalent of a median human that you could hire as a co-worker." It's not the first time Altman has referred to a median human. In a 2022 podcast, Altman said this AI could "do anything that you'd be happy with a remote coworker doing just behind a computer, which includes learning how to go be a doctor, learning how to go be a very competent coder."Altman's company happens to be one of the current frontrunners for achieving AGI.Although a disputed term, AGI or artificial general intelligence has been defined as an AI model that surpasses average human intelligence or can achieve complex human capabilities like common sense and consciousness.The comparison with median human intellect isn't new. As writer Elizabeth Weil notes in her Altman profile, the term is used by "many in the tech bubble." The term is used by AI insiders on Reddit, Twitter, and on blogs.An August report from McKinsey adopted similar benchmarks, including a graph of technical capabilities where generative AI is expected to match the "median level of human performance" by the close of the decade.Still the term, especially when it's used by those in charge of powerful AI models like OpenAI's GPT-4, has been raising eyebrows."Comparing AI to even the idea of median or average humans is a bit offensive," Brent Mittelstadt, director of research at the Oxford Internet Institute, told Insider. "I see the comparison as being concerning and see the terminology as being concerning too.""It's interesting to use the term median human — that's importantly different from average human," Henry Shevlin, an AI ethicist and professor at the University of Cambridge, told Insider. "It makes the quote sound more icky.""There is an argument for thinking that Sam Altman could be more sensitive around this stuff," he added.However, Shevlin said the profile wasn't intended to be a scientific paper and some level of quantification was needed in the complex field."One thing that current AI architectures and models have shown is that they can achieve basically typical human-level performance. That's not problematic in itself," he said. "I feel when we get into things like intelligence people are more touchy, and there are some good reasons for that."One reason is that the practice of trying to quantify intelligence has been marred by scientific racism although, Shevlin added, it's not inherently problematic in itself.How tech bros are defining this idea of median human intellect is open to question.Mittelstadt said the link was rarely backed up in terms of a "concrete measurable comparison of human intelligence."He said: "I think it's an intentionally vague concept as compared to having a very specific grounded meaning.""There's all these different benchmarks that are used to evaluate the performance of language models or AGI," he said. "They might be referring to IQ, for example, but then there's all sorts of problems with that." Traditional measurements for comparing AI and human intelligence have tended to focus on capabilities rather than general intellect."A lot of the classic benchmarks have involved things like the ability to play chess, the ability to produce good code, or the ability to pass as a human," Shevlin said.But comparing AI with human intelligence at all can be ethically murky and potentially misleading, according to Mittelstadt."The problem is that that you're directly equating the performance of these systems with human capabilities or with human intelligence," he said. "That is a hugely problematic leap to make because all of a sudden you're assigning agency, comprehension, cognition, or reasoning to these mechanistic models."Read the original article on Business Insider.....»»

Is World War III About To Start? Part I: Drift Toward War Authored by Richard Cook via ScheerPost.com, It is likely that billions of people around the world view the conflict in Ukraine as a proxy war being waged by the U.S. against Russia. US President Joe Biden has pledged to aid Ukraine’s pursuit of victory “for as long as it takes,” without defining what the end state might be. Russian President Vladimir Putin has interpreted U.S. intentions to mean a fight “to the last Ukrainian.”  Anyone with a discernible pulse is aware of the danger that the conflict could escalate into a conflagration large and destructive enough to morph into World War III. The threshold would likely be crossed once nuclear weapons were unleashed. The military doctrines of all nuclear powers stipulate that such an attack would justify an in-kind response, though without always ruling out the same for lesser provocations of a potentially existential nature.  President Biden has said “the world faces the biggest risk of nuclear Armageddon since the 1962 Cuban Missile Crisis.” The context of Biden’s statement came a month earlier on September 21, 2022, when Putin warned the West he was not bluffing when he said he would be ready to use nuclear weapons to defend Russia against what he said was “nuclear blackmail.” Earlier, in an April 21, 2021, speech, Putin said: We really do not want to burn bridges. But if someone mistakes our good intentions for indifference or weakness and intends to burn or even blow up these bridges, they must know that Russia’s response will be asymmetrical, swift, and tough. Those behind provocations that threaten the core interests of our security will regret what they have done in a way they have not regretted anything for a long time.  Another to speak of nuclear war has been former Russian president and prime minister Dmitry Medvedev, now deputy head of the Russian Security Council and one of Putin’s top advisers. Commenting on Ukraine’s highly touted but now failed 2023 “spring offensive,” Medvedev said in July 2023 that if Ukraine succeeded in taking Russian sovereign territory—including Crimea plus the four Donbass oblasts (regions) annexed by Russia last year—Russia “would have to use nuclear weapons by virtue of the Russian Presidential Decree.” This decree stated that any assault on Russian territory justified a nuclear response. On Hiroshima Day, August 6, 2023, UN Secretary General Antonio Guterres said, “The drums of nuclear war are beating once again. Mistrust and division are on the rise. The nuclear shadow that loomed over the Cold War has re-emerged.” One who has predicted world war has been UK Defense Minister Ben Wallace. On May 19, 2023, he warned “that the UK could enter a direct conflict with Russian and China in the next seven years and has called for an increase in military spending to counter the potential threat.” Speaking to London’s Financial Times, Wallace said “a conflict is coming with a range of adversaries around the world.” More recently, independent commentator Tucker Carlson, who has said the U.S. is intentionally seeking war with Russia, remarked in a September 2023 interview on The Adam Corolla Show that the Biden administration would attempt to stay in power by starting a “hot war” with Russia before the 2024 election. Carlson argued that the U.S. was “already at war” with Russia in Ukraine. He added, “I don’t think we’ll win it.”  Meanwhile, Russia’s new generation of Sarmat ballistic missiles, capable of carrying ten or more nuclear warheads, have been deployed for combat duty. Of course we now must wait and see if recent action by House Republicans to launch an impeachment inquiry against Biden, along with his worsening senility, put enough of a crimp in his style to force a postponement of any irretrievable decisions.  But feeding into Carlson’s fears are statements by U.S. Acting Deputy Secretary of State Victoria Nuland in a September video clip supporting Ukrainian strikes against Russian territory. Nuland said that one “axis” of U.S. strategy is to “put some of Russia’s most precious assets at risk.”  This comes as the U.S. is planning to send long-range Army Tactical Missile Systems (ATACMS) to Ukraine, with Germany promising Jupiter missiles, and as the UK plans to send RAF fighters to the Black Sea. Russian Defense Minister Sergey Shoigu said in June 2023 that use of Western-supplied weapons to launch such attacks” would mean the full involvement of the United States and the United Kingdom in the conflict.”  So was Biden correct? Is nuclear Armageddon looming? Or is “brinkmanship” today merely “bluffmanship?” 75 YEARS OF CONFLICT Of course, potential nuclear war between the U.S. and Russia, especially in its previous iteration as the Soviet Union, is nothing new. World War II was scarcely over before figures like Winston Churchill and U.S. banker Bernard Baruch began raising alarms about the existence of an “Iron Curtain” across Europe and the start of a “Cold War.”  But even before World War II began, the Roosevelt administration accepted the recommendation of studies by the Council of Foreign Relations, financed by the Rockefeller Foundation, that the U.S. should aim for  postwar global military domination. Note that there was nothing in the U.S. Constitution that even remotely supports such a goal. The closest the U.S. might have come was the myth of “Manifest Destiny” that once supplied the ideology for coast-to-coast expansion; i.e., “from sea to shining sea.” At the end of World War II, with the British Empire crumbling and Europe in ruins, there were two clear victors: the U.S. and the Soviet Union. The accepted logic of U.S. planners now dictated that the latter must go.  Stalin is said to have asked to join the newly-formed NATO but was rebuffed. He responded by forming the Warsaw Pact. The post-war standoff had begun and, 75 years later, has not ended. With the Soviets being accused of fomenting leftist revolutions around the world, the U.S. military has been laying plans for a U.S.-Russian nuclear exchange ever since. While the military sought an advantage favorable to a nuclear first strike, the everyday working objective toward the Soviets was “containment.” Meanwhile, the U.S. began its own long history of generating coups friendly to its interests with the CIA’s overthrow of governments in Iran in 1953 and Guatemala in 1954.  In 1956, Eisenhower’s Secretary of State John Foster Dulles proclaimed a U.S. policy of “brinkmanship.” Speaking of the potential for nuclear war in a Life magazine interview, he said, “If you are scared to go to the brink, you are lost.”  In 1961, President John F. Kennedy seemed to have stared down Soviet Premier Nikita Khrushchev over the planned installation of nuclear weapons in Cuba. Unknown publicly, JFK had already pulled U.S. nukes out of Turkey.   Nor are proxy wars anything new. They began with the Korean War. Of course, there were U.S. “boots on the ground,” but North and South Korea also fought against each other with Russia/China and the U.S./UN having the backs of each respectively. The Vietnam War was fought with U.S. troops and weapons aiding the South Vietnamese against the Russian-backed Hanoi regime and its ally, South Vietnam’s Viet Cong. The Korean conflict became a stalemate; Vietnam, a debacle.  But change was in the wind. JFK moved to revolutionize the discourse with his now-famous proposal for world peace delivered at American University on June 10, 1963. In the Soviet Union, Khrushchev denounced Stalin and proposed a new era of “Peaceful Coexistence” with the West. In the early 1970s, President Richard M. Nixon and his national security advisor Henry Kissinger sought détente with the Soviets along with their epochal opening to China.  Rapprochement with the Soviets was sabotaged by the Reagan military build-up in the 1980s and the lies of Soviet supremacy promulgated by the Committee on the Present Danger. The U.S. was also creating the Mujahedeen to attack the Soviet military presence in Afghanistan. This was part of Reagan’s engagement in his own proxy wars—called the “Reagan Doctrine”—against leftist regimes in Asia, Africa, and Central America, with U.S.-supported “death squads” in El Salvador and elsewhere.  It was under Reagan that the faction known as the “Neocons” began their infiltration of the national security apparatus. These included “Trotskyite” intellectuals from New York like Irving Kristol; alumni of Democratic Senator Henry “Scoop” Jackson’s staff like Paul Wolfowitz and Richard Perle; “Team B” CIA analysts empowered by short-term Director George H.W. Bush, leading to the future prominence of Bob Gates; icons of the military-industrial complex like “Father of the H-Bomb” Edward Teller; Donald Rumsfeld and Dick Cheney, who’d been joined at the hip to each other and to President Gerald Ford; Reagan’s Director of Central Intelligence William Casey; and many future dark personages like John Bolton.  It was Casey who famously said at one of Reagan’s early staff meetings, “We will know our disinformation program is complete when everything the American people believes is false.” This statement defined perfectly the future program of what we call today the “Deep State” and its mass media megaphone, especially outlets like The New York Times, the Washington Post, and CNN.  One of the first major Neocon projects—Iran-Contra—devolved into scandal, with Reagan and Vice-President Bush both claiming ignorance under the “plausible deniability” fiction. Another was Reagan’s pet project—the Strategic Defense Initiative—lampooned as “Star Wars.”  Purporting to be offended by the U.S.-Soviet nuclear standoff, whereby peace was assured only by the logic of “Mutually-Assured Destruction,” Reagan proposed an armada of “defensive” weapons in space. The military-industrial complex seized on Star Wars as a cornucopia of lucrative research and development projects that ended when space shuttle Challenger blew up. The space shuttle was being converted to a testing platform for space weaponry, as I saw personally at NASA when I worked there in 1985-1986. One of the war planners’ bright ideas was to send the president to orbit in the space shuttle, from which he could safely direct military operations.  But the Star Wars project, which was not revived until the 21st century, nevertheless witnessed vast planning of space battle stations, nifty theoretical space weaponry like the X-ray laser and devices later called “rods from God,” and cost-benefit studies that included calculations of how many tens of millions of Americans could die in a space-based nuclear war against the Soviets while still allowing the U.S. to claim victory.  Meanwhile, it was after the horrendous exposures of CIA assassinations, media subversion, poisoning of subjects with LSD, and other misdeeds arising from the Church Committee hearings in 1975, that the CIA began to retreat into the shadows. Under Reagan came authorization of the National Endowment on Democracy, whose signature mission became “color revolutions” and later the “Arab Spring.” Amid the horrors, though, Reagan was yet able to sign the Intermediate-Range Nuclear Forces Treaty with Soviet Premier Mikhail Gorbachev, rolling back the number of nuclear weapons for the first time.  But things took a decided turn for the worse under President George H.W. Bush with the 1992 Wolfowitz Doctrine that reformulated the old CFR plans for global U.S. military dominance and contained the ominous warning that Russia was the only nation on earth with the power to destroy the U.S. By now, the U.S. had begun its next phase of global conquest with Bush’s war against Iraq—Desert Storm. The goal was total military colonization of the Middle East, with the “Greater Israel” project so near and dear to the hearts of the Neocons an obvious beneficiary. The Iran-Iraq War of 1980-6, with the U.S. arming both sides, doubtless had the same underlying purposes.  