Popeyes Chicken Expects to Have Earnings of 5.25 in 2017

Profile
Collaboration
Social Map
Data Insights
Create an alert and get updates Export Results

News: Forbes - Energy
Site: www.forbes.com

Tesl a posted first-quarter earnings that topped analysts' expectations a day after CEO Elon Musk tweeted Trump-style attacks of the extended COVID-19 shutdown that idled his California plant for over a month (which he continued in a conference call). The better-than-expected results were powered by regulatory credit sales worth $354 million and marked the first time Tesla has stayed in the black for three consecutive quarters. The electric-car maker said it had GAAP-based earnings per share of 9 cents for the quarter that ended March 31, or $1.24 per share excluding certain items. That beat consensus expectations for a loss of 37 cents a share. Quarterly revenue was $5.99 billion, up 32% from a year ago. Tesla shares, which have been on a tear for the past month, rose more than 7% in after-hours Nasdaq trading to $862, after closing up 4% at $800.51. "There's something for everyone but modestly more material to be constructive than bearish," Morgan Stanley equity analyst Adam Jonas said in a report. "Profit was much better than expected driven by China and regulatory credits." The results and subsequent share price rise appear to ensure that Musk will meet the final requirements early next week to qualify for a massive stock-based payout that will be worth more than $600 million. To receive that, Tesla's market capitalization must stay at an average of $100 billion for both six-month and 30-day periods. Currently, those averages are $97.3 billion and $109.8 billion, respectively. "Q1 2020 was the first time in our history that we achieved a positive GAAP net income in the seasonally weak first quarter," Musk said in a results call. "Despite global operational challenges, we were able to achieve our best first quarter for both production and deliveries." Musk has targeted sales of at least 500,000 vehicles this year, though the company didn't confirm if that goal will still be attained. "We have the capacity installed to exceed 500,000 vehicle deliveries this year, despite announced production interruptions," Tesla said. Still, " for our US factories, it remains uncertain how quickly we and our suppliers will be able to ramp production after resuming operations. Barclays analyst Brian Johnson, who'd estimated Tesla would post earnings of 61 cents per share for the quarter, predicted in a report this week that "an earnings beat, and reiteration of full-year delivery guidance would significantly advance the narrative and set up a possible fundraise shortly after the earnings announcement." The Palo Alto, California-based company this month reported deliveries and production that were up significantly from a year ago, hinting at today's stronger results. The company delivered 88,400 vehicles to customers worldwide in the first three months of the year, up 40% from the year-earlier period and topping consensus expectations for just under 80,000 units. Production totaled 102,672, rising by a third from 77,100 in 2019's first quarter. Tesla benefited from the addition of its new plant in Shanghai that opened in January and restarted production in February, prior to the idling of its Fremont, California, factory. Tesla has told employees that plant could resume some production by May 4. Musk fired off angry tweets about the extended shutdown on April 28, and during the conference call described efforts by U.S. states and cities aimed at limiting the spread of COVID-19 as "fascist." "Give people back their goddamn freedom," he told analysts on the call. Tesla once again got a big boost from sales of zero-emission and other pollution credits to automakers who mainly sell gasoline-powered vehicles and need them to meet U.S. and California regulations. The free money it received from these sales, which analysts can't easily predict, jumped 64% from a year ago to $354 million. With its main plant currently shut due to the health crisis, the bulk of its U.S. factory workers furloughed and a drop in overall demand for new vehicles as the economy weakens and unemployment surges, the second quarter may feel a much bigger hit. "Unavoidably, the extended shutdown in Fremont will have an impact on our near-term financial performance," CFO Zach Kirkhorn said in the results call. "We will need to work through how quickly we will be able to ramp production to prior levels." Along with the Shanghai Gigafactory, which Kirkhorn says is already building Model 3 sedans at a cost that's lower than at Tesla's main California plant, the company has begun construction of its first auto plant in Europe, at a site in Germany Tesla began preparing prior to the coronavirus crisis. More may be on the way. In March Musk said Tesla had begun searching for a site for to build its blocky Cybertruck, and during the call he said an announcement on a new Gigafactory could come in about a month. He didn't elaborate. The company was generally upbeat in its assessment, however. "Although impacted by inefficiencies related to the temporary suspension of production and deliveries in many locations, our gross margin remained strong. At Gigafactory Shanghai, further volume growth resulted in a material improvement in margins of locally made Model 3 vehicles," Tesla said. "We are diligently managing working capital, reducing non-critical spend, and driving productivity improvements. We believe we are well-positioned to manage near-term uncertainty while achieving our long-term plans." Full coverage and live updates on the Coronavirus

News: Companies News
Site: companies.einnews.com

GSX Techedu, Inc (NYSE:GSX) Q3 2019 Earnings Conference Call November 5, 2019 8:00 AM ET Ladies and gentlemen, thank you for standing by and welcome to the GSX Techedu Third Quarter 2019 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded on Tuesday, the 5th of November of 2019. I would now like to hand the conference over to your first speaker today, Ms. Sandy Qin, IR Senior Manager of GSX. Thank you. Please go ahead. Thank you, operator. Hello, everyone, and thank you for joining us today. GSX earnings release was distributed earlier today and is available on the company's Investor Relations website. On the call with me today are Mr. Larry Chen, GSX Founder, Chairman and Chief Executive Officer; and Ms. Shannon Shen, Chief Financial Officer. Larry will give a general overview and then Shannon will discuss the financials. Following the prepared remarks, Larry and Shannon will be available to answer your questions during the Q&A session that follows. Before we begin, I would like to remind you that this conference call contains forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. These forward-looking statements are based upon management's current expectations and current market and operating conditions and relate to events that involve known or unknown risks, uncertainties and other factors, all of which are difficult to predict, and many of which are beyond the company's control, and may cause the company's actual results, performance or achievements to differ materially. Further information regarding these and other risks, uncertainties or factors is included in the company's filings with the SEC. The company does not undertake any obligation to update any forward-looking statement except as required under applicable law. It is now my pleasure to introduce Larry. Larry, please go ahead. Thank you, Sandy, and thank you all for joining us for our third quarter earnings call. GSX had another great quarter with good -- with exponential growth, demonstrating our superior teaching quality and excellent learning results. We [delivered] speed, efficiency and effectiveness to gain insurmountable competitive advantage. We are fully committed to productivity improvements and take sustained massive action immediately. We make every major effort to invest in all areas of content development and technology. We will continue to invest strategically and smartly in our customer acquisition and R&D in 2019 and 2020. We are determined to achieve a steep but shorter learning curve. All that we have been doing contribute to even greater engagement with our students and parents. We are proud to see our net operating cash flow for the third quarter to reach approximately RMB 287.8 million. Our cash and cash equivalents and the short-term investments and the long-term investments to reach more than RMB 2.1 billion. Our non-GAAP net income reached to RMB 20.1 million. And we will continue to have our -- and we will reinforce on our strategy to reap financial reward. This quarter, I have several thoughts to share with you guys. The first point I want to say is that GSX only does the one thing; GSX is laser-focused on the online live large-class education. To perfectly fulfill this sole task, we have smoothly integrated all functions, including traffic acquisition; sales and marketing; instructors and tutors; live broadcasting; content development; and data analysis et cetera. For any outperforming company, there are always several key factors, or remotely several key factors to determine effectiveness and efficiency and build a competitive advantage and economic mode. The outperforming company has always been in pursuit of the better performance in each factor. If each loop of this value chain outperforms the industry average by 3%, the exponential effect will drive our overall performance to beat the industry average by 19%. There you guys might ask what if others follow. Let's say a newcomer just call this each loop. But he can only do each loop 90% as well as the leader. Then the 6 loops combined together can cause this performance to be only, say if it is 3% as good as the leaders. GSX is just like a 5-year-old child. We stay humble, we stay focused, we stay foolish, we stay hungry, and we stay dedicated to our commitment as just on the one. The second point I want to reiterate the importance of operating cash flow. If you want to measure the operation efficiency of an online live broadcast education company, especially for the summer quarter. We believe that outreaching cash flow is one of the key indicators. Many ventures keep a close eye on this summer's promotional world. They monitor the customer acquisition cost, conversion rates and ROI. And they ask about the enrolments for entrance classes, regular classes and the retention rates. But please keep in mind, not every company discloses comprehensive data set, nor are their calculation method compatible. As such we believe operating cash flow really reveals the true performance of each company for the summer quarter. Over the past 3 years, we prioritized effective growth. We featured profitable growth. We gauged each dollar of investment to make sure it first makes the sense in terms of unit economics. And that's why even made a fierce competition over the summer, we were still able to achieve a quarterly net operating cash flow of RMB 287.8 million. The third thing I want to point out that online K-12 providers usually see the highest gross billings and operating profit during school breaks and that is between June and August as well as between December and February. But online education providers are totally favorite for online K-12 courses providers. They usually report low or even negative operating margin for the period that overlap with the school breaks, especially Q2 and Q3, lasting from April to September. But the flip side is they tend to report higher operating margins during the Q4 and Q1 since those periods overlap where the more of the school year. The reason is that they generally incur heavy sales and marketing investments from late May to August as by that time they need to attract enrolments for their summer entrance and the promotional courses. For GSX, the summer sales and the marketing expenses then pay off in the upcoming quarters as we see a spike in gross billings in Q3, and then higher revenue in Q4. I also want to add that because the 4 enrolments carry over, in Q4 we usually see a big quarter for retention and that will turn into higher gross billings in Q4 and higher revenue in Q1 in 2020. We will continue to invest heavily in the best instructors. We will constantly invest heavily in content development and differentiated cross offering. We will keep investing heavily in proprietary technologies. Thanks to our 5 years accumulation in technologies, we have stood out in live broadcasting, database analysis, artificial intelligence and internal operating system at 4 instructors contributing for the same and content development; we have been endeavoring to recruit the best parents. We have been dedicated to choose the most trustworthy partners. We have been swearing to deliver the most effective learning experience to students and the parents. That is our culture and value. Our success has always been all about customer success. Now I will hand the call over to Shannon, our CFO to walk you guys through the details of our financial and operating result. Thanks, Larry, and thank you, everyone, for joining the call. I will now walk you through our operating and financial results, and end with how we build out the coming quarters. Please note that all financial data I talk about will be presented in RMB terms. I am pleased to report that we saw continued momentum across all of our key operating metrics which drove strong financial performance during the third quarter. The top line far beat our guidance. Moreover, we managed to deliver our sixth consecutive quarter of non-GAAP profitability in a highly competitive market thanks to our successful summer campaign and effective growth strategy focus. The third quarter net revenue increased 462% from the same period of 2018. Since 2018 Q4, we have maintained over 4x [growth] for 4 consecutive quarters, thanks to solid accumulation in both education experience and technology resource in the past years. Our gross billings in non-GAAP metric that drives revenues increased by 420% year-over-year to RMB 818 million, mainly due to increasing student enrolments that were driven by our outstanding summer promotion efforts. Total enrolments which were driven by our -- which refers to enrolments to courses priced above RMB 9.9 hit a record high of 820,000, which was 3.4x that of the same period of 2018. Paid enrolments, which refers to enrolments priced above RMB 99, increased to 538,000 or 3.7x that of the same period of 2018. Please note that during the summer, we provided 3 different types of promotion classes. First is RMB 49 entrance level classes. The second is RMB 9 promotion classes. And the third is classes totally for free, within which only RMB 49 classes were counted as part of total enrolments. This year, we have achieved a significant number of the enrolments into our summer promotional courses. We set our sights on becoming the market leader given the current high-speed and healthy growth. Now let's break down our revenue streams by business lines. Net revenue from our K-12 courses increased by 526% year-over-year to RMB 459 million and accounted for 82% of net revenues. The net revenue contribution from K-12 courses has increased for 5 consecutive quarters and will continue to be our main source of revenue going forward. The revenue increase was primarily driven by increase in paid course enrolments and the K-12 students' tuition fees. Gross billings contributed by K-12 courses rose by 470% year-over-year to RMB 745 million. Paid course enrolments for K-12 after-school tutoring business increased by 368% year-over-year to 477,000, growing at a much higher speed compared to other segments. This demonstrates our superior teaching quality is being recognized by both parents and students. Average enrolments per class further increased from 1,200 in the second quarter in 2019 to around 1,400 in the third quarter. ASP also increased year-over-year, partially contributed by new types of courses development, such as critical thinking. Net revenue from our foreign language, professional and interest courses were up by 390% to RMB 91 million and accounted for 16% of net revenues. This significant year-over-year increase was primarily because we constantly optimized our course catalog and promoted highly qualified teachers, all of which helped to increase paid course enrolments as well as the ASP. Gross billings contributed by foreign language, professional and interest courses were up by 304% year-over-year to RMB 124 million. Paid course enrolments for our foreign language, professional and interest course increased by 191% year-over-year to 51,000. Leveraging our know-how with online live large-class education, we will further expand into this large industry segment. We did an impressive job in the summer campaign and saw our conversion rate and word of mouth referrals keep improving. As a result, our core business has grown rapidly. They've also benefited from the strong and rising demand for online education. At the same time, we've managed to achieve and retain profitable growth by improving our ability to control costs and operating expenses. Our cost of revenues increased by 317% year-over-year to RMB 157 million, up from RMB 38 million in the third quarter of 2018. The rise was primarily due to our increased recruitment of teaching staff, including both instructors and tutors as we expand our business operations to support the rapid growth. We expect our cost of revenues to increase in absolute amounts in the foreseeable future as we serve more students and offer more courses. But the propulsion of instructors' compensation will decrease due to the economics of scale. Therefore, we do see an upside for our gross margin going forward. Non-GAAP gross margin, which includes share-based compensation, increased to 73%, up from 62% in the same period of 2018. We are able to pay our teachers incremental compensation while still enjoying greater operating leverage. The competitive compensation that we provide, a byproduct of our scalable business model, ensures that we can effectively execute when teaching larger class and also improves instructors' retention, which of course also benefits our students in the end. Before we turn to the sales and the marketing expenses, I want to reiterate the seasonality of online K-12 business. We had always followed our own pace and that help us outperform. As I highlighted last quarter, summer marketing campaign requires heavily investments in sales and marketing expenses. Also, the actual revenue benefits will not surface until the next quarter. As a result, this quarter's operating margin was lower compared to the full fiscal year's margins. Yet due to the jump in enrolments we saw from the summer promotion, we're positive that the fourth quarter will be quite strong in both top and bottom lines. So the entire year will reward us with a continued high-speed growth compared to last year. Selling expenses increased to RMB 330 million, up from RMB 31 million in the third quarter of 2018. The increase was primarily a result of more marketing expenses, especially for the summer campaign to attract new students and expand market share and for brand enhancement. Research and development expenses increased by 186% year-over-year to RMB 57 million. We constantly work on ways to apply the latest technology to improve the learning experience. For example, we added emanations and interactive designs into our live stream courses to increase the engagement of students. We've also updated our course materials to stay abreast of the latest educational trends in their respective subjects. As mentioned the last quarter, given that our revenue growth rate still outpaced our R&D expending, we believe we can still expand our operating leverage despite the incremental investment in research and development. G&A expenses increased by 123% to RMB 24 million, mainly due to a increase in G&A head count and a increase in related compensation. Non-GAAP income from operations, which excludes share-based compensation, increased to RMB 7 million from RMB 0.4 million in the same period of 2018. Non-GAAP net income increased to RMB 20 million in the third quarter. Thanks to our strong organizational capability and operational efficiency, we have been profitable for consecutive 6 quarters since the second quarter of 2018 from a non-GAAP perspective. We are one of the few, if not only, leading players in the market that have achieved sustained profitability. In the future, we will continue to execute our pricing strategy, well-proven market strategy and provide students with the best-in-class learning experience. Net operating cash flow for the third quarter of 2019 was approximately RMB 288 million, up 380% year-over-year from net operating cash flow of RMB 60 million for the same quarter of last year. This demonstrates our strong organizational capability in balancing investment and returns this summer. Now let's take a look at our key financials on the balance sheet. As of September 30, 2019, we had RMB 32 million of cash and cash equivalents and around RMB 1 billion of short-term investments. The decrease of the balance on June 30, 2019, was primarily due to the purchase of a medium-term note from Citibank classified as long-term investments of RMB 1 billion during the 3 months to end September 30, 2019. We are highly confident that in our operating cash flow, therefore, invest in assets that have a higher return and with low risk. As of September 30, 2019, our deferred revenue balance was RMB 778 million. Deferred revenue primarily consists of the tuition collected in advance. With that, I will now provide our business outlook. Based on our current estimate, net revenue from the fourth quarter of 2019 expected to be between RMB 806 million and RMB 826 million, representing a projected increase of 343% to 354% over year-over-year basis. This estimate reflects the company's current expectations, which are subject to change. Going forward, we will continue to increase our investment in teaching training, technology development and our ongoing marketing efforts. We believe our continued investment in marketing and a steadily improving organizational efficiency will help us achieve far higher than industry average growth this year and the next year. That concludes my prepared remarks. Operator, we are now ready to take questions. Thanks. The first question is from the line of Alex Yu with Credit Suisse. Congratulations on very strong results. I have 3 questions. Firstly, what is your view on the outlook of customer acquisition cost in 2020 and then amidst intensified competition in this industry? And secondly, what is the trend of the contribution of top 10 teachers in your platform? And how is your progress in terms of introducing new teachers to your platform? Thirdly, in the primary school segment, I believe you're investing more after IPO. What's the progress in the primary school segment in terms of enrolment and revenue contribution? Your first question is about customer acquisition cost. So customer acquisition cost will increase steadily, but for us -- for GSX, we believe we can have a relatively lower customer acquisition cost, thanks to our strong operating efficiency and organizational capability. So in the past, especially after the IPO, we saw quite a few articles started to talking about our marketing process and tried to figure out why we can maintain our customer acquisition cost at such a low level, but actually, they chose it, there's no secret ingredients. So although we are an online education company and technology is the foundation, but in essence it's still education and education itself is all about connections, it's all about intimacy, it's all about love. So holding that philosophy, we always believe that as long as we can provide a very good service to every parents and students, we can treat them well, then we can provide each class with a higher quality and we can address their concerns on timely basis and give them answers to their questions to their satisfactory, then they will stay with us as long as possible, then that can be a considerable amount of time and the revenue contributed by them will far exceeding the customer acquisition cost. So looking back to the past 9 months, from the non-GAAP perspective, our total sales and marketing expenses was around RMB 595 million. If the number is divided by the RMB 1.09 million paid cost enrolments that basically give us a number of around RMB 545 million. That's the weighted average customer acquisition cost and we can see the number is fairly low especially considering like the coming Q4 will be the largest retention season, then we do see the weighted average customer acquisition cost to further decline. So this low customer acquisition cost is contributed by a combination of high sales conversion rate, a high retention rate, a high-cost selling rate as well as a high word of mouth referral rate. So for us to maintain the cost to such a low level require us to not only be efficient on the overall operations, but also we need to put advertises and always put advertises on improve our teaching quality and to provide -- to elevate the service quality. So -- but thanks to our past experience, we have been practicing all these kind of activities and emotions things since we started this business in 2016. So we are quite confident that even in the future and when the compensation is intensifying, we can still keep our customer acquisition cost at the low end of the spectrum across the whole industry. And your second question is about the top 10 instructors' concentration. So in Q3, the top 10 teacher contributed about 34.6% of our total revenue. This number is decreased 1,200 basis point from 2018. So on our prospectus, we disclosed in 2018 and the first quarter in 2019 top 10 teacher basically contributed around 46% to 47% of our total revenue. So basically there's a story behind this number. By the end of 2018, although on the prospectus we disclosed we have 163 instructors, but you know when they grow very fast, we recruit quite a few teachers in the second half in 2018 and all those teachers are still under the training process because we respect to the bottom line that all the teachers need to be trained sufficiently before they can deliver a sophisticated class. So actually in 2018, there are only around like 