The oddity in the designation of Russia as the worst of enemies named in the Wolfowitz Doctrine was that a year earlier, the Soviet Union had collapsed, ceasing to exist in 1991, with U.S. hawks declaring that the Cold War was over and that the U.S. had won. Their corollary was that the Reagan military build-up had forced the Soviet economy into receivership because they couldn’t keep up with U.S. military spending.  But in a December 17, 2022, interview on the online news platform, The Duran, Jack F. Matlock, former U.S. ambassador to the Soviet Union, said that “the idea that we spent them to defeat was absolutely wrong.” He said the U.S. “did not win the Cold War.” He said the Soviet Union broke up because the Cold War was over by 1989 and that it was local nationalism that tore it apart. He added that the end of the Cold War was “negotiated as equals.” But here was the rub: the Wolfowitz Doctrine proved that it wasn’t “communism” that the U.S. wanted to defeat, as Russia was no longer a communist state. Matlock said that Gorbachev had abandoned communism in his UN speech of December 7, 1988. Nor was the U.S. really pushing for “democracy.” Overnight Russia had become more democratic than many of the authoritarian regimes the U.S. had been supporting around the world for decades, such as those in Saudi Arabia and Turkey. Rather it was Russia as a geopolitical enemy that the U.S. was targeting; meaning, in Russia’s eyes, its very existence as a territory, a state, and a civilization. In order to promote peace with the West, Gorbachev had agreed to the reunification of East and West Germany as one nation and part of NATO, given U.S. Secretary of State James Baker’s agreement that NATO would not advance “one inch eastward” from the German border. This pledge was violated by the next three presidents—Clinton, Bush II, and Obama. Veteran U.S. statesman George Kennan opposed the expansion of NATO, while Ambassador Matlock called it “a great tragedy.” Meanwhile, 9/11, the Neocons’ “new Pearl Harbor,” produced the “War on Terror,” the Patriot Act, the Department of Homeland Security, the military doctrine of Full-Spectrum Dominance, and the assaults on Afghanistan, Iraq, and later Libya. The ideological focal point was demonization of all things Islam. The rationale? “They hate our freedoms.” But the 9/11 Truth Movement began to poke holes in the official conspiracy theory of terrorists with box cutters that over time became gaping abysses. The anti-Islam narrative began to wear thin when stacked up against U.S. military overkill, the CIA’s torture chambers, the useless expenditure of trillions of dollars shooting at goat herders, the absence of any evidence of WMDs in Iraq or co-conspirators anywhere, and Israel’s endless strife with the Palestinians.  Now Russia itself had begun to make a stand. At the 2007 Munich Security Conference, Putin challenged the attempt by the U.S. to achieve hegemony through creation of a “unipolar” world “in which there is one master, one sovereign.” He said, “at the end of the day this is pernicious.”  There was never any indication that Putin, in making his Munich declaration or afterwards, had any intention of restoring the Soviet “empire.” But he was absolutely determined to preserve Russia’s sovereignty and security despite the declared intention of factions in the West to break up Russia’s territory and gain control of its resources. He had also lamented the fact that with the collapse of the Soviet Union, 25 million ethnic Russians had been left out of what was now a unified and strengthening nation-state, blending a multiplicity of races, languages, and religions.   The “War on Terror” ended up being a tragic failure. So now the Western mainstream media jumped at their next big chance by depicting Putin as the bad guy du jour, even more “authoritarian,” and “evil” than either Saddam Hussein or Osama bin Laden. But they would have done the same had Donald Duck been president of Russia—a nasty, duck-billed, feathered tyrant who was attacking democracy, freedom, human rights, and, yes, the “New American Century” the Neocons had dreamt up.  UKRAINE — THE CROSSROADS Now the U.S., with the Neocons firmly entrenched in the State Department and elsewhere, surrounded Russia with military bases and attacked its perimeter with color revolutions in Georgia, Ukraine, and Kyrgyzstan, following on the dismemberment of Yugoslavia in the late 1990s and early 2000s. President Barack Obama then situated the Aegis Missile Defense System in Poland and Romania with the potential to activate missiles that could reach Moscow with nuclear warheads in six minutes. Talk was current of a possible “decapitation” strike against the Russian leadership. Finally, in 2014, with “cookies” Victoria Nuland and Vice President Joe “Burisma” Biden in charge, the U.S. fomented a coup in Ukraine with the aid of paid snipers to drive out a president friendly toward Russia and his replacement with a NeoNazi junta that put Ukraine on a war footing. In response, Russia annexed the Crimean Peninsula, where Sevastopol is the home of its Black Sea fleet, with 85 percent popular approval, while the eastern Ukrainian Donbass provinces of Donetsk and Lugansk, ethnically-Russian, declared independence.  Finally, after eight years of Ukrainian provocations, the death from Ukrainian shelling of more than 10,000 Donbass civilians, and the treachery of Germany and France in failing to uphold the Minsk agreements they had guaranteed, Russia entered Ukraine with its military forces in February 2022. The conflict was on, a conflict that Russia is winning. U.S.-led sanctions against Russia failed to bring down its economy or force regime change against Putin. But each Ukrainian setback on the battlefield has been followed by more weapons and money supplied to the Volodymyr Zelensky regime by the U.S., UK, Germany, France, and other NATO members.  But who was calling the shots? In March 2022, Russian and Ukrainian negotiators reached agreement on a tentative settlement at meetings in Istanbul. UK prime minister Boris Johnson then rushed to Kiev to induce Zelensky to tear up the agreement and continue the war. Western escalation has included billions of dollars worth of heavy tanks and other weapons to Ukraine, along with cluster munitions and depleted uranium projectiles. There have been drone attacks on Russia itself and on Crimea. But the Ukrainian counteroffensive has collapsed, with speculation increasing of a major Russian counterattack, possibly even cutting Ukraine off from the Black Sea.  We have now come full circle. Warnings from Washington continue that Putin had better not go nuclear, which can be read as inviting him to do so. This is obviously a new phase of brinkmanship that could give the U.S. a pretext for themselves moving to nuclear war. Meanwhile, the U.S. understands that it could in no way challenge Russia in a conventional war even with the entire NATO alliance being activated. Even then, divisiveness within NATO and the absence of sufficient military force anywhere in Europe make this impossible at present. Veteran military analyst Scott Ritter writes in Sputnik News on September 21, 2023, that even were the U.S. to activate its entire military force stationed in Europe against Russia, it would be defeated within one to two weeks of intensive combat. The only alternative would then be to activate a gigantic airlift of additional forces into Europe with U.S. cargo planes sitting ducks for destruction en route. Impossible.  There are now signs that the U.S. may be pressuring Ukraine to agree to a cease-fire, with a “freeze” along the lines of the decades-old Korean settlement. But all this would do would be to “kick the can down the road”—possibly until after the 2024 U.S. presidential election, likely to be preceded by elections in Ukraine in March. There are no signs that the U.S. is ready to concede a Russian victory involving the redrawing of the European security apparatus with Russia a respected party. The Ukrainian government speaks of a “long-term” conflict lasting decades. So there is no way to aver that the war in Ukraine is ending or to speculate about the next phase.  So, is a nuclear World War III a possibility?  Next: Part II Are the Military-Industrial Complex and Deep State Driving Us to War?  *  *  * Support ScheerPost's Independent Journalism - Donate Today! SUBSCRIBE TO PATREON DONATE ON PAYPAL Tyler Durden Wed, 09/27/2023 - 02:00.....»»

Android smartphones may never be as cool as Apple devices, but Insider's Grace Dean doesn't care one little bit. The iPhone 15 is now available to buy.Mario Tama/Getty Images I've never owned an iPhone. I don't plan to buy one anytime soon, either. Apple devices don't come cheap and I don't think they're worth the money. They say once you get an iPhone, you'll never go back. I don't want to get stuck in that loop. I've never owned an iPhone – and I don't plan to change that anytime soonJakub Porzycki/Getty ImagesMy first phone, like many people born in the '90s, was a so-called Nokia "brick." Since then, I've cycled through various other phone makers — Samsung, Huawei, Motorola — but I've never succumbed to Steve Jobs's empire.Here's why.They don't come cheapApplePossibly the biggest consideration that people take into account when buying a new phone is the price. And iPhones aren't cheap.The newest model, the iPhone 15, costs a hefty $799 for the cheapest version. And the Pro version, which comes with other perks like a better camera and battery and is made from titanium, starts at $999.If you want a bigger screen, you need to add $100 to upgrade to an iPhone 15 Plus or $200 to upgrade to an iPhone 15 Pro Max. The most expensive version of the iPhone 15 available for purchase, the Pro Max with a terabyte of storage, comes in at $1,599.If you want a more basic version with less functionality but a smaller price tag, you're out of luck. Unlike other phone makers, Apple doesn't sell an updated but low-budget version of its phones, and instead redirects customers to its older models.Samsung, in contrast, sells the Galaxy A54 5G for under $500, alongside much higher-end models like its fold and flip phones.My current phone — a Samsung Galaxy A52s 5G — isn't perfect, and there are things about it that can frustrate me, but at least I know I haven't spent a lot of money on it.There's no headphone jack ...Alex Tai/Getty ImagesI have a largely unjustified hatred for AirPods — but Apple doesn't give the buyers of its latest models the option to shun the wireless earbuds.Instead, since 2016, iPhones have come without a headphone jack, leaving users with limited options if they don't want to blast their music out loud to unwilling passengers on the subway.They can either invest in pricey AirPods or buy a set of headphones with a special adapter that can be inserted into the charging jack – meaning you can't charge your phone and listen to music at the same time, unless you have a wireless charger.The cheapest AirPods on Apple's site start at $129.I personally hate the concept of AirPods. True, sometimes headphone wires get caught in your hair or unplug if you forget and stand up to get a coffee, but these are solvable problems. I worry enough about losing jewelry or my scarf when I'm out and about – I don't want to have to worry about an AirPod falling out, too.Once I saw a person chasing an AirPod down the sidewalk after a gust of wind whipped it out of their ear during a thunderstorm. It was an image I'll never forget.My Samsung phone came with a free pair of Galaxy Buds Live, but I haven't used them once. I actually had the option to get a newer version of my phone for around $30 more, but opted not to because it didn't have a headphone jack.... and they don't come with a chargerNurPhoto/Getty ImagesiPhones no longer come with wall chargers, either. Since the model 12, iPhones have simply come with a USB C to Lightning cable, which Apple says allows it to create smaller and thus more sustainable packaging.You can just plug your phone into your laptop or an adapter you already have to charge it – but if you want an adapter from Apple to plug it into, you have to fork out an extra $19.Considering it used to be provided for free, the extra charge is annoying for first-time iPhone users who may not have other adapters they can plug their cable into.Then there's "batterygate"Jakub Porzycki/NurPhoto via Getty ImagesThe battery life on iPhone isn't that great, either, and Apple has been sued for its past practice of intentionally slowing down old iPhones.Apple's so-called "batterygate" scandal began in 2017 when Apple admitted it was slowing down customers' devices when they downloaded new versions of its software, saying that it was to prevent their old batteries from randomly shutting the phones off. Some critics, however, questioned if it was a move to prompt people to buy newer, more expensive models."We have never — and would never — do anything to intentionally shorten the life of any Apple product, or degrade the user experience to drive customer upgrades," a spokesperson previously told Insider. "Our goal has always been to create products that our customers love, and making iPhones last as long as possible is an important part of that."In November 2020, Apple agreed to pay $113 million to settle an investigation in the US over the matter and paid $500 million in a class-action lawsuit in March.There's not much difference between each iPhoneApple released the iPhone 14 in September 2022.Marc Asensio/Getty ImagesThe differences between each iPhone model aren't that big. Even Steve Jobs' daughter Eve Jobs agrees.An Insider reporter wrote last year that he regretted trading in his iPhone 13 Pro Max for an iPhone 14 Pro Max."While the newest series of smartphones has several new software features, I'm disappointed that there isn't more to it," he wrote."Having had the iPhone 13 Pro Max, I can't see a difference that makes it actually worth upgrading for, apart from Dynamic Island. Maybe the smartphone has simply got as good as it's fundamentally going to get?"I don't care about iPhones as a status itemEdward Berthelot/Getty ImagesiPhones are now the norm: Counterpoint Research says Apple has a 55% share of the US smartphone market. Brand-specific terminology around them is even encroaching on our everyday conversation: "AirPods" is sometimes used for non-Apple wireless earbuds; people say "FaceTime" even if they're video-calling using other software; and my roommate even said to me once, when he went to look something up, "Let me check that on my iPhone."But I don't care about iPhones as a status item. Like designer clothes and sports cars, which phone model you have doesn't say anything interesting about you as a person.Once you get an iPhone, you never go backJakub Porzycki/NurPhoto via Getty ImagesIt's a mantra I've heard many times. And I don't want to be tempted, and then get stuck in that loop.A lot of iPhone owners tend to gravitate towards other Apple products, too, and end up with a whole suite complete with a Mac, Apple Watch, and Apple TV, too. I'm quite happy as I am.I'll stick with my Android thanksJoan Cros/NurPhoto via Getty ImagesSometimes not having an iPhone can be annoying.I have never FaceTimed or iMessaged anyone, and there are some apps I get access to late or even not at all on Android. There are also some great features included in the newer models, like the crash-detection software.But for me, personally, I can make do without one. I'm stubborn in my ways, and an iPhone is a big investment that I personally don't think is worth it.Read the original article on Business Insider.....»»