50 of K-12 teachers are under full capacity. So which means by the time nearly 20% of the teacher contributed over 40% of the net revenue? So we still see that structure is fairly healthy. Then coming to this year and as we always communicated with the market since our IPO, then they have trained enough good teachers and they become more sophisticated to handle a lot of that. And with the new -- of this new academic year, they started to teach our class with a lot of site. So that's why we see this number fail a lot. And they do see in the future this can be further lower. And what's more, when they look at the details of these top 10 teachers, only 7 of them were related -- were teaching K-12 classes and probably 7 teachers, they are evenly distributed on subjects and grades. So which means they're not rely heavily on one teacher on one subject. So we don't see that as a huge operational risk. And also with our sophisticated teacher training system and with more qualified teachers getting onboard, we do see like in the future the [Indiscernible] of the teaching faculty will be more healthy and sustainable. So your third question is about the development of our primary school sector. So in general other sectors grew quickly in the past quarter and especially for primary school, they grow the fastest. In past Q3, the revenue growth rate for primary school was over 800%, and which means it's basically 9x as that the same time of last year. So right now the revenue contributed by primary school is catching up very quickly and getting close to the high school segment. So in the future, we do see primary school is our future focus. It's not only because there are 6 grades and it has lot of population and a lot of student base, but also we wanted to plant the brand image at an early stage. Even though at this time quite a few of the students, even though they were part of the promotion classes and they haven't sent out result because they may have some offline classes they need to finish, but they believe as long as our class is entertaining enough, informative enough and the quality is very good, they will come back eventually. And in the past summer we have upgraded our curriculum and courses for primary school. We embedded all the interactive designs in the cost delivering. So we do receive very positive feedback from parents and students and several parents -- some parents even told us that their kids are -- like they like their class so much that they don't even want to go to the restroom until the class is over. So they do see the satisfaction from this sector continue to rise -- continue rising, so we are quite confident that in the future across all the segments that our revenue growth will be more healthy and sustainable. Hope that addressed your question. Thanks. The next question is from the line of Gregory Zhao with Barclays. Congratulation to the strong quarter. I also have 3 questions. The first one is about online-offline competition. So just wanted to understand how you think about the online-offline K-12 tutoring markets current competition and considering your fast growth, how many of the students or what percentage of the new enrolments do you think were taken from offline? So my second question is about the margin. So you reported strong gross billings and deferred revenue in this quarter. So assuming most of the gross billing and deferred revenue would be booked in the next couple of quarters, how shall we think about the contribution to your operating margins in Q4 and Q1 next year, especially considering the marketing campaign slowing down? And the last one, also want to understand a little bit more about your teacher recruitment and teachers' compensation structure. So we know the space is quite competitive, especially in the past summer, so given the high quality of your content and the teacher quality, so we wouldn't be surprised if the competitors want to undermine some of your top-ranking teachers, so want to understand your strategy to cope with competition. And how do you compensate your teachers to satisfy their demand? Thanks, Greg. As for online versus offline competition for K-12, what I want to share is just as follows. Number one; online education market grows much faster than offline education market. As you know, in the past 9 months GSX net revenues increased 448.7% year-over-year, which is unimaginable for the offline peers. Number two is you know many online education companies had finished successful IPO; many private online education companies had finished the financing from the fees. And also policies from the government come to encourage the online education development. All these just forms a good habit for the students and the students and the parents are willing to take online courses more and more. And all those help leverage the online market to grow much faster. Number three is the essence of the education is about lab. The best teachers know how to allow the students and how to engage students to know what is the lab and how to lab. And that's the reason why we need the best instructors or the best teachers. Therefore, online -- offline education companies, one teacher just teaches 20 students in one class and he or she may teach 5 different classes in one time. So let's say he or she can teach 100 students in a certain period. But for online education companies, an instructor can teach 200 or 300 students at same time. This will say, does one handle the time efficiency or than the offline model. And our mission is that technology makes education better. And by leveraging technology, we -- and we can just increase the efficiency and effectiveness of our service. Number four is with our successful IPO, more and more top teachers from the offline institutions join us. And we believe that in the next few years more and more outstanding teachers will come to compete for being top instructors of the online live broadcast of tutoring institutions. Number five is what is the [Indiscernible] unchanged? We believe that the [Indiscernible] unchanged for education is it should have the best instructors; the most qualified tutors; the best learning result; the best learning experience; and the best engagement. And you know just as an online education company, we deliver speed, efficiency and effectiveness and we leverage technology and we can duplicate the best practice manufacture. All those guarantee the result. Right. Adding to Larry's point, so the reason we do the large-class, the performance thinking before -- behind that is all about the highest teaching quality. We believe that leveraging the technology online can validate all the best teaching quality that has the exposure to more parents and students, then that will also help with the fairness of education because online is more flexible -- the online learning is more flexible, more affordable to a lot of parents and students. And actually, things around us move quickly because we are facing all the parents and students on daily basis. We can feel that how much they impress the online education because actually the class itself is very entertaining and frankly speaking the product is still at the early stage. We believe with the development of technology, the online learning experience can be very close to the -- even for offline, like small classes. And that's why we do see online education has a promising future. And your second question is about our guidance on Q4's OP margin and 2020. So for Q4, we expect the OP margin to be around 20% and that is the highest among the year. So as we have been communicating in last quarter and as Larry just mentioned, so the seasonality of OP margin for online education company is completely different from offline. So for offline, usually the summer season and the winter season will -- the OP margin will be the highest because during that time, the utilization rate of the classroom will be higher. But for online, especially for large-class, in Q3 and Q2, these are the seasons we invest in heavily in sales and the marketing expenses. When it comes to Q4, all the classes will be regular priced classes, and leveraging the very solid foundation student base in Q2 or in Q3, they do see a boost in the concurrent enrolments in Q4. And usually, in the fourth quarter, the marketing activity will be less intense. So we do have the confidence that in Q4 the OP margin will be around 20%. And going forward to fiscal year 2020, we expect the OP margin to be largely in line with 2019. Although we will still make improvements, let me go to Larry's notion, this year's best performance should be next year's lowest standard and that's our operating philosophy. So the key factor to impact the OP margin will be our investment in our sales and the marketing expenses. So look at our financial structure. The GP margin in Q3 from the non-GAAP perspective, it was up to 72.8%. And going to Q4, we still see there's a room to increase that number because we still see the economics of scale in a large-class format. And we still enjoy the operating leverage on R&D expenses and the G&A expenses as well because our revenue grow at like 400%. So that means we have a larger room to invest in sales and marketing. Look back -- take a step back and look at the Q3 numbers. Our gross billings in Q3 were around RMB 880 million and the non-GAAP sales and marketing expenses was around RMB 330 million. So that does a quick math which basically gives us the ROI at around 2.68%. That's a fairly large number that give us the confidence that we should invest in sales and marketing today than tomorrow. So that's still we have confidence in our Q4 margin and even going forward in 2020. So your next question. Your next question is about teacher's recruitment and compensation structure. So the compensation structure for our instructors consists of 3 part; the base salary; the performance-based salary; and also we provide a share-based compensation to our instructors. And we -- our operating philosophy is to provide the highest compensation to our staff, especially for those employees that faces our customers on daily basis. It's not only about our instructors; it's also about our tutors, our salespeople. We want to provide the highest compensation to them. That's all based on our high operating efficiency. And so we do see like the compensation we provided to our instructor is very competitive and attractive compared to other players in the space. Frankly speaking, after our IPO basically not only the top 10, probably the top 30% of our instructors have been approached by other players. But now our sophisticated teachers have met even like when they were -- even like at things like 2018, the key reason is that not only because the compensation we provided to them, but also their passion in education and they fit in the culture we provided and created. So for the instructors, it's very important for them to feel that they -- I mean even though they are very good, but talking about the online education, the service churn is quite long. It's from the traffic distribution, and -- but it also needs to have a sales conversion process and like the tutoring process and the retention process. So the instructor and the whole team work together to make a team. Then in -- within our company, the instructors, they all feel very comfortable and they enjoy working with their current team. That's another key reason they don't want to leave. And also as a public company, all of our data are very transparent. Other instructors, they compare our data to like maybe other companies and we are the only -- probably not only, but very few companies that can be profitable at this scale. And they do see we are in a fast-growing class, that they do have confidence in our company. So that's the reason they don't leave. So even though like in the future when their compensation is intensifying, we feel we are quite confident with the retention of our instructors. Also, we do have the ability and which is also the biggest breakthrough for us this year is like we improved our teachers' training system. Now they provide a sophisticated and systematic training to our teachers that they can make sure like the recruitment and training to our teachers that can match the expansion of our business. Hope that addressed all questions. The next question is from the line of Jeffrey Chan with CLSA. Congratulations on a very strong start in Q3. I have 2 questions to ask. The first one is we see that the interest income in quarter 3 is around RMB 3.3 million and how do you see about the full year of the interest income? And my second question is what is the city exposure now, like how many percent of enrolment in each tier of cities? And any change in coming quarters? Do we see a higher penetration rates in the coming few quarters? Thanks, Jeffrey. First question about interest income. Yes, this quarter that interest income is around RMB 3.3 million in R&D terms. Compared to the cash-related assets, it's already RMB 2.1 billion. That number is fairly low, but it's all about accounting treatment. So we purchased some of the short-term investment as well as the long-term investment, all wealth management assets. Before they expire all the unrealized P&Ls are recorded in OCI other than P&L. So they will recognize -- they will be recognized as interest income when they expire. So that's why we see the interest income in this quarter is low, but in the future, they will all be realized in the P&L. And the second question is about the enrolment distribution in geography, right? So this quarter still our 4Q enrolments contributed by first-tier cities -- new first-tier cities and second-tier cities were around 48% and the lower tier cities contributed around 52%. So compared to previous quarter, the lower tier cities contribution increased 1%. So we do see our penetration rate in the third-tier and fourth-tier cities grow quickly. That means we have better compensation advantage in these tier cities. But one thing I want to put a little color on is like in the past quarter Beijing actually become the largest enrolment contribution city and so that means we are generally accepted or well-accepted by key opinion leaders even in the higher-tier cities. With talking to a few of the parents in Beijing and Shanghai, actually they were very sophisticated and very familiar with the curriculum. They take a lot of notes and make comparisons between us and some offline institutions and even some compare us with other online institutions. And from their very detailed notes, they kind of like integrate a lot of advantage we have. For instance, the high teaching quality experiences the teachers, then that's the reason they choose that. So in the future, we are very confident that these geography-wise enrolments can grow healthily and very -- in a sustainable way. In the interests of time, we will now conclude our question-and-answer. I would now like to turn the conference back over to Ms. Sandy Qin for any closing comments. Thank you. Okay. Thank you, operator, and thank you everyone for joining the call today. If you have any further questions, please don't hesitate to contact us or the company directly. Thank you very much. The conference is now concluded. Thank you for attending today's presentation.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

Good afternoon. My name is Vincent, and I will be your conference operator today. At this time, I would like to welcome everyone to the Q2 Earnings Call and February Sales. 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. I will now turn the call over to your speaker today Mr. Richard Galanti, CFO. Sir, you may begin. Thank you, Vincent, and good afternoon to everyone. I'll start by stating that these discussions will include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements involve risks and uncertainties that may cause actual events, results and/or performance to differ materially from those indicated by such statements. The risks and uncertainties include, but are not limited to, those outlined in today's call, as well as other risks identified from time-to-time in the company's public statements and reports filed with the SEC. Forward-looking statements speak only as of the date they are made, and the company does not undertake to update these statements except as required by law. In today's press release, we reported operating results for the second quarter of fiscal 2019, the 12 weeks that ended this past February 17th, as well as February retail sales for the four weeks ended this past Sunday, March 3rd. Note that the first two weeks of February fell into the second fiscal quarter with weeks three and four of February are the first two weeks of our fiscal third quarter. The reported net income for the quarter came in at $889 million or $2.01 per share, a 27% increase compared to the $701 million or $1.59 per share last year in the quarter. In terms of sales, net sales for the quarter came in at $34.63 billion, a 7.3% increase over the $32.28 billion reported last year in the second quarter. Comparable sales for the quarter, as shown in the press release for the 12 weeks on a reported basis, US was 7.4%, Canada was minus 0.3%, Other international 0.7%, for the total company a 5.4%, as well e-commerce for the 12 weeks on a reported basis was 20.2%. Excluding gas deflation, the impact of FX and some weakening foreign currencies relative to the dollar, as well as revenue recognition, which is an impact this year, the 7.4% reported in US would've been at 7.2%, the minus 0.3% in Canada would be a plus 6.0%, other international instead of being 0.7% reported would be plus 4.8%, for total company the 5.4% reported would become a 6.7%, and again e-commerce reported a 20.2% ex-gas, FX and rev rec 25.5% plus. In terms of Q2 comp sales metrics, second quarter traffic or shopping frequency increased 4.9% worldwide and 5.2% in the United States. Weakening foreign currencies relative to the US dollar negatively impacted sales by approximately 140 basis points and gasoline price deflation was another minus 50 basis points of impact. Our rev rec actually benefited comp sales by about 55 basis points to the positive. These are the three factors that we adjust for and that are presented in today's release, as the adjusted column. In addition, weather conditions adversely impacted Q2 sales by around 0.5 a percentage point and cannibalization weighed in on the comps by about minus 70 basis points. In terms of front end transaction or what we call ticket, our average frontend ticket was up 0.4% during the quarter and excluding the impacts from gas deflation, FX and rev rec our average ticket was up approximately 1.8%. Going down the income statement, membership fee income reported came in at $768 million or 2.22%, that's up $52 million or 7.3% from a year ago. Again with weak foreign currencies if you adjusted for flat FX that would make the up $52 million another $9 million up or up 61% -- up $61 million year-over-year ex-FX. Reported membership revenue of the plus $52 million amount, that's -- a little more than half of that -- a little more than $20 million of that related to the membership fee increases taken in June of 2017 in US and Canada. We're now nearing the end of that 23 months cycle to recognize the incremental benefit of the fee increases as that was deferred accounting into our P&L. The benefit to our P&L will be fully recognized in the next two quarters by the end of fiscal year. But as with these last couple of quarters, it diminishes each quarter. In Q3 we will have about half of the benefit recorded in Q2 and then in Q4 it will be very a very small benefit. In terms of renewal rates in the second quarter, our US and Canada member renewal rates in Q2 came in at 90.7%, up from 90.5%, 12-weeks earlier at Q1 end and worldwide the rate improved to 88.3% up from 88.0% at Q1 end. So improvement in our renewal rates. In terms of the number of members at Q2 end, the member households and total cardholders, we ended Q1 12 weeks earlier with 52.2 million member households, at Q2 end that was 52.7 million, and total cardholders increased from 95.4 million at Q1 end, this is 12 weeks later Q2 at 96.3 million. During the quarter, we had one new opening in Coral Springs, Florida and we also relocated in Miami location. At Q2 end, our paid executive membership base stood right at 20 million. This is an increase during the quarter of 341,000 or about 28,000 per week since Q1 end. Now this includes the recent introduction of the executive membership in Korea, which is our fifth country offering executive membership. For Q2 Korea contributed a little over half of those increases. Going down the gross margin line, reported gross margin in the quarter came in at 11.29% up 31 basis points from last year's Q2 '18 of 10.98%. The 31 basis point improvement ex-gas, FX and the rev rec would be plus 30 basis points. I'll give you the chart and there is not a whole lot to it given that the adjustment column was not that different than the reporting column. In terms of core merchandise, year-over-year in Q2 was up 1 basis point on a reported basis as well ex-gas deflation in the rev rec up 1 basis point, ancillary businesses up 33 on a reported basis and up 32 on an adjusted basis. 2% reward minus 3 and minus 3 basis points year-over-year. And then total up 31 basis points that I just mentioned on a reported basis and up 30 basis points ex-gas, deflation and rev rec. The core merchandise component again was higher by 1 basis point here. Looking at the core merchandise categories in relation to their own sales, what we call core on core, margins year-over-year were higher by 8 basis points. Within the four key sub categories both food and sundries and fresh foods were up a little and soft lines and hard lines were down a little. But the net of the four departments on their own sales was up 8 basis points. Ancillary and other business gross margin was up 33 basis points, up 32 ex-gas, deflation and rev rec primarily driven by gas and also benefiting somewhat from e-com and a few other things. Moving to, SG&A, our SG&A percentage Q2 over Q2 was lower or better by 2 basis points both with and without the adjustments coming in at 10.0% of sales this year compared to 10.02% last year. In the chart that I normally give out there really isn't not a whole lot to tell you. Operations was an improvement of 2 basis points in both columns, the other 2 line items that we usually point out, central and stock compensation expense were zero and zero, so the total remained at 2 basis points, so overall 2 basis points better. In terms of that 2 basis points better, we feel it was pretty good result given that we're still facing headwinds from the US wage increases to our hourly employees that went into effect last June 11th of 2018. As mentioned in the past couple of fiscal quarters, those wage increases negatively impacted SG&A by about 7 basis points to 8 basis points during Q2 year-over-year, and it will continue to impact SG&A comparisons through Q3, which ends May 12th and into the first month of our 16 week fiscal fourth quarter to anniversary on that June 11. Additionally, this past Monday, we began our new three year employee agreement. With the new agreement, we announced that we're taking our starting wages from 14 and 14.50 up to 15 and 15.50 per hour in both the US and Canada. In addition we're also increasing wages for supervisors and introduced -- and also introduce paid bonding leave for all hourly employees. These items are incremental to the usual annual top of scale wage increases that are typically done each March. Collectively, these additional items will add about 3 to 4 basis points to SG&A over the next four quarters. Now again this is on top of that 7 to 8 basis point impact I just mentioned that will impact the SG&A through this coming mid June. Otherwise, pretty comparable year-over-year in terms of central and stock comp and other various SG&A expense line items. Next on the income statement is preopening. Preopening expenses were actually lower by $3 million coming in this year at $9 million compared to $12 million last year. This year again, we had two openings, one net opening and one relocation. Last year we actually just had one opening. There's other activities that relate to preopening as well. Year-over-year primarily the difference is due to the $4 million in Q2 last year related to our -- opening of our new meat plant in Morris, Illinois slightly offset by higher warehouse preopening this year due to the additional opening. All told, reported operating income in Q2 '19 was up 18.4% coming in at $1.203 billion this year compared to $1.016 billion last year. Below the operating income line, reported interest expense was $3 million lower or better year-over-year, coming in at $34 million this year in Q2 as compared to $37 million last year. The actual interest expense quarter-over-quarter each year is about the same, a little bit more -- a little delta in improvement in capitalized interest amounts. Interest income and other third quarter was better by $39 million year-over-year. Interest income itself was higher by $17 million year-over-year in the quarter, a combination of higher interest rates being realized and also higher invested cash balances. Also benefiting the year-over-year comparison were the various FX items in the amount of $22 million. Recognize that much of this is essentially an offset to lower reported operating income and earnings in our foreign operations due to the strength of the US dollar versus many of the foreign countries, the currencies in the countries where we operate compared to last year. Overall, pre-tax income in Q2 was up 23% coming in at a $1.250 billion this year compared to last year $986 million. In terms of income taxes our income tax rate was a little better than we had anticipated, came in at 25.8% effective tax rate during Q2 '19 compared to 27.7% in Q2 last year. For all of fiscal '19 based on our current estimates which again are subject to change, we anticipate that our effective total company tax rate for the fiscal year to be approximately 26% to 26.5%. This figure is about 0.5 a percentage point lower or better than we had previously estimated a quarter ago. This is primarily due to a Q2 tax rate that now includes a one-time benefit for certain foreign tax credits. This one-time tax benefit will continue