In this article, we discuss the 25 best-selling cars, trucks, and SUVs for 2022 and 2023. If you want to skip the detailed analysis of the automotive industry, you can jump straight to the 5 Best Selling Cars, Trucks, and SUVs of 2022 and 2023. The automotive industry has experienced significant changes and challenges in […] In this article, we discuss the 25 best-selling cars, trucks, and SUVs for 2022 and 2023. If you want to skip the detailed analysis of the automotive industry, you can jump straight to the 5 Best Selling Cars, Trucks, and SUVs of 2022 and 2023. The automotive industry has experienced significant changes and challenges in the aftermath of the COVID-19 pandemic. It forced the automotive industry to adapt, innovate, and reevaluate its strategies. It also accelerated trends that were already in motion, such as the transition to electric and autonomous vehicles, digitalization, and changing consumer preferences for mobility solutions. These changes are likely to continue shaping the industry’s trajectory in the years to come. The automotive industry is poised for growth in the upcoming years despite the uncertain global economic conditions. It is anticipated that global car sales will surpass 69 million units in 2023, driven by increased market presence in emerging economies, the growing adoption of electric vehicles, and the reopening of China as it eases lockdown restrictions. These factors, combined with steady production rates and a backlog in demand for the sector, provide a degree of resilience against the challenges posed by rising living costs and supply chain disruptions, which have impacted both sales and production. Analysts project that car sales will continue to rise, reaching 74 million units in 2024, sustaining the upward trend observed since 2020 and approaching pre-pandemic levels. Several car companies have been performing well financially, technologically, and in terms of market reception. The automotive industry is dynamic, and rankings can change annually based on new model introductions, shifts in consumer preferences, global economic factors, and other variables. However, some major car manufacturers like Ford Motor Company (NYSE:F), General Motors Company (NYSE:GM), and Toyota Motor Corporation (NYSE:TM) have maintained their position as the top vehicle manufacturers for decades. The electric car industry is looking forward to substantial growth in the near future. Forward-thinking automakers and their primary suppliers have the chance to innovate within the expanding realm of software-defined vehicles (SDVs), focusing on software-driven features that enhance safety, convenience, and the overall in-car experience. Additionally, as businesses face increasing pressure to reduce carbon emissions and optimize logistics to counter inflation, there is a growing interest in efficient electric vehicles that lower the total cost of ownership. Due to their high demand, companies like Tesla, Inc. (NASDAQ:TSLA), NIO Inc. (NYSE:NIO), and Rivian Automotive, Inc. (NASDAQ:RIVN) have forced companies like Ford Motor Company (NYSE:F) and General Motors Company (NYSE:GM) to step into the electric vehicle market. In its Q2 2023 earnings call, President and Chief Executive Officer of Ford Motor Company (NYSE:F), Jim Farley, said the following about the EV sector growth: “We’re going to dive more into the electric vehicle market during Q&A. But clearly, this transition to EVs is dynamic and so much more than just a change in propulsion. The number of global entrants is increasing even at the high end and the pricing pressure has dramatically increased in the past 60 days.” Looking ahead, challenges for the automotive aftermarket and the car industry include managing high inventories and navigating market price fluctuations in raw materials. Inflation, as well as rising food and energy costs, will remain major concerns for consumers, pushing them toward more affordable product choices. However, premium segments offering performance and convenience, such as all-season tires, larger rim sizes, and synthetic oils, will continue to drive growth. Emerging economies will present opportunities for forward-thinking manufacturers, and the reopening of the Chinese market will bolster the industry’s resilience. Meanwhile, there will be a growing emphasis on sustainability, rewarding innovative brands that offer environmentally friendly alternatives in response to mounting regulatory and consumer pressures. In the competitive automotive industry, General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), and Tesla, Inc. (NASDAQ:TSLA) are some of the automotive stocks that investors should keep their eye on. Our Methodology We collected the list of best-selling cars in the United States from several sources, including Car and Driver and Edmunds, and created a list of around 40 vehicles. We then checked the sales of each car from different sources and calculated their average for both years. The best-selling cars, trucks, and SUVs of 2023 are listed according to their estimated units sold in the US. 25 Bestselling Cars, Trucks, and SUVs of 2022 and 2023 25. Ford Escape Total number of sales: 202,210 units Ford Motor Company (NYSE:F)’s Escape has garnered popularity due to its well-rounded appeal and versatility. Its compact size makes it an ideal choice for urban dwellers seeking easy maneuverability and parking convenience. The availability of various powertrains, including gasoline, hybrid, and plug-in hybrid options, allows consumers to choose according to their specific needs and environmental considerations. The Escape boasts a comfortable interior with ample passenger and cargo space, catering to families and those with active lifestyles. Its competitive pricing and strong resale value make it an attractive financial choice. Ford Motor Company (NYSE:F)’s commitment to safety features and technology upgrades further enhances its appeal, solidifying the Escape’s status as a popular option in the competitive compact SUV market and making it to our list of best-selling cars, trucks, and SUVs of 2022 and 2023. 24. Nissan Altima Total number of sales: 203,200 units The Nissan Altima has gained popularity for a variety of reasons. One of its key attractions is its reputation for reliability and longevity, instilling confidence in buyers seeking a dependable vehicle. The Altima also stands out for its strong fuel efficiency, appealing to both budget-conscious consumers and environmentally-conscious drivers. Its comfortable interior, spacious cabin, and user-friendly technology contribute to its popularity among families and daily commuters. Furthermore, Nissan’s commitment to safety features and competitive pricing makes the Altima an attractive choice in the midsize sedan segment. These qualities, combined with a solid track record, have established the Altima as a well-liked and enduring option in the automotive market. 23. Honda Civic Total number of sales: 228,000 units Civic’s enduring popularity is rooted in its exceptional blend of qualities. Renowned for its reliability and durability, Honda Motor Co., Ltd. (NYSE:HMC)’s Civic consistently delivers a dependable and low-maintenance driving experience. Its fuel efficiency appeals to budget-conscious consumers, offering excellent miles per gallon. The Civic’s practicality shines with a spacious interior and a well-thought-out cabin layout, providing both comfort and convenience. Moreover, Honda Motor Co., Ltd. (NYSE:HMC)’s Civic has a reputation for safety features, strong resale value, and a wide range of trims and body styles which further solidifies its status as a perennial favorite among drivers seeking an affordable, efficient, and well-rounded compact car that stands the test of time. 22. Subaru Outback  Total number of sales: 228,650 units Subaru Outback is a Japanese vehicle that mostly comes in an all-wheel drive version. Its sixth generation for the North American market was introduced in 2019. The Outback has a reputation for being one of the longest-lasting vehicles. It also has top-of-the-line handling and performance and has high safety ratings. 21. Subaru Crosstrek  Total number of sales: 231,270 units The Subaru Crosstrek is the highest-selling vehicle that Subaru produces. Its base comes with a 152 horsepower 2.0-liter engine and also has a 182 horsepower 2.5-liter version available. Subaru Crosstrek is the 21st best-selling vehicle of 2022 and 2023. 20. Mazda CX-5  Total number of sales: 231,600 units The Mazda CX-5 is a compact crossover SUV that has been in production since 2012. It started after the discontinuation of the mid-size CX-7. The CX-5’s low body weight, exceptional handling, and performance have made it one of the best-selling vehicles in the North American market. It is sold in Japanese, Australian, European, Malaysian, and North American markets.  19. Honda Accord Total number of sales: 254,450 units The Honda Accord has earned the trust of consumers who seek a dependable vehicle. Its longevity is a testament to its robust construction and quality engineering. Honda Motor Co., Ltd. (NYSE:HMC)’s Accord offers a comfortable and spacious interior, making it suitable for families and daily commuters. Fuel efficiency is another hallmark, aligning with the need for economical transportation. Honda Motor Co., Ltd. (NYSE:HMC)’s commitment to safety, advanced technology, and innovative features ensures the Accord stays competitive. Furthermore, a diverse range of trims and engines allows buyers to tailor the vehicle to their preferences, cementing its position as a top choice among midsize sedans for decades. 18. Jeep Wrangler  Total number of sales: 266,050 The Jeep Wrangler comes in two different versions; a compact SUV and a mid-size SUV. It is one of the most sold SUVs in the world. Its fourth generation was introduced in 2017 which comes in a rear-wheel drive and a four-wheel drive version. Stellantis N.V. (NYSE:STLA)’s rugged off-roader, Wrangler, is one of the best-selling SUVs of 2022 and 2023. 17. Hyundai Tucson Total number of sales: 275,900 units   Tucson’s striking design, characterized by bold lines and a distinctive front grille, catches the eye and appeals to a wide range of consumers. Offering versatility in powertrains, including gas, hybrid, and plug-in hybrid options, it caters to various preferences and environmentally conscious buyers. The Tucson boasts a comfortable and well-designed interior, providing ample legroom and a user-friendly infotainment system. Additionally, Hyundai’s reputation for reliability and affordability adds to Tucson’s appeal, making it a popular choice among those seeking a stylish, practical, and dependable compact SUV. 16. Toyota Tacoma Total number of sales: 290,900 units As a midsize pickup truck, Tacoma offers excellent off-road capability and towing capacity, making it a top choice for outdoor enthusiasts and those with active lifestyles. Its durable build ensures that it can withstand tough conditions, while Toyota Motor Corporation (NYSE:TM)’s reliability and durability add to its appeal. The Tacoma’s diverse trim levels and configurations cater to a wide range of consumer needs, from workhorse to adventure companion. Its strong resale value and long-lasting performance have further solidified its status as a trusted and enduring favorite among pickup truck enthusiasts. 15. Toyota Camry Total number of sales: 295,200 units   The Toyota Camry, now in its eighth generation, remains a favorite worldwide for several compelling reasons. Its affordability stands out in a segment known for value. Toyota Motor Corporation (NYSE:TM)’s renowned reliability is exemplified by the Camry with quality and reliability. The Camry excels in practicality, fuel efficiency, ease of maintenance, safety ratings, aesthetics, and advanced tech features, making it a versatile and enduring choice. 14. Ford Explorer  Total number of sales: 312,100 Ford Explorer’s production started in 1990. Ford Motor Company (NYSE:F) has also introduced a battery-electric compact crossover of Ford Explorer for the European market. It comes in seven different versions and two of them are specifically made as Police Interceptor Utility and not sold to the general public. 13. Chevrolet Equinox Total number of sales: 318,000 Chevrolet Equinox is a crossover utility vehicle introduced in 2004. Chevrolet also introduced the Equinox EV in 2022 for the 2024 model year. It is the 13th best-selling vehicle on our list and according to several sources, it is one of General Motors Company (NYSE:GM)’s most dependable and reliable vehicles in production. 12. Tesla Model 3 Total number of sales: 319,700 units   The Tesla Model 3 combines impressive performance, efficiency, and safety, making it a popular choice. Its exterior boasts sleek curves, sharp lines, and a unique front grille for improved aerodynamics. Performance-wise, the Model 3 impresses with a 491km range, responsive acceleration, and customizable driving modes. Charging options are competitive, with 10-80% charge in 30 minutes on a DC charger. Due to its exceptional range, comfort, and performance, Tesla, Inc. (NASDAQ:TSLA)’s Model 3 continues to hold its position as the leading electric vehicle in the market around the world. 11. Toyota Corolla Total number of sales: 319,710 units Toyota Corolla is the crown jewel of Toyota Motor Corporation (NYSE:TM) and continues to dominate the global automotive market, delivering exceptional value to drivers worldwide. Renowned for its legendary reliability, the Corolla has earned the trust of countless drivers who prioritize a trouble-free ownership experience. Its reputation for longevity and minimal maintenance costs makes it a wise choice for both first-time car buyers and those seeking a dependable daily driver. Toyota Corolla is the best-selling car in the world and the 11th best-selling car in the US. Toyota Motor Corporation (NYSE:TM)’s Corolla topped 50 million sales in August 2021. 10. Toyota Highlander Total number of sales: 336,100 units The Highlander instills confidence in buyers seeking a trustworthy and durable SUV. Its spacious and well-designed interior comfortably accommodates passengers and offers ample cargo space, catering to families and those with active lifestyles. Toyota Motor Corporation (NYSE:TM)’s reputation for safety features and innovative technology further enhances its appeal, providing peace of mind on the road. The availability of various powertrains, including hybrid options, addresses different environmental concerns. With a reputation for strong resale value and competitive pricing, the Highlander continues to be a top choice in the competitive midsize SUV market, appealing to a broad spectrum of consumers. 9. Nissan Rogue Total number of sales: 334,225 Nissan Rogue is a CUV that comes in a front engine front wheel drive and an all-wheel drive version. Nissan debuted the Rogue at the North American International Auto Show in January 2007. Rogue is highly commended for its safety which is why its sales have placed it at number 9 on our list of best-selling cars, trucks, and SUVs. 8. Jeep Grand Cherokee  Total number of sales: 348,300 Jeep Grand Cherokee’s production started in 1992 and comes in a front-engine rear-wheel-drive and a front-engine four-wheel-drive version. It is famous for its practicality, reliability, and off-roading capabilities. The Grand Cherokee is the successor to the smaller Jeep Cherokee XJ. Jeep Grand Cherokee is produced by Fiat Chrysler Automobiles which is now a part of Stellantis N.V. (NYSE:STLA). 7. GMC Sierra Total number of sales: 384,530 units As a full-size pickup truck, the GMC Sierra is known for its robust towing and hauling capabilities, making it a top choice for those who need a workhorse. Its striking exterior design and luxurious interior options also cater to buyers seeking both style and substance. The availability of various trims, engines, and features allows customization to meet diverse needs. Additionally, General Motors Company (NYSE:GM) has a reputation for durability and reliability, which adds to the Sierra’s appeal, making it a favorite among truck enthusiasts and those requiring a dependable, high-performance vehicle for work and play. 6. Honda CR-V Total number of sales: 401,850 units The CR-V consistently delivers on Honda Motor Co., Ltd. (NYSE:HMC)’s reputation for longevity and dependability. Its versatility as a compact SUV offering ample interior space and practicality appeals to families and individuals alike. Efficient fuel economy and a comfortable ride enhance its daily usability. Honda Motor Co., Ltd. (NYSE:HMC)’s commitment to safety features and high resale value further bolsters its appeal. The CR-V’s consistent commitment to these attributes, coupled with a reputation for quality and a loyal customer base, solidifies its position as a top-selling car. Click to continue reading and see the 5 Bestselling Cars, Trucks, and SUVs of 2022 and 2023. Suggested articles: 12 Best Alcohol Stocks to Own According to Hedge Funds 15 Easiest Countries to Get Citizenship as an American 15 Best Affordable Stocks To Buy Under $5 Disclosure. None. 25 Bestselling Cars, Trucks, and SUVs of 2022 and 2023 is originally published on Insider Monkey......»»