through the end of the fiscal year, but we do not anticipate a similar type of benefit beyond fiscal '19. A few other items of note, again, we opened a net one unit during Q2, opened two including a relocation. In Q3, we have three new openings planned and no relos. We actually opened this morning in Bayonne, New Jersey. In late April, we plan to open our 16th location in Korea; and in early May, our 11th location in Australia. The big expansion quarter for us this year is Q4. We plan to open a net of 12 units, 14 openings include two relos, including our first opening in China in Shanghai in the City of Minhang; and also our third unit in Spain, which would be our second in the Madrid area. Any of these can slip a little bit better for our best guess right now is 14 openings including to relos, so a net of 12. As of Q2 end total warehouse square footage stood at the 112 million square feet. I might also add that in terms of CapEx we continue to allocate more CapEx to grow and support our operations, including as you know over the last year, year-and-a-half we had opened a second meat plant, the first one in California many years ago and then in Morris, Illinois, also a little while ago our Canadian bakery commissary in Canada. We are under construction with the big chicken plant in Nebraska. We plan to start initial processing and production later this year. Depot expansion we are doing that in many areas around the world. Also, we -- just a month ago I believe we started up our first fulfillment automation operation near our -- next to our -- as part of our Mira Loma Depot. This is for small packages for e-commerce and we plan two more of those this year at other depots. In terms of two-day grocery, which as you know we started in October by year-and-a-half ago. We did that out of 10 or 11 of our business centers around the country and we are in the process of moving these operations out of the 10 to 11 business centers to six of our depots over the next several months. I think we've done the first one, and we have got several more planned right around the end of spring, beginning of summer. In terms of stock buybacks, in Q2, we expanded $117 million to repurchase 561,000 shares at an average price of $208.72. The $117 million of course is significantly higher than the Q1 purchases of $35 million. In terms of e-commerce, overall again e-commerce sales increased during the quarter on a reported basis 20.2% and ex-FX and rev rec up 25.5%, continued increases in e-commerce in terms of orders and sales and profits and other metrics. Top growth categories in the quarter, quite a few actually, grocery, consumer electronics what we call majors, hardware, health and beauty aids, tire automotive, toys seasonal, and apparel. We have now passed our one year anniversary on the grocery launch which was again a year ago October. Same day grocery delivery is now available to members within a short drive of 99% of our US locations. Two-day grocery is available anywhere throughout the Continental United States and while still these are small pieces of our total business operation they are growing nicely. We now have grocery shipments to all 50 states. In terms of the e-commerce, in terms of new brands and items online during the quarter, we are now offering a much broader selection of Apple products, including the recent addition of MacBooks and iMacs and yes you would expect good values to our members. Also the first of what we expect several products from Sony, they just started to arrive. In terms of health and beauty aids names like Living Proof shampoo and conditioner, Murad Skin Care and Kate Somerville items. On the exercise front, NordicTrack is a new name. And finally, I had pointed out that now somewhat famous 180 serving 23 pound 20 year shelf like macaroni and cheese for $89.99. If interested, you can find that online under emergency supplies and in a few of the Costco locations. We continue to improve our online and in line cross-marketing initiatives and we think that's continuing to drive our business. In terms of buying online and pickup in store, in the quarter, we expanded our selection within the same categories, jewelry, some electronics and handbags and continue to test pick-up lockers in 10 locations for this program. Lastly, this calendar year, we will begin e-commerce operations in Japan early summer likely and in Australia late summer, early fall. Finally, I'll turn to our February sales results, the four weeks ended March 3, 2019 compared to the same period a year-ago. As reported in our release net sales for the month came in at $10.72 billion, an increase of 5.0% from $10.21 billion a year earlier. In terms of comparable sales US on a reported basis for the four weeks was 6.0%, ex-gas, FX and rev rec that 6.0 would be 5.7, Canada on a reported basis zero ex-gas, FX and rev rec, plus 4.8; other international reported minus 5.9; and again, adjusted with ex those things, minus 1.2%, total company came in at a 3.5 reported and a 4.6 ex those items. In terms of e-commerce reported for the four weeks 24.2%, and ex those adjustments -- appropriate adjustments 21.6% up. February sales were negatively impacted by weather throughout the US and Canada in a big way. We estimate that negative impact on the total company was approximately 1% and a little more than the 1% figure in the US and Canada. In addition, Lunar New Year and Chinese New Year occurred in February as same as last year, however, 11 days earlier this year. This is an important holiday in terms of sales strength. The holiday shift negatively impacted February's other international sales by we estimated 450 basis points to 4.5 percentage points, and total company sales by about 0.5 percentage point. Looking at January and February combined, effectively eliminating the impact of that holiday shift, the comp for other international for the eight weeks was 0.2% reported and plus 4.9%, ex-FX, gas deflation and rev rec. The US regions were the strongest results in February with Midwest, Northeast and Southeast, and internationally the strongest results were mixed across Japan, UK and Spain. Spain of course is relatively new with two locations. Foreign currencies year-over-year relative to US dollar hurt Feb comp sales by -- hurt February comp sales in Canada by approximately 460 basis points. Other international also by about the same number basis points about 4.5 percentage points, and total company by an estimated 130 basis points. The negative impact of cannibalization was about 50 basis points negative in US, 80 in Canada and 120 in other international, for total company minus 70. Within ancillary businesses hearing aids, optical and food court had the best comp sales in February. Gas price deflation negatively impacted total reported comps by about 75 basis points. The average selling price during the four-week month compared to the year earlier was down 6.3% year-over-year, the average gallon a year ago we sold for $2.74, this year $2.56. Including the adverse impact of weather and the holiday shift in Asia, our comp traffic or frequency for February even if taking those into effect -- taking those impact into effect February was up 2.7% worldwide and plus 3% -- 3.2% in the US. For February the average transaction was up [0.8%] for the month, again this includes combined impacts from FX, gas deflation and rev rec. So that's about it in terms of our prepared notes. Lastly, in terms of upcoming releases we will announce our March sales results for the five weeks ending Sunday April 7th, on April 10th after the market close -- after the market closes. With that, I will open it up to Q&A and turn it back over to Vincent. Thank you. [Operator Instructions]. We have your first question, comes from the line of Christopher Horvers from JP Morgan. Your line is now open. Thanks. Good morning, Richard. So a question on the core margins, the core margins performance this quarter was much better sequentially, I think everyone is sort of taken by surprise by the core margins ex-gas in the last quarter and now they're looking much better. So can you put it into context what sort of drove that change and any commentary about how you're thinking about core margins as you look forward? Honestly you know we drive our business by driving sales and usually that means lowering prices on things which we continue to do, and we're also buying better all the time. Some of it's mix, some of it -- the one category that shifted if you look back over the last few quarters of reports where we look at core on core, fresh foods has been a little down and I think the keyword here is little. I appreciate the fact that every basis points for us is $14 million plus pre-tax a year of [nearly 1 billion] [ph] but you are talking about 5 to 10 basis point swings here and there's a lot of things that impact it, whether it's freight, tariffs, some -- negative, in some cases not as bad as we thought. I think we've done a great job and we continue to do a great job particularly in fresh food organics where there's a little -- I believe there's a little less pricing pressure and some competitive pressure, but don't get me wrong, as soon as we have a good quarter next quarter we will change that. Not giving any guidance, we know that we keep it pretty steady and we feel pretty good about it, whether it's up a few basis points or down a few basis points. Got it, and then just a question about the gas margins industry wide, I understand there are a few ways that gas impacts margin, but if you just focus on the fact that it seems like the core cents per gallon has improved across the industry, the independents may be in the integrated has taken a little bit more and that's given you some room to take a little bit more. So can you talk about what you're making sort of per gallon I guess relative to say last year and maybe a couple years before that? And as you think about the upcoming years, is there anything that you're seeing that would suggest that, that core profitability of every gallon sold is all of a sudden going to revert back to what it was a number of years ago? I think over the last several years the new normal is better. If you go back to when gas prices sky rocketed several years ago and as they started coming down, what we saw, and what we read frankly from others is that as they came down not all of those savings were passed on to the consumer. They gave us perhaps a little bit bigger window, we're still -- I think if you ask our gas -- the people in charge of gas operations around here, we're saving the customer a little more today and making a little more because there's just a bigger opportunity of [gap][ph] there. It really comes down to that. It is still a volatile, no pun intended profitability item. It can swing back and forth, based on underlying cost of goods sold that change daily. And -- but the new normal is better in all those examples. But I'm sure there will be quarters, this was a -- Q2 was a particularly good quarter. But as I believe Q2 a year ago was a little better than the other three. But that's not seasonal necessarily, it's just -- there is a lot of different factors, what's going on in the news internationally, what's going on with inventory levels, world and US inventory levels, what's going on with -- inevitably a refinery shuts down for two weeks for their planned repairs, it takes four weeks. So any of those things switching from winter to summer blend and back. All those things impacted. I think we are fortunate in the fact that we turned a lot of gas. We literally turned inventory about daily and as you know we have locations with up to 24 pumps and they are backed up all the time, it's great. So I think we're in a fortunate position that overall retailers whether it's retailers that have gases in their parking lots, like supermarkets and discount stores and ourselves or full line independent retailers or the ones with the convenience stores, I think everybody seems to have been taking a little more and that's given us an ability to do so over the last couple years. But I guarantee it will evolve and we will always tell you that it was certainly a little more of a benefit this quarter than normal but it was a year ago too. So then just a quick one on that. So of the 30 odd basis points in ancillary this quarter, should we assume some portion of that comes out [indiscernible] the second quarter, is there like anything that you would say is one-time that we should put back next year on behalf of it? I wouldn't use the word one-time, I'd say unpredictable, and it truly is not predictable. We know that when demand rises at the beginning of summer that impacts -- the gas prices have a little bit more positive pressure on them. And where prices are going up not only for us but when I read the profitability of gas and other big retailers, supermarkets and Walmart alike, it impacts them as well. When prices are going up we are all making the less, when prices are going down we are making a little more. We I think are in the enviable position to being extreme. And as overall, the retail environment has chose to make it a little more -- it gives us an ability to make a little more -- a less than a little more as