You’ve worked hard your whole life. And if you’re like many people, you dream of the day you can start ... Read more You’ve worked hard your whole life. And if you’re like many people, you dream of the day you can start your carefree retirement. But to have a carefree retirement, you need careful planning. If you’re currently in that planning stage, it may be worth taking a look at a lifestyle that’s gaining in popularity: comfortable retirement abroad in a foreign country. Not all countries make equally great retirement destinations. But if you investigate your options, you’ll find a country where you can enjoy financial security while exploring a whole new world. Choose Your Future: Finding the Right Retirement Destination The first step in turning retiring abroad into a reality is choosing your destination. But when faced with a (literal) world of opportunity, choosing one country can be challenging. Don’t just go with whatever country is currently the most popular destination. You’ll need to take your own preferences and priorities into account: Climate: What type of weather do you prefer? Culture: Do your values align with the nation’s culture? Language: Do you know the local language? If not, are you willing to learn it? Healthcare: Does the country’s healthcare system meet your needs? Once you’ve found a few promising locations, take the time to visit each if you can. There’s no substitute for actually spending time in a country. Retirement experts also recommend renting a home before purchasing one to ensure you’re comfortable staying in the country year-round. Top Retirement Destinations Around the World If you aren’t sure where you want to live after retirement, check out these popular destinations: Portugal Portugal is both scenic and affordable — its cost of living is roughly 29% lower than that of the U.S. In recent years, the Portuguese government has also taken steps to attract retirees: Many new residents are eligible for ten years of tax benefits! Residency requirements are less strict than they used to be, though you will need to submit a valid passport, proof of health insurance, and proof of income. You also will need to pass a criminal background check. Healthcare in Portugal is accessible, although there is a downside. EU residents get access to free healthcare immediately, but Americans must live in the country for five years and become permanent residents beforehand. However, you can purchase health insurance in Portugal, and it’s significantly less expensive than U.S. health insurance. Portuguese culture is laid-back, and the country as a whole has a deep appreciation for music and the arts. It’s also a mecca of winemaking. Many of its citizens’ cultural values center around the importance of family. Costa Rica Retiring to a tropical paradise is a dream for many, and you can achieve that dream in Costa Rica. However, becoming a permanent resident can be difficult. There are three different programs you can take advantage of when applying. The Pensionado visa is designed for retirees with at least $1,000 in monthly retirement income. The Rentista visa is an option with less strict income requirements. And if you have the capital to invest in Costa Rican infrastructure, you can take advantage of the Inversionista program. This residency visa requires you to invest at least $200,000 in a qualifying business. These paths don’t give you permanent residency status immediately; you must renew your residency every two years. You can apply to be a permanent resident after three renewals in a row (six years total). If you retire here, you’ll find plenty of activities to keep you busy. You can enjoy visiting pristine beaches, hiking through jungles, and taking traditional Costa Rican cooking classes. Costa Ricans are friendly and welcoming, and the country is a vibrant mixture of Spanish, Indigenous, Jamaican, and even Chinese cultures. Ireland Ireland is ideal if you want to retire in a country with breathtaking beauty and a rich cultural heritage. However, it’s more expensive than some popular destinations; living in Ireland costs almost as much as living in the U.S. Additionally, Ireland has stringent requirements for getting a visa and becoming a resident. To take advantage of its unique program for retirees, you first need to prove that you have a yearly income of at least €50,000 per person. You also need to have an emergency expense fund of roughly $250,000. Once you get a visa, you must renew it yearly for five years. After that, you can apply for a five-year visa. You can then apply to be a permanent resident after 10 years has passed. Healthcare in Ireland is relatively affordable, even if you pay out of pocket. You can also access both public and private health insurance. Irish culture is known for being especially friendly, and you can easily meet locals and expats in the country’s many pubs. Because Ireland is so close to the rest of Europe, it also offers excellent travel opportunities. Financial Considerations Make sure you understand how moving to another country can impact your finances. Here are some things to think about: Taxes Can Be Complicated No one wants to pay double taxes. But if you’re a U.S. citizen living in another country, the IRS still requires you to file a tax return. The good news is that most retirees in foreign countries don’t end up paying income taxes (unless it’s on retirement account distributions — more on that below). Federal taxes aren’t the only thing you need to worry about. Some states will consider you a resident and require you to pay taxes if you retain significant ties to the state, such as if: You have a valid state driver’s license You have a U.S. bank account Your immediate family lives in the state You own a car registered in the state You’re registered to vote You own a house or other property in the state You still have a state mailing address Taxes in foreign countries can be hard to navigate. These countries also might require you to pay more than you’re comfortable with. If minimizing tax liability is important to you, consider these tax-free retirement destinations: United Arab Emirates Qatar Bahrain The Bahamas Monaco The Cayman Islands Oman A tax professional will take a look at your finances and help you understand the tax implications of your move. Currency Exchange The U.S. dollar usually has more purchasing power in foreign countries. But to avoid surprises before you move, ensure you understand the exchange rate. Some countries (including El Salvador and Ecuador) use the U.S. dollar. If you’re moving to a country that doesn’t, decide where to exchange your currency. Some locations (like airports) charge hefty fees. Your best bet is to visit your local bank before you travel. Cost of Healthcare Chances are good that your current healthcare policy won’t cover you if you move abroad. The U.S. has some of the most expensive healthcare in the world, so medical care is likely to be more affordable wherever you move. However, before moving, look closely at the country’s healthcare programs and determine what type of coverage you will qualify for. Retirement Income Options If you live in a foreign country, you can still receive distributions from your retirement plan. Unfortunately, many of those distributions are still subject to taxation: 401(k): All withdrawals are subject to taxation Social Security: Tax guidelines are typically similar to those for U.S. residents, although you won’t be taxed if you live in certain countries Traditional IRA: Withdrawals are taxed like income Roth IRA: All qualified withdrawals are tax-free Notably, you cannot receive Social Security retirement benefits if you live in a few specific countries. These include the following: North Korea Cuba Belarus Azerbaijan Kazakhstan Moldova Kyrgyzstan Turkmenistan Tajikistan Uzbekistan The situation around retirement income and relevant taxes is more complex than you might think. Before planning your move, consult with a tax professional who can help you better understand your options and limitations. Preparing for the Move Living abroad during retirement can give you a new sense of freedom. But, like all significant steps in life, it takes some degree of planning. Here are some tips to help you get ready for the move: Make a Healthcare Plan: Health insurance benefits vary greatly from country to country — before you move, make sure you have options for accessing and paying for medical care Consider Transportation Options: Try to understand the country’s transportation infrastructure — researching flights to and from the U.S. and deciding whether you need to own a car are two great places to start Gather Documents: Before applying for a visa or moving, make sure documents like your passport, Social Security card, birth certificate, medical and dental records, driver’s license, and marriage certificate are at hand Look Into Banking: See if your bank has a branch in your new country; if it doesn’t, ask how you can make sure you’ll have access to your funds See If You Need Additional Immunizations: You might need another vaccine or two before you travel Consider Pet Transportation: Some countries restrict what types of pets you can have, and they might require animals to quarantine The logistics of moving to a foreign country can be challenging to navigate. In many cases, it’s worthwhile to consult with an immigration professional to make sure you have everything in order. Real-Life Experiences One example of a successful overseas retirement is Christina and Amon Browning, a couple who moved from the San Francisco Bay Area to Portugal to retire early. Thanks to the high cost of living in the Bay Area, the couple realized that retiring there would be nearly impossible. They tried to earn and save as much as possible, and they could retire in Portugal when Christina was 41 and Amon was 39. Dave and Marcia Murray are another great example. They could retire in Grecia, Costa Rica, when they were 66 and 69, respectively. Both had lived and worked in Michigan. They opted to take early retirement packages and sell their home to buy land in Grecia. Using those funds, they built both a home and a guest house. Marcia also noted that she and her husband found another benefit to living overseas: Thanks to the large population of expats in Costa Rica, the couple can socialize more than they ever did in the U.S. Because of Costa Rica’s low cost of living, they have been able to live off of their savings while enjoying a great quality of life. Is Retiring Abroad Right for You? Life doesn’t have to be boring after retirement. Retiring abroad opens the door to a wealth of new and exciting experiences — all while enjoying financial security. At Due, we can help you plan your finances to ensure a comfortable retirement, no matter where you plan to go. Register with us today to get started! The post Retirement Abroad: How to Pick the Best International Retirement Destinations appeared first on Due......»»

AutoZone, Inc. (NYSE:AZO) Q4 2023 Earnings Call Transcript September 19, 2023 AutoZone, Inc. beats earnings expectations. Reported EPS is $46.46, expectations were $45.12. Operator: Greetings, and welcome to AutoZone’s Fourth Quarter 2023 Fiscal Earnings Release Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal […] AutoZone, Inc. (NYSE:AZO) Q4 2023 Earnings Call Transcript September 19, 2023 AutoZone, Inc. beats earnings expectations. Reported EPS is $46.46, expectations were $45.12. Operator: Greetings, and welcome to AutoZone’s Fourth Quarter 2023 Fiscal Earnings Release Conference Call. At this time, all participants are in a listen-only mode and a question-and-answer session will follow the formal presentation. [Operator Instructions] Please note, this conference is being recorded. We will now play our Safe Harbor statements. Unidentified Company Representative: Before we begin, please note that today’s call includes forward-looking statements that are subject to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not guarantees of future performance. Please refer to this morning’s press release and the company’s most recent Annual Report on Form 10-K and other filings with the Securities and Exchange Commission for a discussion of important risks and uncertainties that could cause actual results to differ materially from expectations. Forward-looking statements speak only as of the date made, and the company undertakes no obligations to update such statements. Today’s call will also include certain non-GAAP measures. A reconciliation of non-GAAP to GAAP financial measures can be found in our press release. Operator: It is now my pleasure to turn the floor over to your host, Mr. Bill Rhodes, CEO, Chairman and President. Sir, the floor is yours. Copyright: zenstock / 123RF Stock Photo Bill Rhodes: Good morning. And thank you for joining us today for AutoZone’s 2023 fourth quarter conference call. With me today are Phil Danielle, our CEO-Elect; Jamere Jackson, Chief Financial Officer and Brian Campbell, Vice President, Treasurer, Investor Relations and Tax. Regarding the fourth quarter, hope you’ve had an opportunity to read our press release and learn about the quarter’s results. If not, the press release, along with slides complementing our comments today are available on our website, www.autozone.com, under the investor relations link. Please click on quarterly earnings conference calls to see them. As we begin, we want to thank our AutoZoners for their incredible contributions during fiscal 2023 that resulted in our solid performance. As our pledge states they continued putting our customers first, which resulted in total sales growth of 7.4% for the fiscal year, while earnings per share increased 12.9%. It’s important to remember that these results build on the phenomenal three year performance from the pandemic years of 2020 to 2022. Candidly, Phil, Jamere, Tom Newbern, and I felt at some point we would see our sales per store migrate closer to pre-pandemic levels. That hasn’t happened. And at this stage, we do not expect it will. To put it in perspective, our domestic average weekly sales per store are 33% higher than in 2019, growing from $35,600 a week to $47,300 a week. This level of growth and sales also drove enormous growth in operating profit, where this year’s $3.474 billion was 61% above 2019, when adjusted for the 2,019, 53 week. That is remarkable growth, especially for a 44-year old enterprise. We could not have achieved this success without exceptional efforts across the entire organization. We have several updates for you this morning. First, I’m sure you’ve noticed the new table in our press release. We are now presenting our same store sales results for domestic, international and total company. We’re also reporting our international same store sales, which includes both Mexico and Brazil, on both an actual and constant currency basis. Why the change? The answer is International is becoming a larger and larger part of our business, and we are investing a sizable amount of our growth capital in those countries. As we evaluate important growth metrics, we think it is important to assess it in total. As we know this is a change we are committed to providing you with each component individually for at least five quarters, as our objective is to enhance your visibility. Next, our domestic same store sales were 1.7% this quarter compared to 1.9% last quarter, and about half of our fiscal 2023 growth of 3.1%. Our performance in retail was respectable and generally in line with our expectations. But as was well documented last quarter, our commercial sales performance in the second half of our fiscal year declined meaningfully and to us unacceptably. We ended with 3.9% growth in domestic commercial sales. Our performance in both retail and commercial in the first half of the quarter was disappointing, but during this period we experienced very mild weather. As we reached the second half of the quarter, and temperatures escalated materially, so did our sales. Specifically for the first eight weeks of the quarter our retail comps were flat, but increased 3.4% in the second half. Commercial experienced a similar trajectory, ending particularly strong in the last four weeks of the quarter, up over 7%. Regarding regional results, we saw a material performance gap between the Northeast and Midwestern markets versus the rest of the country. The total comp difference was well over 300 basis points and over 450 basis points for commercial. We attribute this to the lack of winter weather and snowfall in the latter part of last winter in that region. This has led to lower growth trends in undercar categories. Both those are things that “happened to us, not what we did to enhance and improve our performance.” Last quarter, we highlighted that we were not executing at our peak levels. We have made many changes since then, and are pleased with the improvements in execution we are seeing. We aren’t there yet. But we’re on a really good path. We also recently completed another strategic review of our commercial business. We have validated our direction and have some exciting new enhancements that we will be testing over the next few quarters. We also made significant improvements in the information technology that we use to operate our commercial business, and we opened many more commercial programs, reaching 90% domestic penetration for the first time in our history. Even more encouraging is how strong those new openings are starting and how many — many weeks — or they’re just a few weeks old. Ultimately we will operate in a favorable and unfavorable macro and weather environment. We want to share our perspectives with you so you can understand our