to make more but even be greater savings to our member. I mean -- and that's the thing that we are focused on. Are we saving our member more than we used to? And we are. Your next question comes from the line of Simeon Gutman from Morgan Stanley. Your line is open. Hey, Richard. A follow up on the gross margin or the core margin. You mentioned mix helped a little to dig in, anything about mix that was either seasonal or something that is changing. You said it was always lower product acquisition cost. Can you remind us when your own [check up plans] [ph] is coming up? And then one more in that mix, can you tell us the channel mix between physical and digital, is that sort of embedded gross margin improving as well? No, overall our gross margin online is a little lower than our company overall, part of it is the product mix itself and part of it is we are driving that business. The [banana] [ph] hasn't changed, that's been that way. We also work on a lower SG&A online as you might expect. In terms of mix there are so many different pieces to it honestly. Part of it is, when you walk into a Costco in the US roughly 90% of the goods are -- come through our cross-stock operations. For us cross-stocks are very profitable. It's the most cost efficient way to ship stuff. Nobody can do that to the extent that we do it because of how we sell goods in pallet and large case quantities, so I mean there's lots of little pieces to it. I think private label and continuing penetration of private label, fresh, but all these are anecdotal. There is no one thing that's driving in a particularly large direction. We think we are pretty good at what we do and we're constantly buying better even as it related to tariffs, which so far so good in terms of being on hold, but we don't know, what's in the future. I think bigger retailers have the ability to buy better. And then shifting to SG&A, in the past I think you talked about [indiscernible] your comps hold up in mid-single-digit, you're leveraging, and that was based on some [indiscernible] of spending, there was IT, there was technology. Has anything on the spending side changed, any curve, that's increasing, decreasing on that same mantra of about mid-single-digit comps, that [indiscernible] to give you leverage? Yes, hopefully it won't and while -- the word modernization I think is finally been retired around here. We are still spending a lot and we're going to continue to spend a lot as some of these new things come online like the chicken plant, like the fulfillment automation. These are $50 million to $100 million plus items, chicken plant is more, where a bigger chunk of it is things like equipment and software that is depreciated over a shorter period of time than steel buildings. And that's --all those things [hitting us] [ph] as well. I think the fact is as we've been fortunate with our sales levels. As they go down that will hurt us a little. We are achieving our current SG&A with all the things that we haven't talked about some of these other items that impacted the other way. There are lots of little things and we are not terribly worried though if some of these things -- if sales were to come down a little and some of these things will impact us, so be it, we're going to do what we do and drive the top-line. The next question comes from the line of Chuck Grom from Gordon Haskett. Your line is now open. Just on the pricing front, I'm curious how you guys are handling increases in certain categories including any of those that maybe impact by tariffs, just -- are you looking to pass along those increases and do you think that may have helped out the core margins at all here in the second quarter? I don't think it would have helped the margins. This question is did it hurt it or not hurt it. And probably it hurt it less than one might think but that again gets back to our ability to buy right and to send those 10% tariff items so as examples versus 25 that's a big difference, in some cases you've got your vendors along with us, ease out a little bit, sometimes not. I think it's just one piece of what we do. The fact that organic helps us, the fact that KS helps us. The fact that we don't talk about but we really plan through a lot on the marketing dollars that are out there now, that some of those impact cost of sales. And I guess just a follow up on Chris' question here, you've got three consecutive quarters in a row of the core on core, core being negative in this quarter, what's the positive, is there anything else you could point to? I would read a lot, look we are happy about it and hopefully you are happy about it. It's not -- it's how we run our business. We didn't sit there and say hey let's get it up a little higher, it is a few basic, it is I know we were a basis point company and you guys have known us for 30 plus years we talk about basis points. It's some minor switches, it's nothing that we've changed dramatically and there's so many different moving parts to it frankly. Understood. I guess the other bright spot here in the quarter was the renewal rates are picking up nicely if you look back at the cadence in '18 they were pretty steady but they're showing a nice uptick both in US and worldwide, just wondering if you could comment on that improvement? Well, we like it. Look we focus on all the things that we feel we should be focusing on, customer service, great products, great services at the best prices. We've been fortunate notwithstanding the fact that we really don't have a PR department per se, that there's been a lot of good press about us, about purple signature, about our e-commerce site and customer satisfaction. I think that we've been blessed that some of the weaknesses that traditional brick-and-mortars or traditional formats have had in some ways have helped certain other discounters like ourselves and hopefully that'll continue. Your next question comes from the line of Edward Kelly from Wells Fargo. Your line is now open. Good afternoon, Richard. I wanted to start with just a follow-up on fuel. If we were thinking about trying to strip out fuel and the impact, do we take the majority of the 33 basis points in order to do that? And then is there any intentional reinvestment to sort of consider as we think about this? On the latter part of the question, there is no intentional reinvestment. I mean there is a 100 different moving parts to our company all the time and we do what we feel is right. It's kind of like a question that was asked a year ago, we were asked about what the extra earnings from the lower tax rate, will that change, what we're doing with automation online, fulfillment whatever else and the answer was of course no. We've got more cash than we spend and this will add to that and that's all good, but we're constantly figuring out what other things we can do there. What was the first part of your question? I'm sorry. On fuel, if you're trying to -- yes. Well we don't disclose every component, it certainly was the biggest piece of it. Okay. In the last quarter you mentioned a little bit of competitive pressure specifically talked about Sam's and fresh. I am just curious if you could give us an update on the competitive backdrop, what you're seeing? And then you know as part of this it seems like we're starting to see maybe a little bit of food price inflation. Just curious on your thoughts on pass-through I guess and expectations for the year? Well, I think the keyword on price inflation is little, we're not seeing other than the tariff impacts on things. But in terms of food what have you, it's frankly very little and some other time it'll go up. Our comments over the years have continually be -- will be the last to go up and the first to go down and I think that holds true as well. In terms of the comment last time on Sam's that was an entry comment because I think after the call, the headline in the press was is, that's why things -- margins were down. And the fact of the matter is, we call it out because we're pretty transparent, Sam's and others but Sam's has been more competitive as we are -- as are we. And that's the nature of the business and it has been for 30 years. We see that continuing and I think the fact that it's continuing we'll still show improvement on some of these things, is a good sign for us. The next question comes from the line of Karen Short from Barclays. Your line is open. Sorry to harp on this gas margin question, gas profit question. But is there any way you could just help us get a feel for how much you benefited EPS this quarter because the data we saw in gas margins for the quarter throughout your whole market area was just astronomically high gas margins? When you say our area, throughout the United States? Well, we map it by kind of stores by state. But west was particularly strong. Yes, we don't disclose that. Again it was a little more than half but not all. And then I guess just wondering a little bit in terms of the wage increase that you called out for March. Is there anything to think about in terms of the basis point impact as we get into the next quarter? Yes, I mean that is starting March 4th this past Sunday, I think I indicated. On top of the 7 to 8 that will continue through June 11th if you will. So all through Q3 and the first month of the -- the first four weeks of the 16 weeks fourth quarter effective March 4th we will have that additional on top of that 3 to 4 basis points. And that 3 to 4 basis points will be March 4th to March 3rd of 2020 if you will. 3 to 4 basis point, okay. And then just wondering if you could call anything out in terms of tax refund data, like in terms of your expectations on driving sales and there is a lot of noise on the timeline of that but any color what you are thinking that will do the comp, certain not do I guess? Well, honestly I never heard anybody here talk about that and I have read some of the same things that you read, it started off in the period was a little lower and now in the period was a little higher, not a lot higher but a little higher. Typically on a macro basis that impacts retail overall and whatever impact it has on that is typically little less to us. That's what we've seen historically, whether it was a change in tax rates or dividend rates or you name it, EBT, food stamps, whenever there's any kind of macro change that impacts retail across the United States, there's a little bit less of an impact to us. But we've not really seen or even know how to answer that. Okay. And then just last question. I know that you don't want to have people get in the habit of assuming that there will be a special dividend on a regular basis but any thoughts on your philosophy on that as it relates to the timing within this year? Because we're at the two-year mark. Yes. I mean, our thoughts continue as they have been. The three we did were about two and a quarter years apart but that doesn't mean anything going forward. It's still a topic on the table and we continue to talk about it along with other things. So, really, not a whole lot of news to tell you about. Your next question comes from the line of John Heinbockel from Guggenheim Securities. Your line is now open. So, Richard, what are you guys seeing with regard to inbound freight? Is that a slight directional drag? And then, if anything, what are you doing to mitigate that? I'm shooting from the hip a little on this one but I believe, while it's been up a little bit because of new restrictions on how many hours long-haulers can drive and just truck capacity out there, it's gone up for everybody, I believe we internally look at it in our freight department as a freight factor or premium factor or fuel factor -- whatever we call it. I forget. And it's up a little less than it was a couple of months ago but it's still up. And it's come down a little bit from where it was but it's still up from a year ago is my guess. Okay. And you've had the adjustment item in gross margin related to some supply chain investments, not there now. Is that now gone for the duration or does that come back with other supply chain investments that you might make, whether it's the chicken plant or other depots? One of the things was the return centers we talked about for a few quarters. I think there's more things happening that impact us a little bit negatively to start. We opened a new meat plant, major capital expenditure. First, it takes a few things out of our Tracy meat plant that goes to the East Coast. With Tracy, we couldn't accommodate all our needs just from that plant. And then you've got a new plant that's starting with its own -- even though we know how to run one -- it has its innate inefficiencies when you first start and it's not at full capacity. Same thing with the commissary, which was more of a learning experience over the last two years in Canada. I think all these things will impact us. A comment I made earlier is we're not going to point out each one of these but, in the aggregate, my guess is it's still a little bit of a drag which is offset by other things, most particularly sales. All right. And then, lastly, there was a period there where you'd stepped up the growth of the business centers for a period of time. What's the philosophy now on