performance. But ultimately, it is our actions that will determine our long term success. And we’re encouraged by the actions we’re taking. Finally, our strategy supporting our store operations and commercial teams includes several other key elements. Global new store growth, where we disappointingly didn’t achieve our goals in FY23, more on that later; continued growth with our hubs and in particular, mega hubs, where we are nearing the halfway point of our ultimate goal of having 200 mega hubs and 300 hubs. It’s important to reinforce the continued, very strong performance of these stores, especially the mega hubs, and particularly in commercial; reconfiguring our global supply chain to efficiently process the enhanced sales we have achieved and expect to achieve over the next decade, while optimizing our processes for handling more direct import products from many countries, and more challenging slow turning parts assortments that are critical to our success; and finally continuing to lean in hard on technology improvements to make our AutoZoners more knowledgeable, efficient and effective. I’ve given you the high level sound bites on the quarter’s results. Now I’d like to introduce Phil Daniele to give more in-depth color on the quarter. Phil? Philip Daniele: Thanks, Bill. And good morning, everyone. I’m honored to be participating in my first earnings release conference call. I will start by reviewing our Q4 overall same store sales, DIY versus DIFM trends, our sales cadence over the 16 weeks of the quarter, and merchandise categories that drove our performance as well as any regional disparities. We will also share how inflation is affecting our costs and retails and how we think inflation will impact our business in FY24. Our domestic same store sales were 1.7% this quarter, on top of last year’s exceptionally strong 6.2% growth. I do want to reiterate what Bill said a moment ago, our execution improved materially over the quarter. And that execution, which is a hallmark of our success will ultimately deliver better results as we move forward. Our domestic commercial business grew 3.9%. Despite lower than anticipated, we believe we grew share and set another fourth quarter record with $1.5 billion in sales. For the full year, we generated nearly $4.6 billion up 8.7% from last year. Domestic commercial sales represented 30% of our domestic auto parts sales, which is identical to last year. Our commercial sales growth continues to be driven by the key initiatives we have been working on for the last several years, improved satellite store availability, material improvements and hub and mega hub coverage, in addition to aggressive growth in the number of those types of stores. We continue to strengthen the Duralast brand with an intense focus on high quality products. And we continue to deliver technological enhancements to make us easier to do business with. We are also operating more efficiently with improvements in delivery time and enhanced sales force effectiveness. In Q4, we opened 156 net new commercial programs, opening the majority of them late in the quarter, which had minimal impact on sales, but positions us well for FY24 and beyond. With these moves, we now have commercial in over 90% of our domestic stores. We continue to see tremendous opportunity for commercial sales growth in FY24 and beyond. We’re also very proud of our performance in domestic DIY. We had a positive 1.4% comp this quarter on top of last year’s comp of 1.1%. Additionally for the year, we delivered 1.8% DIY on top of a 2.9% DIY comp last fiscal year, and 11.2% comp in FY21. These results are very solid considering the outsized growth we saw during the pandemic. The fact that we continue to retain the vast majority of the share we built during the pandemic, and our recent performance gives us continued conviction about the sustainability into FY24. Now let’s focus on the sales cadence. Over the quarter, which spanned 16 weeks, early May through the end of August, as Bill mentioned, our same store sales were flat over the first weeks, but increased to 3.4% over the last eight weeks. We were encouraged by the trends we saw as the quarter ended. Regarding weather, in May and June we experienced cooler and wetter weather trends across the country which negatively impacted our sales trends. By July however, it became very hot across much of the country, and it remained very hot through August. The heat and the associated rebound in sales helped us partially overcome a relatively mild winter, particularly in the Midwest and the Northeast, where weather sensitive hard part categories underperformed our expectation. We anticipate that the summer heat will give us some positive momentum as we head into fall. As a reminder, historically extreme weather, either hot or cold drives parts failures and accelerated maintenance. Regarding the quarter’s traffic versus ticket growth, in retail, our traffic was down 0.8% while our ticket was up 2%. Our transaction count improved as the quarter went along, and in fact, turned positive over the last eight weeks of the quarter. However, the average ticket being up only 2% was the weakest quarterly increase we’ve seen since FY 2000, as we lapped significantly higher inflation a year ago, where the ticket was up 8%. Regarding commercial trends, we continue to see traffic and ticket growth, but our commercial ticket growth, just like retail, has shown a marked deceleration compared to recent history as hyperinflation begins to abate. For perspective, our ticket growth was 11% in Q4 last year, versus roughly 2% this year. As expected, some of our commercial customers are experiencing trade down and lower car count as the consumer comes under economic pressure. In order to continue to grow our comps in ’24 we will have to continue to increase share of wallet with our customers. The share data we see continues to encourage us that we are gaining share in the industry despite the macro trends, but recently, not in line with our aspirations, which we intend to change. During the quarter there were some geographic regions that did perform differently than others as there always are. This quarter we saw a material 315 basis point difference between the Northeast and the Midwest compared to the balance of the country, with the Northeast and the Midwest performing lower. As the Northeast in the Midwest experienced a very mild, mild winter, with below average snowfall, we’ve seen less weather sensitive hard parts in this part of the country. Headed into the first quarter of the new fiscal year, we are not anticipating that weather will have a significant impact on sales. Regarding our merchandise categories in the retail business, our sales floor categories outperformed our hard part categories. And our hard part business was essentially flat for the quarter. As I said previously, weather sensitive hard parts were clearly impacted by the milder winter weather, particularly in the Midwest and the Northeast. Let me also address inflation in pricing. This quarter, we saw low single-digit inflation and as a result, our ticket average was up roughly 2%. We believe inflation for the first quarter will be similar to the fourth quarter as the industry is migrating back to pre-pandemic inflation levels and lapping high inflation from a year ago. I want to reiterate that our industry has been very disciplined about pricing for decades, and we expect that to continue. Historically, as costs have increased the industry has increased pricing commensurately to maintain margins. It is also notable that following periods of higher inflation, our industry historically has not reduced pricing to reflect lower cost and we believe we have entered one of those periods. For the first quarter of 2024 we expect our DIY sales to be resilient and our commercial trends to improve. We will, as always, be transparent about what we are seeing and provide color on our markets and outlook as trends emerge. Before handing the call to Jamere, I’d like to highlight and give some color on a few of our key business priorities for the new fiscal year. First, we continue to focus on our supply chain with two initiatives that are in flight to drive improved availability. One is our expanded hub and mega hub rollouts. And secondly, we are making good progress on transforming our supply chain. Our strategy is focused on leveraging the entire network to carry more inventory closer to the customer to drive sales growth with speed to customer and expanded availability. Additionally, we plan on continuing to grow our Mexican and Brazilian businesses. With 804 stores open internationally or 12% of our store base these businesses had impressive performance last fiscal year and should continue to grow in 2024. We are leveraging many of the learnings we have in the U.S. to refine our offerings in Mexico and Brazil. Now I’d like to turn the call over to Jamere Jackson. Jamere Jackson: Thanks, Phil. And good morning everyone. As both Bill and Phil had previously discussed we had a solid fourth quarter, stacked on top of an impressive fourth quarter last year. 6.4% total company sales growth, 1.7% domestic comp, a 14.9% international comp on a constant currency basis, a 10.8% increase in EBIT, and a 14.7% increase in EPS. In addition, our results for the entire fiscal year were very strong as total sales grew 7.4% and EPS grew 12.9%. We continue to deliver great results and the efforts of our AutoZoners in our stores and distribution centers have continued to enable us to grow our business and our earnings in a meaningful way. To start this morning, let me take a few minutes to elaborate on the specifics in our P&L for Q4. For the quarter total sales were just under $5.7 billion, up 6.4%. For the year our total sales were $17.5 billion, up 7.4% versus last fiscal year. I continue to marvel at the strength of our business since FY19. Our sales are up an amazing 47% or nearly $5.6 billion since 2019. Let me give a little more color on sales and our growth initiatives starting with our domestic commercial business. For the fourth quarter our domestic DIFM sales increased 3.9% to $1.5 billion and up 25.9% on a two year stack basis. Sales to our domestic DIFM customers represented 26% of our total company sales and 30% of our domestic auto parts sales. Our average weekly sales per program were approximately $16,700, down 1.8%. Now it’s important to point out that our sales per program productivity was impacted materially by the late in quarter openings of approximately 120 new programs. While these openings depressed the point in time productivity metric, we’re encouraged by the growth prospects of these programs and their early contribution to our commercial business. These openings are part of our efforts to open more stores with commercial in response to the tremendous opportunity to grow our market share. Our commercial acceleration initiatives are delivering the expected results, as we grow share by winning new business, and increasing our share of wallet with existing customers. We now have our commercial program and approximately 90% of our domestic stores, which leverages our DIY infrastructure. And we’re building our business with national, regional and local accounts. This quarter we opened 156 net new programs, finishing with 5,682 total programs. As I’ve said since the outset of the year, commercial growth led the way in FY23, and we feel good about our prospects heading into the New Year. For FY23, our commercial sales were $4.6 billion, up 8.7% versus last year, and up 37% from two years ago. Importantly, we have a lot of runway in front of us, and we expect to deliver on our goal of becoming a faster growing business. To support our commercial growth we now have 98 mega hub locations with 13 new stores opened in Q4. While I mentioned a moment ago, the commercial weekly sales per program average was $16,700 per program, the 98 mega hubs averaged significantly higher sales and are growing much faster than the balance of the commercial footprint. In fact, our commercial mega hub business grew twice as fast as our overall commercial business in Q4. As a reminder, our mega hubs typically carry over 100,000 SKUs and drive tremendous sales lift inside the store box as well as serve as an expanded assortment source for other stores. The expansion of coverage and parts availability continues to deliver a meaningful sales lift to both our commercial and DIY business. These assets are performing well individually, and the fulfillment capability for the surrounding AutoZone stores is giving our customers access to thousands of additional parts and lifting the entire network. We have an objective to reach 200 mega hubs supplemented by 300 regular hubs in the near term. Our AutoZoners and our customers are excited and we’re determined to build on our strong momentum. On the domestic retail side of our business, our DIY comp was up 1.4% for the quarter. For FY23 our DIY crop grew 1.8% and 4.7% on a two year stack basis. The business continues to be remarkably resilient as we’ve managed to deliver positive comp growth through the cycle. As Bill mentioned, we saw traffic down slightly and 2% ticket growth. As we move forward, we would expect to see slightly declining traffic counts offset by low to mid-single digit ticket growth, in line with the long term historical trends for the business driven by changes in technology and the durability of new parts. Importantly, our DIY business has continued to strengthen competitively behind our growth initiatives. In addition, the market is experiencing a growing and ageing car part and a challenging new and used car sales market for our customers which continues to provide a tailwind for our business. These dynamics, ticket growth, growth initiatives and macro car part tailwind have driven a positive comp. We’re forecasting a consistent and resilient DIY business environment for FY24. Now I’ll say a few words regarding our international business. As you may have noticed, we changed our disclosure on our international business, and we will continue to do so going forward. With 12% of our total store base outside of the U.S., the current revenue contribution and the growth prospects moving forward, we simply have to share more about international. We continue to be pleased with the progress we’re making in Mexico and Brazil. During the quarter, we opened 27 new stores in Mexico to finish with 740 stores, and 17 new stores in Brazil ending with 100. Our same store sales grew 34.1% on a reported basis and 14.9% on a constant currency basis. We remain committed to Mexico and Brazil, and given our success in these markets, we will accelerate the store opening pace going forward. By 2028, after a robust strategic review of the market and ultimate store comp potential, we revised our strategy and anticipate opening as many as 200 stores annually in these markets in a disciplined fashion, making this an attractive and meaningful contributor to AutoZone’s future growth. Now let me spend a few minutes on the rest of the P&L and gross margin. For the quarter our gross margin was 52.7%, up 118 basis points, driven primarily by a non-cash $30 million LIFO. credit this quarter. For Q4 last year, we had a $15 million LIFO charge. Excluding LIFO from both years, we had a 37 basis point improvement in gross margin. I will point out that we now have $59 million in LIFO charges yet to be reversed through our P&L and we expect these to largely reverse over FY24. We’re currently modeling $15 million in LIFO credits in Q1 as inflation continues to abate, and we turn our inventory. And as I’ve said previously, once we credit back the $59 million through the P&L, we will not take any more credits and we will begin to rebuild our unrecorded LIFO reserve. Moving to operating expenses, our expenses were up 7.6% versus last year’s Q4 as SG&A as a percentage of sales deleveraged 34 basis points. The accelerated growth in SG&A has been purposeful as we continue to invest in an accelerated pace in IT and payroll to underpin our growth initiatives. These investments will pay dividends in customer experience, speed and productivity. We are committed to being disciplined on SG&A growth as we move forward, and we will manage expenses in line with sales growth over time. Moving to the rest of the P&L, EBIT for the quarter was $1.2 billion, up 10.8% versus the prior year, driven by our positive same store sales growth and gross margin improvements including the LIFO year-over-year benefit. EBIT for FY23 was just under $3.5 billion up 6.2% versus the prior year, also driven by strong top line growth. Interest expense for the quarter was $108.7 million, up 70% from Q4 a year ago as our debt outstanding at the end of the quarter was $7.7 billion versus $6.1 billion at Q4 and last year. We’re planning interest in the $88 million range for the first quarter of FY24 versus $57.7 million in this past year’s first quarter. Higher debt levels and borrowing rates across the curve are driving this increase. For the quarter, our tax rate was 22.4% and up from last year’s fourth quarter of 22.1%. This quarter’s rate benefited 22 basis points from stock options exercised while last year had benefited 70 basis points. For the first quarter of FY24 we suggest investors model us at approximately 23.4% before any assumption on credits due to stock option exercises. Moving to net income and EPS, net income for the quarter was $865 million, up 6.8% versus last year. Our diluted share count of 18.6 million was 6.9% lower than last year’s fourth quarter. The combination of higher net income and lower share count drove earnings per share for the quarter to $46.46, up 14.7% for the quarter. For FY23 net income was $2.5 million, up 4.1% and earnings per share was $132.36, up 12.9%. Now let me talk about our free cash flow for Q4. For the fourth quarter we generated $1.1 billion of operating cash and $701 million in free cash flow. For the year we generated $2.1 billion in free cash. We expect to continue being an incredibly strong cash flow generator going forward, and we remain committed to returning meaningful amounts of cash to our shareholders. Regarding our balance sheet, our liquidity position remains very strong. And our leverage ratios remain below our historic norms. Our inventory per store was down 0.6% versus Q4 last year while total inventory increased 2.2% over the same period last year driven by new store growth. Net inventory, defined as merchandise inventory less accounts payable on a per store basis was a negative $201,000 versus negative $240,000 last year, and negative $215,000 last quarter. As a result, accounts payable, as a percent of gross inventory finished the quarter at 124.9% versus last year’s Q4 of 129.5%. Lastly, I’ll spend a moment on capital allocation and our share repurchase program. We repurchased $1 billion of AutoZone stock in the quarter, and at quarter end we had just over $1.8 billion remaining under our share buyback authorization. The strong earnings, balance sheet and powerful free cash we generated this year has allowed us to buy back 8% of the shares outstanding since the beginning of the fiscal year. We have bought back over 100% of the then outstanding shares of stock since our buyback inception in 1998, while investing in our existing assets and growing our business. We remain committed to this disciplined capital allocation approach that will enable us to invest in the business and return meaningful amounts to cash to shareholders. We finished Q4 2.3 times EBITDAR, which is below our historical objective of 2.5 times EBITDAR. However, we remain committed to our leverage objectives, and we expect to return to the 2.5 times target in FY24. To wrap up, we remain committed to driving long term shareholder value by investing in our growth initiatives, driving robust earnings and cash and returning excess cash to our shareholders. Our strategy continues to work. We’re growing our market share and improving our competitive position in a disciplined way. As we look forward to FY24, we’re bullish on our growth prospects behind a resilient DIY business, a fast growing international business and a domestic commercial business that is continuing to grow share. I continue to have tremendous confidence in our ability to drive significant and ongoing value for our shareholders driven by a high degree of confidence in our strategy, and our exceptional team of AutoZoners. One last housekeeping point, I’d like to remind you that in FY24, we will have a 53rd week in our financial results. This extra week will be added to our Q4 results. As a result, our fiscal year will now end August 31, 2024. In order to model that extra week, I encourage you to look at our financial breakouts of both our fiscal 2019 and 2,013 fourth quarters, which were the last two years we had the extra week and we show breakouts of the full P&L accordingly. And now I’ll turn it back to Bill. Bill Rhodes: Thank you, Jamere. As we start a new fiscal year, I’d like to take a moment to discuss our operating theme for the New Year, live the pledge. I know this sounds like a very consistent theme for AutoZone. In fact, it was the theme we used in my first full year as CEO in 2006. I’m asked frequently, what differentiates AutoZone from others. My answer goes back to the same point over and over, the culture. I, our Board and our leadership team believe we can never emphasize the culture enough. The culture is defined by helping solve our customers’ challenges and optimizing the performance of their vehicles. It’s based on a team-based approach recognizing everyone’s contributions and performance and putting team goals ahead of personal goals. It sets the standard at exceptional performance, not mediocrity. It’s about the AutoZone family. Calling yourself a family comes with great responsibility. And it is so much more. The pledge and our values summarize our operating strategies succinctly. As we’ve accelerated our top line since the onset of the pandemic, our competitive positioning has also materially improved. Our efforts for 2024 will be focused on execution. We have a lot of projects in flight, and we did get them completed. Supply chain improvements will remain a key focus in FY24. We will continue with our additions of mega hub and hub stores, new distribution centers and international store growth. As you noticed our international teams posted same store sales comps on a constant currency basis of 14.9%, much higher than our domestic comp. International has been strong for a few years now. This morning, I’m excited to share after an extensive strategic review of the ultimate number of locations we can have in the U.S., Mexico and Brazil. We are announcing our plans for a much more aggressive global store development plan. Over the last five years we’ve averaged 140 domestic store openings and 50 international openings for a total of roughly 190 new stores a year in the Americas. We plan on accelerating this pace and aspire to open as many as 500 stores five years from now. So by FY28 we are modeling 500 store openings with the split being 300 in the U.S., 200 internationally. FY24 we will remain around 200, but we will ramp from there. You may be asking why this change of strategy and why now? The answer is our profitability per store is materially higher since the beginning of the pandemic. We continue to find new trade areas even in our more mature U.S. markets. Our growth in commercial has materially changed the economics on a per-store basis. We believe this is just the beginning on commercial, and our ROIC, one of the most important metrics we track is over 50%. Also our international markets are immature. So we continue to see expansion opportunities in Mexico and Brazil, along with putting a toehold at some point in other new markets. I want to stress that we will be diligent and disciplined. We have a long track record of performance with high returns and strong cash flow generation. We have no plans on changing that strategy and approach, where we believe in evolution over revolution. We believe in continuous improvement and we believe in test and learn. We have been, and remain anchored on our capital allocation strategy. While I spent time talking about our store development strategies for the future, that is not the key focus for us in FY24. The number one focus will be on growing share in our domestic commercial business. We believe we have a solid plan in place for growth over the next 12 months. We know our focus on parts availability and better customer service will lead to sales growth. We’re excited as we start 2020. This time of year, I always enjoy reflecting on the past. Our team achieved some impressive milestones this year, $17.5 billion in sales, racing past the $17 billion milestone. DIY comps are 1.8%, most impressively 15.9% on a three year basis. Commercial sales are now $4.6 billion. I personally distinctly remember a goal of $1 billion not that long ago. Average weekly sales domestically of $47,600, equating to just under $2.5 million per store annually. Our Mexico and all data [ph] teams both broke multiple records, and Brazil is poised for significant growth in store count, and getting to profitability breakeven on the path to substantial profitability in the future. We bought back 3.7 billion in AutoZone stock, the second highest ever, only behind last year’s 4.4 billion. And our team has grown our EBIT by 61% in four years. That’s remarkable. But we can’t rest on our laurels. And we aren’t without our challenges. That’s for sure. As I’ve said on several occasions, we have to exit pandemic mode. We had to get back to taking care of the customer. And this requires as close to flawless execution as possible. We have to make sure every store is staffed right, every hour of every day, our processes need to function correctly, always. We have to meet our store opening goals and timelines. Simply put, we have to remain the execution machine that we have always been. On June 26, we announced our leadership transition plan. And yesterday we announced the next evolution of AutoZone’s senior most leadership team. I’ve had the honor and privilege of being part of this team for nearly 29 years now. And it has been one of the most rewarding experiences of my life. We, as part of that leadership transition plan, announced that I would step away from the President and CEO roles, but remain Executive Chairman in January. As a Board we’ve been contemplating this transition for many, many years, and began a very robust well-defined disciplined process nearly three years ago. Our goal was to identify a successor and ensure that successor had a fabulous team with them. I think we’ve accomplished that goal. The company will be in fantastic hands with Phil Danielle leading it. He loves this business, is a car fanatic, and has been here for 30 years, and in the industry for nearly 40 years. With Jamere Jackson leading the finance and store development teams and Tom Newbern now serving as our Chief Operating Officer, in addition to the balance of our talented executive team, our company is in terrific hands. While it will be bittersweet for me, I’m excited that Phil and the Board have asked me to continue to be very involved for the foreseeable future. Ultimately, I know Phil, Jamere, Tom and I all know, this is a team sport and ultimately it’s not about the senior most leaders in this organization. It’s about in our case, the pledge, our values, and most importantly, our culture, which at its core is all about having the best most passionate AutoZoners taking care of customers, and the organization prioritizing AutoZoners and their development, or we say — as we say, caring about others. Yesterday, we announced another organization changes with the promotion, Bill Hackney to Executive Vice President, Merchandising, Marketing and Supply Chain. I congratulate Bill, a 38 year AutoZoner who knows this business exceptionally well and has always been a top performer. We also announced that three terrific long term leaders will be retiring around the end of the calendar year. I thank and congratulate Grant McGee, Charlie Pleas and Al Saltiel, for their partnership, leadership and friendship for all these years. They leave AutoZone a massively better organization than they found it many years ago. So changes in the air, frankly, it always is. It’s amazing to me to see how much our leadership has changed over my near 30 year tenure at AutoZone. To me, that’s why the culture. It’s why the culture is so important in this organization. With a phenomenal culture, it’s not about individuals. It’s about the team. It’s about the goals, and it’s about performance. As we begin this transition, Phil and I both shared that not only do we both feel we embody the culture, both of us believe we are products of this culture. We’ve learned extraordinary lessons from our three decades at AutoZone. Most importantly, always put the customer first, execution wins. People want to play on winning teams and be recognized for their performance. Details matter. Listen to those closest to the customer, and so much more. Phil and I, both continue to say, and it may sound like a cliché, but we believe it. AutoZone’s best days lie ahead of us. Now we’d like to open up the call for questions. Operator: Thank you. At this time, we will be conducting a question-and-answer session [Operator Instructions]. Thank you. Our first question is coming from Bret Jordan with Jefferies. Your line is live. See also 15 Most Globalized Cities in the World and 20 Countries that Use Crypto and Bitcoin the Most. Q&A Session Follow Autozone Inc (NYSE:AZO) Follow Autozone Inc (NYSE:AZO) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Bret Jordan: Hey, good morning, guys. Bill Rhodes: Good morning, Bret. Philip Daniele: Hey, Bret. Bret Jordan: You called out market share gain in the commercial space in the fourth quarter. Then you said, not in line with your aspirations. But then also said that pricing is rational. What do you think is happening in the space? Are there peers that are showing relatively better in-stocks? Or really was it just your regional footprint and exposure to some of those softer markets that made the difference? Bill Rhodes: It’s a terrific question, Bret. And there’s a lot of different elements as you would expect. Again, we are not satisfied with our commercial growth at this level. And we’re going to change that, and we’re encouraged about the direction that we’re heading. I think part of it Bret is a comparison versus last year. You mentioned in-stocks. Last year, 18 months ago, we got very aggressive with some key categories and a lot of merchandise, when frankly a lot of our less sophisticated competitors were not in great in-stock positions. As we’re beginning to lap that significant outsized growth last year, that’s certainly a challenge for us. And we’re beginning to get past that point in time. We also mentioned that we’ve had some challenges in the Midwest and Northeast, particularly with under cart categories, and particularly in commercial where we just didn’t have that winner that we so desperately want and need. And we’ve suffered in those under cart categories. Bret Jordan: Okay, great. And a big picture question, I guess on the international. When you look at the, obviously different vehicle demographic and economy, but how do you see the underlying growth rates in the DIY and the DIFM segments in Brazil and Mexico, sort of on a longer term basis? Bill Rhodes: That’s a great question. We’ve been in Mexico for nearly 25 years now. There’s just not great data there, Bret. And so you don’t have the terrific kind of information that we get from the Auto Care Association. So we don’t have great data down there. We’re working to try to see if we can get some better data. But what we know is we’ve been in Mexico now, as I said, almost 25 years and we continue to grow significantly and think that we have a lot of growth left in front of us, not just in new stores but on same store sales. There are still categories where we are massively under penetrated, there are still categories we don’t participate in at all. And as we learn more about that business, we’re continuing to grow. Same things happened in Brazil. We’re just much earlier in Brazil. Bret Jordan: But fair to think an older car base that drives a better underlying growth than U.S. Bill Rhodes: I think in Mexico, clearly the car basis is older, and there’s a lot of U.S. cars, there’s also a lot of Mexico manufactured vehicles. Brazil is very different in that the size of the vehicles and in particularly, the engine sizes in Brazil are massively smaller. I mean, if you have a two liter engine in Brazil, that’s a big car. Many of them are 1.4 liters and the like. So we still got a lot to learn in Brazil. But we’re excited about where we are. We believe we see a path to great success, but we’re still losing money there. We got to fix that over the next couple of years. Bret Jordan: Great. Thank you. Bill Rhodes: Thank you. Operator: Thank you. Our next question is coming from Simeon Gutman with Morgan Stanley. Your line is live. Simeon Gutman : Good morning, everyone, and congratulations to the retirees and promotees. My first question is, I may have missed, is double digits still the goal for commercial? And if so what’s the — how should we think about the timeframe to getting there? Bill Rhodes: Absolutely is still the goal. Keep in mind, we still have pretty low share in that, 4.5% range or so. So we’re under share. And we think there’s still tremendous opportunity for us to gain share. Like we said, we’re not happy with our performance in the Q4 timeframe. We do feel like we’re exiting the quarter at a higher rate, and we believe will continue to improve from this point forward. But we’re not back to where we want to be. But we do see line of sight to getting back to that double digit growth over time. Simeon Gutman : And then maybe the follow up, the way you’ve built the business in commercial, it’s been methodical, and you’ve had some periods of faster growth. But it’s been cumulative. And my question is now that you’re focused on it, again, how do we get comfortable with timing that, prescriptively, your business really accelerates, call it in the next few quarters versus why not take the year to get some of the traction from the things that you’re working on? Bill Rhodes: Well, like I said, we talked, in Q3 or Q4 that our execution in the commercial arena wasn’t where we expected it to be. And we’ve been working on that. We saw that performance and the execution levels improve as we worked through Q4. We’re not finished yet. We’ll frankly, never be finished. Execution is a long term strategy. But we continue to get better. And we think we continue to improve our business model. Like we said, we’ve opened up more hubs, more mega hubs. We continue to strengthen our store side assortments. And we’re also continuing to leverage the technology enhancements that we’ve made over the last couple of years. And those will continue to mature. And we’re not standing still. That technology enhancements will continue as we move through this next year. Simeon Gutman : Thank you. Good luck. Operator: Thank you. Our next question is coming from Seth Sigman with Barclays. Your line is live......»»