where they go, US or internationally, as part of your expansion over the next couple of years? I think, right now, we have one in Canada and what? Sixteen in the U.S.? I would expect one or two a year for the next couple of years, which is not really a change of what we thought. The change was several years ago when we went from zero to eight over a million years, over a long period of time, and then we started opening a couple a year. And so we'll continue to open a few but we're not -- it's part of the plan but our focus is regular warehouses and, quite frankly, a lot of the infrastructure things that we're doing now. We'll continue to do it in a bigger way. Your next question comes from the line of Scot Ciccarelli from RBC Capital. Your line is now open. Hi, guys. Scot Ciccarelli. Richard, with your first opening in China coming up, what is the best way to think about U.S. versus international store openings over the next, call it, 2-3 years? And then related to that, any reason why we should see international profitability levels decline as you start to move into some of these new markets, like China? Well, first of all, if you'd asked us five, six, seven years ago, by now, what percentage of our units would be outside of the U.S. and Canada -- and I include Canada as part of the original, mature, fully grown-out area -- that, by now, we'd probably be 50/50 international, outside of the U.S. and Canada. And we're not. It's 65/35, 70/30 U.S./Canada still. Part of that is the opportunities that we've had in the U.S. and Canada. And part of it is the pipeline is taking a little longer elsewhere. I think you'll continue to see that change and the direction is toward more international. But I can't sit here and tell you that it'll be 50/50 three years from now or five years from now. But, clearly, we've got more things going on. Now, as it relates -- whenever we go into a new country, it's almost, by definition, you're going to lose money for the first few years, even if that first location or two contributes a small amount of profitability, if it does. Because you still have the central expense and the whole full thing, the infrastructure. I look back at Japan. When we first went into Japan, we opened six units in the first five years and the goal was to be at breakeven at the end of Year 5 and I think we beat it by about 10 months. But at the end of the day, fast-forward another 10-12 years past those five years, and we now have in the high-20% and we'll grow from there faster and more profitable than it was in that mid-term when we were opening several units on a small base. But it takes time. And as we go into France, as we went into Spain, by definition, those are going to add more to the bottom line sales in that calculation of return on sales and sometimes even subtract a little at the top. The key is balancing a little of that and I think we're big enough now that, even if we overdo it a little bit on some of that new stuff, it's OK. We'll let you know if it costs us an extra basis point or two. Got it. Okay. Thanks, guys. Why don't we have two more questions? Your next question comes from the line of Mike Baker from Deutsche Bank. Your line is now open. Thank you. A couple of clarifications. One, to Karen Short's question, you said that gas was about half of it. A little more than half or a little less than half of it. Half of what? Was that the year-over-year increase in earnings or operating profit dollars? No. First of all, I said it was more than half. I didn't say it was a little over half. It's substantial. But we try not to be that specific. Clearly, there's a lot of things that helped our earnings this quarter year-over-year, as evidenced by improvement in core-on-core. And the fact there's evidence of things that hurt you a little bit. We don't pick out each one. Gas certainly helped but, again, I think Karen had mentioned she's done some studies, in terms of profitability, and it's a good piece of it but it's not entirely. There's other things -- That's what I'm trying to clarify. There's other things that benefited it and other things that hurt it a little too. It being the growth in earnings? Okay. Thank you. Understood. One other question. I thought that you said that the ancillary margins were helped mostly by gas. We get that. But you also said helped by e-commerce. So, are your e-commerce margins getting better year-over-year? And, if so, why is that? I believe the e-commerce bottom-line margin improved a little but also the sales were stronger than the rest of the company. So, it's penetration as well. Okay. Understood. Last, real quick, SNAP. Any benefit from the pull-forward in SNAP? I don't know how much of it is your customer but it's helped others. No, we really don't see any of that. Very little of it. Those kind of things don't really impact us. Your last question comes from the line of Scott Mushkin from Wolfe Research. Your line is now open. Hey, Richard, thanks for taking my questions. So, I just want to go back to e-commerce. I know you touched on it, in the quarter, that it was a little helpful to margins. But you're putting a lot of money into it, it sounds like, with two-day and one-day grocery. I was wondering if you could walk us forward on e-commerce and what you think it's going to do to margins as you go forward. Well, every company allocates things or puts things in different silos. In our e-commerce, the one-day grocery is not part of e-commerce. Even though you go online to order, it's really the Instacart engine and it's in warehouse. They come into our warehouses, they shop, they deliver the same day. And so that's part of the e-commerce numbers. That and a couple of other things would actually increase the percentage increases a little bit but it's still so small, it wouldn't have that much of an impact. And then the rest of the e-commerce business? I think you said you were building out some fulfillment for e-commerce. I think it's for more consumables. How are you guys thinking about margins on that business as we move forward because the mix is going to shift, I think? Well, it has shifted. As you know, a few years ago, the average ticket was $400 or something because we sold big ticket items. We didn't have lots of little things or things that got you back to the site more frequently and more regularly. Some of that's just starting. As I talked about, the first of three planned fulfillment -- what we are calling fulfillment automation centers, we have our first one in southern California. It's literally open less than eight weeks, I believe. It's over a $100 million investment. The first one is the most expensive because you developed all the systems and everything as well. We have two other planned for depots in other parts of the country. I would hope that that's something that's going to hit our number a little bit because it means we're doing well in it as we're growing it. We're going to see the cost of picking an item dramatically reduce because we've done it not quite manually but less automated than we'll do over time. But that's going to be an ebb and flow over time. We'll just see how it goes. I think, in the scheme of things, recognizing that e-commerce, in its entirety is still, what, 5% to 6% of our business? 5% plus of our business? Even as we hope and assume that it's going to grow at a higher rate than the rest of the company, it's still going to be in the single digits for a while. So, those impacts -- and even with the first one, you're talking about the inefficiencies of getting something open up and running and building it up over the first 6-12 months and then the associated depreciation and the like. Those things, in the scheme of things, are not huge. As we do three and four and five of them, it's a little bigger. So is one chicken plant, so is one new concept bakery commissary a few years ago. So, all these things will be -- I would think these are things, we'll hope to balance some of them, but net-net, if they're a little drag, that's a positive. All right. And then last one. I guess this is the last question. But February sales and traffic, anything to read there? It seems like it was a little slower than we've been seeing. Any thoughts there? Any read? No, look, I think we, more than anybody, hate to use the word "weather" as a reason. And you see it every day. Clearly, whether it was rain, snow, cold, you name it, that impacts things like patio furniture, spring wear. But I think if you ex out the things we try to, as I pointed out on the call, if you ex out the weather, which we assume -- I think I said it was 1% in the month for the full company. A little more, therefore, in the US and Canada. We try to err to the conservative assumption on that. I mean, it's not a lot more than that but we feel comfortable in talking to the operators of the impact. And if you add that back in and you add the holiday shift in Asia, you take those things out, we're a little lower, not a lot lower, than we've been enjoying for the last several months. I guess we'll have to wait and see how March is. See how March is. Exactly. All right. Well, thank you so much and take care. Thank you. Thank you, Vincent, and we'll be around to answer questions. Thank you. This concludes today's conference call. You may now disconnect.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

The purpose of this article is to evaluate the SPDR Bloomberg Barclays Investment Grade Floating Rate ETF (FLRN) as an investment option at its current market price. I reiterated a negative outlook on FLRN back in Q1, and that outlook appears to be well-founded. Floating rate debt continues to substantially lag its fixed-rate counterpart, with investors piling in to fixed-rate government and corporate bonds in order to lock in yields before they go lower. Floaters do not have this same quality, as the distributions paid are at risk of going down as interest rates decline, which is a key risk in our current environment. This past week on July 31, the Fed did indeed cut rates, which pressured floaters. However, the likelihood of this occurring was likely priced in, and Fed Chairman Powell did offer guidance to suggest further rate decreases were not a foregone conclusion. This may have tempted investors to head back in to FLRN, on the expectation rates would be either neutral or heading higher for their next move. However, this outlook was clouded on Thursday (8/1), when President Trump announced new tariffs on Chinese goods imported in to America. This development prompted another flight to safety, namely in fixed-rate assets with low risk, such as treasuries and investment grade corporates. While FLRN holds investment grade debt as well, the tariff tweet also raised expectations that the Fed will indeed continue lowering rates by 2020. This outlook should continue to pressure floating rate options going forward. First, a little about FLRN. The fund is managed by State Street (STT) and "seeks to provide investment results that, before fees and expenses, correspond generally to the price and yield performance of the Bloomberg Barclays U.S. Dollar Floating Rate Note < 5 Years Index". Currently, the fund is trading at $30.68/share and pays monthly distributions, with an annualized yield of 2.87% based on its most recent distribution. When I last reviewed FLRN in March, I cautioned against using floating rate debt for fixed-income exposure going forward. In hindsight, this was the correct call. Despite FLRN offering a total return around 1.5% since that time, this return has markedly under-performed other fixed-rate, corporate options. With that in mind, I wanted to do an updated review on FLRN to see if the current environment offers a better opportunity to initiate positions. I do not believe it does, and I will explain why in detail below. To start, I want to highlight the primary reason I remain pessimistic on FLRN - actual performance. In fairness, FLRN has registered a positive return in 2019, and its investment grade holdings make the risk of default minimal. Therefore, I see the underlying holdings as safe, but offering a total return that is drastically lower than other options. Therefore, while FLRN may manage to squeeze out small gains for the remainder of the year, I believe my pessimistic outlook is appropriate because we do not invest in isolation. Putting funds in FLRN has been a poor option this year compared to alternatives with similar credit risk. To illustrate, consider the year-to-date share price return of FLRN compared against a fund that invests in fixed-rate corporate bonds and a fixed-rate aggregate bond fund. Options from State Street for these investments include the SPDR Bloomberg Barclays Corporate Bond ETF (CBND) and SPDR Portfolio Aggregate Bond ETF (SPAB). As you can see, the performance differential is stark, with FLRN trading in a mildly positive flat line, while SPAB and CBND had been trending higher almost uninterrupted all year. Of course, you could be saying, why not invest in FLRN now for value, since it has been under-performing? While this is certainly an option, I would urge investors to also consider the relative yields on these three funds. While FLRN has not seen its yield decline because of