Endava plc (NYSE:DAVA) Q4 2023 Earnings Call Transcript September 19, 2023 Endava plc beats earnings expectations. Reported EPS is $0.71, expectations were $0.56. Operator: Good morning and welcome to the Endava Q4 and Fiscal Year 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an […] Endava plc (NYSE:DAVA) Q4 2023 Earnings Call Transcript September 19, 2023 Endava plc beats earnings expectations. Reported EPS is $0.71, expectations were $0.56. Operator: Good morning and welcome to the Endava Q4 and Fiscal Year 2023 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] As a reminder, this event is being recorded. I would now like to turn the conference over to Laurence Madsen, Head of Investor Relations and ESG. Please go ahead. Laurence Madsen: Thank you. Good afternoon, everyone, and welcome to Endava’s fourth quarter and full fiscal year 2023 conference call. As a reminder, this conference call is being recorded. Joining me today are John Cotterell, Endava’s Chief Executive Officer, and Mark Thurston, Endava’s Chief Financial Officer. Before we begin, a quick reminder to our listeners. Our presentation and our accompanying remarks today include forward-looking statements, including but not limited to statements regarding our guidance for Q1 fiscal year 2024 and for the full fiscal year 2024, ability to grow revenues and, in particular, growth and expansion in our industry verticals, our combined business optimization actions, enhancements to our technology and offerings, the impact of adverse macroeconomic conditions, and our business strategies, plans, and operations. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those contained in the forward-looking statements. Actual results and the timing of certain events may differ materially from the results or timing predicted or implied by such forward-looking statements, and reported results should not be considered as an indication of future performance. Please note that these forward-looking statements made during this conference call speak only as of today’s date, and we undertake no obligation to update them to reflect subsequent events or circumstances other than to the extent required by law. For more information, please refer to the Risk Factors section of our annual report filed with the Securities and Exchange Commission on September 19, 2023. Also, during the call, we’ll present both IFRS and non-IFRS financial measures. While we believe the non-IFRS financial measures provide useful information for investors, the presentation of this information is not intended to be considered in isolation or as a substitute for the financial information presented in accordance with IFRS. Reconciliation of such non-IFRS measures to the most directly comparable IFRS measures are included in today’s earnings press release, which you can find on our investor relations site or on the SEC website. A link to the replay of this call will also be available on our website. With that, I’ll turn the call over to John. John Cotterell: Thanks, Laurence. I’d like to thank you all for joining us today and hope that you’re all well. We’re pleased to be here to provide an update on our business and financial performance for the three months ended June 30th, 2023 and for the full fiscal year 2023. Despite the challenging macroeconomic environment, we reported a good quarter, with revenue totaling GBP189.8 million for Q4 of our fiscal year 2023, representing a 5.2% year-on-year increase from GBP180.4 million in the same period in the prior year. We ended the quarter with an adjusted profit before tax for the period of GBP38.3 million, representing a 20.2% adjusted profit before tax margin. For the full fiscal year 2023, our revenue totaled GBP794.7 million, representing a 21.4% year-on-year increase from GBP654.8 million in fiscal year 2022. We ended the year with an adjusted profit for tax of GBP164.2 million, representing a 20.7% adjusted profit before tax margin. It’s now 23 years since we started Endava, and we’ve grown with tremendous momentum since then and through cycles and changes. Macro and IT services have been challenged over the last three quarters. And banking, financial services, insurance, and Europe has been challenged, as we all know, giving significant headwinds to the business. But I didn’t start this journey imagining that we would always have a tailwind. We see tremendous opportunity going forward and are managing for the long term. And I’m committed to continue to execute on our vision. Our strategy remains the same, but it is also expanding given our success and the opportunities in front of us. We’re focused on diversification of our verticals and client geographies, expansion of our delivery to be more global and continued innovation around new technologies and solutions for our clients. We have a strong track record on organic and inorganic investment and we’ll accelerate that as we move forward. We’re inherently conservative as you know, but are seeing real signs of improvement, which will impact our second half of fiscal year 2024. We have a fiscal year that ends in June, so our guide for FY ‘24 continues to be constrained by the slower start in H1 and doesn’t reflect the full year pickup that will become visible for calendar year 2024. A little more on the current situation. The wave of caution, particularly in banking and financial services and private equity portfolio companies, continues to impact revenue in the short term. However, in parallel with this, we continue to see high levels of new business shaping up, continuing from the Q4 bump highlighted in our last call. These new opportunities will take a while to ramp and hit revenue at scale, but they give us confidence in a return to growth and are the reason for our confidence in H2 of fiscal 2024, which Mark will discuss in our guide. As a result of our long-term outlook, given these immediate market dynamics, we’re taking the opportunity to invest in the future. Firstly, we continue to expand our sales and marketing activity and to push into our target growth areas in the US, Europe and rest of the world. Secondly, we are investing in and building strong AI propositions, including accelerators, in our target industry verticals. More on each of these areas later. In the last quarter, we continued to prioritize our efforts on larger relationships that can grow and scale, with a total of 146 clients each paying us in excess of GBP1 million per year, compared to 134 in the same period last year, representing a 9% year-on-year increase, with the biggest increase coming from clients who paid us over GBP5 million per year. This cohort increased by 38% to [33%, compared to 24%] (ph) in the same period in the prior year. In fiscal year ‘23, we had one client with billings of just over 10% of our revenue, namely Mastercard. Having worked together with Mastercard for more than 20 years, we’re thrilled to announce the extension of our long-standing partnership with a new five-year MSA that will strengthen and deepen the strategic relationship between Endava and Mastercard. This agreement will see Endava continue to help Mastercard deliver and evolve their market-leading suite of global payments products and platforms. We continue to see great demand for modernization and innovative solutions across the payments domain, and we’re excited to continue partnering with Mastercard, a global leader in payments technology, to bring this next generation of payments products and platforms to market. As noted earlier, we’re taking the opportunity of lower utilization to invest. In particular, we’re investing in AI propositions for different sectors and have built accelerators, which are reusable assets to accelerate implementation timescales. I’d like to give some examples of these assets and how we use them. In our financial vertical, we’ve built a generative AI based assistant for wealth managers that combines information from client data sources with information found from Internet searches and proprietary databases in order to build a picture of a potential client. The assistant provides a question-and-answer interface, similar to ChatGPT, to allow the wealth manager to quickly learn more about the client. Using the information it has gathered, the assistant can also identify discussion topics and generate a set of talking points for wealth advisors to use in discussion with clients. This accelerator helps wealth management organizations understand the potential of generative AI in their specific environment. Our insurance team has an acceleration program focused on how claims management will be transformed by the use of AI, advanced automation, and modern customer experience technologies, none of which are widely used in claims management applications today. There are also many ways for us to use AI in our own business and in client delivery. The Endava coding assistant is an example of using an exploratory prototype to understand the potential of a new technology, and exploring ways of using it that deliver — differ from the features of commercial products, like GitHub Copilot in this case. The tool provides us with a way to increase our developers’ productivity whilst meeting specific client needs related to training datasets and data privacy. We’re also investing in developing an internal AI platform to showcase the potential of AI to our clients, acting as both a scalable open-sourced accelerator and a business transformation tool. By integrating our internal generative AI accelerators, we’re building a diverse AI catalog, enabling swift prototype developments and tailored solutions for demonstrating business needs. We believe that this platform approach will enable us to demonstrate to our clients the ability for AI transformation at scale. The growth of AI is also creating demand in adjacent spaces, one of which is synthetic data to train machine learning models, where real world data is not readily available, due to privacy or regulatory restriction and frequency of events or safety challenges in data collection. The Endava Synthetics team joined us from Microsoft, where they were responsible for all aspects of synthetic client delivery. We are already helping clients build more robust machine learning solutions by providing tailored synthetic data built to tackle complex challenges, optimize performance, and unlock new opportunities. In one project, we collaborated with a client in the manufacturing sector who sought to utilize synthetic data to generate observations of rare defect types in their production line. Due to the scarcity of real-world observations, the client previously struggled to effectively train a neural network to detect these specific defect types. By leveraging the client’s existing CAD parts files as a starting point, we designed procedural systems to artificially generate large scale variability of anomalies. As a result, the client was able to train models that achieve a 96% detection accuracy when evaluated on real data, greatly improving production quality. In another example, due to the privacy restrictions associated with utilizing real-world data for model training in the retail sector, we enabled a client to leverage synthetic data to produce an array of machine learning capabilities such as people counting and entrance/exit tracking. This enabled a deeper understanding of customer interactions within their physical spaces and the ability to harness these insights to enhance the efficiency, i.e. queue management, and effectiveness, product layouts, of the retail experience. In healthcare, our industry experts are working on a generative AI-based synthetic data generator specialized on clinical data, allowing testing of healthcare systems without the need to use confidential, real clinical data. We believe there are many other industries with similar constraints where this know-how can be applied in the future. On the partnership side, we continue to invest in the build-out of our alliance ecosystem, working in collaboration with industry-leading technology companies to support our clients’ digital transformation ambitions. We continue to build on Endava’s heritage in payments and were awarded Stripe’s UK&I Partner of the Year award and have established a strategic partnership with checkout.com. We are leading the way in cloud across all hyperscalers. Endava successfully achieved the AWS migration competency, working in partnership with AWS to accelerate our clients’ time to value when shifting workloads to the cloud. Our work with Google continues with the expansion of our Google team into the US, and with Microsoft Azure, Endava achieved the Azure Data and AI, and Azure digital and app innovation partner designations. Lastly, our partnership with Salesforce is growing significantly as we align to their industry cloud strategy, focusing initially on the financial service cloud and automotive where we support clients in areas such as specialty insurance, retail banking and the switch to electric mobility in the automotive sector. Over the past 12 months, we have invested significantly in expansion in the Middle East and Asia Pacific. This has taken rest of the world to 8% of revenue in Q4 FY ‘23 and enables a genuinely global delivery capability to be deployed. Given the global footprint of many of our largest clients, this is a key strategic step from which we are now seeing the benefits in increased demand. In FY ‘23, as part of our focus on rest of the world, we completed three acquisitions in Asia Pacific, starting with Lexicon last October, Mudbath in May, and more recently, the DEK acquisition that was completed in June. DEK develops cutting edge software solutions across a range of applications, including embedded systems, real-time solutions, telecoms and data communications. The acquisition brings around 660 operational employees along with a delivery location in Vietnam. We ended FY ‘23 with over 1,000 [Endavans] (ph) in APAC compared to less than 50 in FY ‘22. With these acquisitions and our own organic growth, we believe we have built a solid foothold in the region and we are now at a scale which should help us become a significant provider of software services to clients in the region. We believe APAC is a region with great potential, and we’re excited about our growth prospects. I’d like to take this opportunity to highlight some of the work we’re doing for clients in both the Middle East and Australia. In the Middle East, Endava has been working with businesses based in the Kingdom of Saudi Arabia for over five years now. And over the last 12 months has been supporting a digital bank being launched as part of the Kingdom’s 2030 vision. Endava’s analysis architecture and engineering teams are working closely with the bank’s product, technology and business departments to both design and build greenfield retail banking capabilities, as well as supporting the bank in reaching the necessary compliance standards set by the industry and the local financial authorities. Endava has supported a leading payment processing and gateway service provider for the MENA region across several key technology initiatives. The client’s mission is to empower online businesses with a simple, affordable, and trusted payment experience. The Endava team provided payments domain expertise and engineering capabilities to enhance the client’s existing platform with new SDK and plug-in functionality, in addition to reviewing and redesigning their existing API capabilities to reflect a world-class developer experience. These additional capabilities and improved developer experience are expected to offer our clients, customers, a more intuitive and flexible user experience, as well as giving our client additional revenue opportunities through additional e-commerce channels. In Australia, Endava is working with Seeing Machines, a leading supplier of driver and occupant monitoring system technology. Seeing Machines’ mission is to reduce the number of injuries and fatalities on the road caused by driver fatigue or distraction. We are helping develop proprietary software based on sophisticated algorithms able to preempt driver fatigue and detect distraction. Developing software to run on lower cost hardware and data annotation for machine learning and AI are some of the areas that we are involved in. Again, in Australia, we are working with a leading global life sciences company that provides scientific instruments, software and services used in research laboratories and other scientific applications, primarily serving the pharmaceuticals and biotechnology industries. Over the past decade, our proven expertise in designing and developing software for highly regulated industries has led us to work with them on numerous projects, from designing and developing new products to quality assurance. Moving on to the US, this summer, we announced our official partnership with Toyota Racing Development North America. The goal of this partnership is to help deliver the best experiences possible to Toyota racing team’s partners, and fans both on and off the track. One of the first programs we are embarking upon aims to create new digital experience for Toyota’s North America Driver Development Program. We are growing our activities in North America with our recent acquisition of TLM partners. TLM provides outsourced development services across design, engineering, art, and animation for PC and console video games and other digital entertainment. TLM has particular expertise in highly complex areas of cross-play, middleware, physics, engine-level tools and technical art and has an impressive list of clients in the gaming sector. TLM is credited as a co-developer on many AAA franchises including Immortals of Aveum, Call of Duty, Marvel’s Midnight Suns and Gotham Knights. Jake Hawley, the Founder and CEO of TLM and his leadership team, bring huge gaming experience and strong industry relationships. Today we published the third edition of our sustainability report, which can be found on our website. I’d like to share some of the highlights from our latest report. Our RISE mentoring program, specifically targeted for the advancement of women in senior level roles is showing excellent results. Over 60% of the individuals who completed the program since it was launched in November 2021 have received a grade promotion or had an increase in responsibilities or change in role. We’re also proud of the impact we have through our Endava Tech campus, which brings together all the tech education projects that we support. I’m also delighted that by Delivering consistent and valuable experiences to our customers, we continue to improve our customer satisfaction skills. We also provide examples of our work to help clients build sustainable business models, such as teaming with Grameen America to provide better support to underserved women entrepreneurs in the US. We’re also advancing our environmental agenda. We had our Scope 1 and Scope 2 greenhouse gas emissions data assured by the PWC and aim to set our science-based targets initiative in 2024. I am proud to share our progress and our stories as we continue on our sustainability journey. We ended the quarter with 12,063 employees, a 1.8% increase from 11,853 in the same period last year. In the current environment, our recruitment is focused on areas of strong demand, as well as continuing to strengthen our sales and marketing team. In summary, despite the recent challenges and based on our conversations, we believe clients’ activity in exploring and commissioning new product will overtake the headwinds over recent quarters and see us return to growth. I will now pass the call on to Mark, who will walk you through our financial results for the quarter and of the last fiscal year and provide guidance for the coming quarter and fiscal year. Mark Thurston: Thanks, John. Endava’s revenue totaled GBP189.8 million for the three months ended June 30th 2023 compared to GBP180.4 million in the same period in the prior year, a 5.2% increase over the same period in the prior year. In constant currency, our revenue growth rate was 4.8%, including a 3.7% inorganic contribution during the quarter. Profit before tax for Q4 fiscal year 2023 was GBP24.9 million compared to GBP32.5 million in the same period in the prior year. Our adjusted profit before tax for the three months ended June 30, 2023, was GBP38.3 million compared to GBP36.2 million for the same period in the prior year. Our adjusted profit before tax margin was 20.2% for the three months ended June 30, 2023, compared to 20.1% for the same period in the prior year. Our adjusted diluted earnings per share, or EPS, was 57p for the three months ended June 30, 2023, calculated on 58.1 million diluted shares, as compared to 51p for the same period in the prior year, calculated on 58.0 million diluted shares. Our adjusted diluted EPS at 57p for Q4 was much stronger than anticipated due to a number of one-off items in the quarter and a lower-than-expected tax charge. These items accounted for 10p of adjusted diluted EPS and our adjusted diluted EPS for Q4 after adjusting for these items would have been about 47p. Revenue from our 10 largest clients accounted for 35% of revenue for the three months ended June 30th 2023 compared to 32% for the same period last fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP5.8 million to GBP6.6 million for the three months ended June 30th, 2023, representing a 13.7% year-over-year increase. In the three months ended June 30th, 2023, North America accounted for 30% of revenue compared to 35% in the same period last fiscal year. Europe accounted for 24% of revenue compared to 22% in the same period last fiscal year, the UK accounted for 38% of revenue compared to 40% in the same period last fiscal year, while the rest of world accounted for 8% compared to 3% in the same period last fiscal year. Revenue from North America declined 8.2% for the three months ended June 30, 2023, over the same quarter of fiscal year 2022. Comparing the same periods, revenue from Europe grew 13.4%, the UK grew 0.1% and the rest of the world grew 177%. Revenue from Payments and Financial Services grew 7.2% for the three months ended June 30, 2023, over the same quarter of fiscal year 2022 and accounted for 52% of revenue compared to 51% in the same period last fiscal year. Revenue from TMT declined 7.2% for the three months ended June 30, 2023, over the same quarter of fiscal year 2022, and accounted for 22% of revenue compared to 25% in the same period in the prior year. Revenue from other grew 13.5% for three months ending June 30, 2023, over the same quarter of fiscal year 2022 and now accounts for 26% of revenue compared to 24% in the same period in the prior year. Our adjusted free cash flow was GBP31.5 million for the three months ended June 30, 2023, compared to GBP43.4 million during the same period last fiscal year. Our cash and cash equivalents at the end of the period remained strong at GBP164.7 million at June 30, 2023, compared to GBP162.8 million at June 30, 2022. Capital expenditure for the three months ended June 30, 2023, as percentage of revenue was 1% compared to 2.1% in the same period last fiscal year. I’d now like to move on to some highlights for our fiscal year 2023. Endava’s revenue totaled GBP794.7 million for the fiscal year 2023 compared to GBP654.8 million in the previous fiscal year, a 21.4% increase over prior year. In constant currency, our revenue growth was 16.6%, including a 2.3% inorganic contribution during the full fiscal year. Profit before tax for the fiscal year 2023 was GBP114.2 million compared to profit before tax of GBP102.4 million in the prior year. Our adjusted profit before tax for the fiscal year 2023 totaled GBP164.2 million compared to GBP138.3 million in the prior year. Our adjusted profit before tax margin remained strong at 20.7% for the fiscal year 2023 compared to 21.1% for last year. Our adjusted diluted EPS was GBP2.28 for the fiscal year ended June 30, 2023, calculated on 58.1 million diluted shares as compared to GBP1.93 for the previous fiscal year calculated on 58.0 million diluted shares. Revenue from our 10 largest clients accounted for 33% of revenue for the fiscal year ended June 30, 2023, compared to 34% for the previous fiscal year. Additionally, the average spend per client from our 10 largest clients increased from GBP22.2 million to GBP26 million, up 17.5% year-over-year. In terms of geographies, on a year-over-year basis, North America was up 13.2% year-over-year, Europe up 32.3%, the UK up 14.2% and the rest of the world up 151.2%. On a year-over-year basis, revenue from Payments and Financial Services increased 25.4%, TMT increased 6.4% and Other increased 28.5%. The year-over-year growth in Other came mainly from mobility and Healthtech. Our adjusted free cash flow was GBP111.5 million for the fiscal year ended June 30, 2023, compared to GBP107.2 million during the same period last year. CapEx for the fiscal year ended June 30, 2023, as a percentage of revenue was 1.7% compared to 2.1% during the same period last year. Now turning to our outlook for Q1 and full year fiscal 2024. As John mentioned in his comments, the revenue outlook remains challenging. Our Q1 revenue outlook reflects further delays in client decision-making that impacted our Q4 FY ’23 outlook when guiding in May. However, we are seeing stronger activity than in recent quarters, especially in large-scale opportunities, which will take time to ramp up and produce revenue. Therefore, we don’t expect to see a significant uplift in revenues until Q3 in FY ’24, with Q1 and Q2 showing a flat sequential profile. If you look at this outlook on a near-term basis, the guide implies a constant currency growth of 3%. We looked at on a 12-month basis to December 2023, we expect to return to high teens growth by Q4 FY ’24. As concerns profitability, adjusted PBT should be subdued compared to the most recent quarter in FY ’23 as we maintain a bench in readiness for the recovery we are seeing develop in H1 and build through H2. We anticipate recovery to historic levels of profitability by Q4 FY ’24. Additionally, I draw attention to the increase in corporation tax in the UK with effect from April 2023, where rates increased from 19% to 25%. As a consequence, our adjusted tax rate is expected to rise from 19.4% in FY ’23 to 21.3% in the FY ’24 guide. With that context, let me now turn to the guide. Our guidance for Q1 fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP186 million to GBP187 million, representing constant currency revenue decrease of between minus 2% and minus 1%. Endava expects adjusted diluted EPS to be in a range of 34p to 35p per share. Our guidance for full year fiscal year 2024 is as follows. Endava expects revenue to be in the range of GBP780 million to GBP795 million, representing constant currency growth of between 1% and 3%. Endava expects adjusted diluted EPS to be in the range of GBP1.52 to GBP1.62 per share. This above guidance for Q1 fiscal year 2024 and the full fiscal year 2024 assumes the exchange rates at the end of August 23, when the exchange rate was GBP1 to $1.27 and EUR1.16. This concludes our prepared comments. Operator, we are now ready to open the line for Q&A. See also 13 Best Beaten Down Stocks To Buy Now and 50 Most Spoken Languages in the World. Q&A Session Follow Endava Plc (NYSE:DAVA) Follow Endava Plc (NYSE:DAVA) We may use your email to send marketing emails about our services. Click here to read our privacy policy. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Today’s first question comes from Bryan Bergin with TD Cowen. Please go ahead. Bryan Bergin: Hi, thank you. I wanted to start here on the fiscal ’24 outlook and try and unpack it a little bit. Can you talk about what you’re expecting out of the PE backed client cohort and payments versus the balance of the portfolio? And if you can really talk about the PE client behavior that you’ve seen progress here over the last several months. Mark Thurston: Hi, Bryan. So PE is behaving as we expected. As you remember, we had a slowdown from Q3 to Q4 when we lost about sort of GBP10 million of quarterly run rate to mid GBP30 million, GBP35 million odd run rate. Q4 ended up basically where we expected. At the time of giving that guide, we did anticipate PE coming off slowly into Q1, so getting into the sort of low 30s. Basically, we’re not assuming any pickup from that level of activity through FY ’24, although we are starting to see some activity in our due diligence components of the portfolio, although that is a very small percentage of revenue. So we’re taking a conservative view through the balance of FY ’24 as regards to PE. Bryan Bergin: Okay. And my follow-up on margin here. So Mark, can you talk about — some of the cadence was helpful there. Can you talk about just adjusted PBT level expectations? And you mentioned investments, obviously, with lower revenue growth, you have the utilization headwind here. But can you quantify how much of the pressure here, maybe investments that you’re ramping in accelerators in the AI solution development you discussed versus lower utilization versus any other factors? And just as a starting point, what are you baking in, in 1Q as you ramp forward? Mark Thurston: Why don’t I start there? So our Q4 adjusted PBT was 20.4%. I called out a number of one-offs. I can touch on those at a later stage, you won’t need to follow up. But basically, we have normalized adjusted PBT of about 17.5%, which is roughly what we were guiding implied in our 45p guide for Q4. Now for Q1, it is going to come off as reflected in the EPS going down from, let’s call it, a normalized 47p, 45p to 35p is mainly being felt on the revenue and gross margin. So our gross margins are contracting going from Q4 to Q1. Part of that is what are those exceptional items reversing, which captured 1% of marginal decel. And the rest is basically utilization. It’s a mixture of slightly increasing bench investment in accelerators. So we’re deploying people on the bench to work on some of those accelerators, and also, we’ve seen a higher level of holiday taken as well. And then the balance to bring this down to Q1 is on SG&A, basically, where we see a sort of rebuilding in commission and other costs. Basically, that’s a low point, if I could call it that, on adjusted PBT. We may see a bit of pressure on that as we go into Q2 because the revenues are going to be flat, and we do continue to invest mainly in sales and marketing in Q2, but also in our integration activities for Asia Pac in particular. And then as we see sequential sort of recovery as we go into Q3, Q4, gross margin starts to rise as we utilize the bench and get back to more normalized levels. To anticipate exiting Q4 at the levels of gross margin that we’ve typically seen in the past around 39% and our adjusted PBT come back up to that 19.5%. Bryan Bergin: Okay, very helpful. Thank you very much. Operator: Thank you. And our next question today comes from James Faucette with Morgan Stanley. Please go ahead. James Faucette: Thank very much. I wanted to follow-up once again on the outlook. You talked about better sales pipeline, et cetera, particularly going into next year. And I guess, just a couple of questions there. First, how should we square that with kind of what you’re seeing in terms of some ongoing cancellations or pushouts? Just trying to figure out kind of how to put those together and what’s driving that decision making. And then another common question that we get is, clearly, your fiscal year and where you’re looking for acceleration bridges into next year, and a lot of your customers really won’t be setting budgets until late this year or early next year. So what are the things that you’re looking at that’s really giving you the incremental confidence that those will be able to be delivered as expected early next calendar year? Thanks. John Cotterell: Yeah. Thanks, James. So the outlook as we’re looking forward, we’re seeing the context of the historic headwinds that started at the end of March, that wave of caution that followed [SVP] (ph). And of course, particularly BFS [Technical Difficulty] the portfolio to slow down that Mark was touching on. And that had a full impact in Q1, partial impact in Q4 as they were ramping down. And so that’s part of the macro that is feeding through into the Q1 numbers. And we’ve adopted a cautious view on that, as Mark was touching on, so they’re not seeing a pickup through the financial year. So it’s then the significant new opportunities that we’re seeing that we’re looking to drive growth, particularly in the second half. Now many of those we’ve actually started work on, and we’re doing early-stage architectural studies or aviation work with clients. The challenge that we have is it takes a while for those to ramp significantly into revenue. Now historically, for us as a business, that has given us a huge level of confidence as we forecast and look forward and has given us a lot of consistency in the forecast we provided to market because we’ve seen those opportunities working through the system and growing steadily. In this situation, that is what’s giving us the confidence as we look to H2 that those opportunities are starting and are ramping. It’s just the time it takes for them to get to sufficient scale to have the noticeable impact on revenue. So that’s what we based our forecast and our confidence on. The work, most of it is not related to calendar year ’24 budgets. It is work where clients are picking off that work now. They have budget for us, and that’s the foundation of the guide that we put looking forward. James Faucette: That’s great. That’s really helpful, John. Thanks. Operator: Thank you. And our next question today comes from Bryan Keane with Deutsche Bank. Please go ahead. Bryan Keane: Hi, Mark. I was just going to follow up there and hoping you could maybe quantify the AI investments, and are those investments that are going to weigh on the margins? It sounds like it’s a onetime investment maybe for three to six months and then it goes away, so has the margins come back by Q4? Mark Thurston: Yeah. Let’s search and build on it. But, we’re basically holding people for the work that we see in the second half. But we’re actually deploying them on internal accelerators that John touched on in his comments. It probably is, I’d say, about a percentage of gross margin stemming through Q1 and Q2, and then as the opportunities return, we will rotate those people into doing [doable] (ph) work. 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