price appreciation, the distribution rate is pressured by the floating rate debt holdings. The interest rates on those products have been stagnant, and could very well decline due to the recent interest rate cut. In fact, even with the gains by CBND and SPAB, both those funds still offer current yields above FLRN's current yield, as shown below: My takeaway here is quite simple. FLRN has been roundly lagging fixed-rate bonds, and its current yield and outlook leave me with no reason to expect this reality to change as we move closer to 2020. The theory behind my recommendation to avoid floating rate bonds since 2019 began was driven by the outlook for interest rates. Investors had widely anticipated the Fed to lower the benchmark rate, and that has a negative effect on the income stream of FLRN. This is because floating rate bonds re-set their distribution rates at prevailing market rates, so when rates decline, so does their yield. Unlike fixed-rate bonds that often rally when interest rates decline, floating rate bonds tend to perform poorly in relative terms, as we have seen in the prior paragraph. With that outlook, I was very hesitant on FLRN and, this past week on July 31st, the Fed did indeed lower its benchmark rate by .25 basis points. This was widely expected, but was still an overall negative for floaters. However, there were some positives that came out of the meeting (with respect to FLRN). Notably, Fed Chairman Powell seemed to indicate this was not the start of a "cycle" of rate cutting, but rather was a "mid-cycle adjustment". To provide clarity, Mr. Powell was asked the following question at the press conference following the release of the July 31 FOMC statement: His response is below (emphasis added): The takeaway here was that Mr. Powell essentially downplayed the possibility of further rate cuts, by noting this may not be the beginning of a "cutting cycle". This was news to the market, as investors had priced in 2-3 rate cuts by year-end. The impact has the potential to be positive for FLRN because, if no new cuts materialize, the fund should maintain its yield close to 3% with a neutral environment. Furthermore, if the Fed reversed course and increased rates down the line, FLRN would be a primary beneficiary of that action. My next point has to do with the marked shift in expectations just a day later (8/1). The story I just illustrated in the previous paragraph suggested that the worst might have been over for FLRN. The rate cut materialized, but investors were expecting it, and the downside risk going forward would be minimized if no new cuts occurred. While that appeared to be the key takeaway to end the week, President Trump shocked the market on 8/1 by announcing new tariffs on Chinese goods via Twitter, set to begin on 9/1. The impact of this announcement was swift, with the Dow erasing a 1% gain and dropping around 200 points, along with oil sliding by 8%. While painful for equities, there were other implications for interest rates that could impact FLRN. While the day prior the Fed had suggested an easing cycle was not beginning, President Trump's new tariff threat could derail that outlook. Specifically, if trade headwinds continue to pressure corporate profits and global economic growth expectations, the Fed may be forced to take more "insurance cuts", even if the official announcement was that a cutting cycle was not imminent. And the market is indeed discounting the Fed's current tone. In light of the escalating trade dispute, the futures market is now expecting further rate cuts to occur short-term. According to CME Group, which tracks the futures market for investor sentiment on interest rate movements, the market is pricing in at least one more cut by year-end, with two cuts being the most likely scenario, as illustrated below: The implication here is not positive for FLRN. On the backdrop of this tweet, investors flocked to safety, buying in corporate bonds and treasuries. However, FLRN's return was minimal, as investors are locking in fixed-rate corporate bonds, not floating rate. With interest rates likely to decline further, the income stream from FLRN will continue to be at risk of declining as well. Given that FLRN has markedly fallen behind under similar conditions this year already, this reality is telling me more of the same will continue. FLRN has been lagging the broader fixed-income sector this year. As interest rates remained low, investors sought income in fixed-rate bonds of all grades, municipal debt, and treasuries. While floating rate bonds did garner some interest, the positive move for FLRN was minimal compared to other options. With interest rates dropping this week, and looking set to continue dropping over the next few months, I do not see a scenario where FLRN begins to out-perform. While the fund's investment grade holdings should provide some safety during any forthcoming volatility, the income stream and yield offered will most likely decline along with interest rates. This limits the potential total return from FLRN if investors were to buy-in now. Therefore, I reiterate caution on FLRN as an investment option, and recommend investors look elsewhere for fixed-income exposure at this time. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

News: PR Newswire, Consumer Technology
Site: www.prnewswire.com

"TI+'s longstanding, industry-leading performance in total returns and risk-adjusted returns, coupled with reduced volatility and consistent NAV growth, is driving significant investor capital inflows," reported Jeffrey Schwaber, Chief Executive Officer of Bluerock Capital Markets. TI+ has delivered the highest risk adjusted returns (as measured by the Sharpe Ratio) compared to leading stock, bond, and REIT indexes by nearly four times1. Since its inception through May 2018, TI+ has delivered a total annualized return of 8.21%, with lower volatility and lower correlation to the broader markets1, and has paid 21 consecutive distributions, most recently at an annualized rate of 5.25%. Trailing year through March 2018, 2017 and 2016, TI+ generated the highest risk-adjusted return (as measured by the Sharpe Ratio) among all 1,257 global open-end, closed-end, and exchange traded real estate funds in the Morningstar universe2. TI+ provides an opportunity for individuals to invest in institutional real estate alongside some of the nation's leading institutions, in a portfolio of nearly 2,900 Class-A properties throughout the U.S. and more than $165 billion in underlying real estate value. The fund utilizes an exclusive partnership with Mercer Investment Management, Inc. to select top-rated institutional private real estate managers, including AEW, Blackstone, Morgan Stanley, Principal, Prudential, Clarion Partners, J.P. Morgan, Invesco and RREEF, among others. Mercer is the world's leading advisor to endowments, pension funds, sovereign wealth funds and family offices globally, with over 3,300 clients worldwide, and $11 trillion in assets under advisement. About Total Income+ Real Estate Fund TI+ offers individual investors access to a portfolio of institutional real estate securities managed by top-ranked fund managers. The fund seeks to provide a comprehensive real estate holding designed to provide a combination of current income, capital preservation, long-term capital appreciation and enhanced portfolio diversification with low to moderate volatility and low correlation to the broader equity and fixed income markets. TI+ is widely available through the independent broker-dealer network, registered investment advisors, and on numerous platforms including TD Ameritrade, Schwab, and Fidelity. The minimum investment in the fund is $2,500 ($1,000 for retirement plans) for Class A and Class C shares. Please visit the fund's website for details at www.bluerockfunds.com. 1 Indexes with respective Standard Deviations and Sharpe Ratios (inception through 3/31/2018): Stocks: S&P 500, 14.92%, 1.40; Bonds: Bloomberg Barclays U.S. Aggregate Bond Index, 3.76%, 0.54; REITs: MSCI U.S. REIT Index, 17.60%, 0.58; TI+ Fund: 1.96%, 5.88. TI+ Correlations (inception through 3/31/2018): Stocks: S&P 500, 0.33; Bonds: Bloomberg Barclays U.S. Aggregate Bond Index, 0.13; MSCI U.S. REIT Index, 0.48. 2 Morningstar Direct, annualized geometric Sharpe Ratio, based on daily data from 2016-2018. Using Morningstar data compiled by Bluerock Fund Advisor, LLC, TIPRX received the highest Sharpe Ratio among 1,257 open end, closed end, and exchange traded funds in the global real estate sector equity category for the one-year period ending 3/31/2018. TIPRX A Shares; no load. Sharpe Ratio is only one form of performance measure. The Sharpe Ratio would have been lower if the calculation reflected the load. 1 The maximum sales charge for the Class A shares is 5.75%. Investors may be eligible for a reduction in sales charges. 2 Inception date of the fund is October 22, 2012. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month end, please call toll-free 1-888-459-1059. Past performance is no guarantee of future results. The total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 2.38% for Class A, 3.12% for Class C, 2.15% for Class I, and 2.69% for Class L. The Fund's investment adviser has contractually agreed to reduce its fees and/or absorb expenses of the fund, at least until January 31, 2019 for Class A, C, I and L shares, to ensure that the net annual fund operating expenses will not exceed 1.95% for Class A, 2.70% for Class C and 1.70% for Class I, and 2.20% for Class L, per annum of the Fund's average daily net assets attributable to Class A, Class C, Class I, and Class L shares, respectively, subject to possible recoupment from the Fund in future years. Please review the Fund's Prospectus for more detail on the expense waiver. A Fund's performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. Fund performance and distributions are presented net of fees. The Total Income+ Real Estate Fund invests the majority of its assets in institutional private equity real estate securities that are generally available only to institutional investors capable of meeting the multi-million dollar minimum investment criteria. As of the end of the second quarter, the value of the underlying real estate held by the securities in which the Fund is invested exceeded $165 billion, including investments managed by AEW, Blackstone, Morgan Stanley, Principal, Prudential, Clarion Partners, J.P. Morgan, Invesco and RREEF, among others. The minimum investment in the Fund is $2,500 ($1,000 for retirement plans) for Class A, C, and L shares. For copies of TI+ public company filings, please visit the U.S. Securities and Exchange Commission's website at www.sec.gov or the Company's website at www.bluerockfunds.com. Investing in the Total Income+ Real Estate Fund involves risks, including the loss of principal. The Fund intends to make investments in multiple real estate securities that may subject the Fund to additional fees and expenses, including management and performance fees, which could negatively affect returns and could expose the Fund to additional risk, including lack of control, as further described in the prospectus. The Fund's distribution policy is to make quarterly distributions to shareholders. The level of quarterly distributions (including any return of capital) is not fixed and this distribution policy is subject to change. Shareholders should not assume that the source of a distribution from the Fund is net profit. A portion of the distributions consist of a return of capital based on the character of the distributions received from the underlying holdings, primarily Real Estate Investment Trusts. The final determination of the source and tax characteristics of all distributions will be made after the end of each year. Shareholders should note that return of capital will reduce the tax basis of their shares and potentially increase the taxable gain, if any, upon disposition of their shares. There is no assurance that the Company will continue to declare distributions or that they will continue at these rates. There can be no assurance that any investment will be effective in achieving the Fund's investment objectives, delivering positive returns or avoiding losses. Investors should carefully consider the investment objectives, risks, charges and expenses of the Total Income+ Real Estate Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained online at www.bluerockfunds.com. The Total Income+ Real Estate Fund is distributed by ALPS, Inc. The prospectus should be read carefully before investing. Bluerock Fund Advisor, LLC is not affiliated with ALPS, Inc. MSCI US REIT Index (Public REITs): A free float-adjusted market capitalization weighted index comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe (www.msci.com). Returns shown are for informational purposes and do not reflect those of the Fund. You cannot invest directly in an index and unmanaged indices do not reflect fees, expenses or sales charges. Risks include rising interest rates or other economic factors that may negatively affect the value of the underlying real estate. S&P 500: An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe (Investopedia). Bloomberg Barclays U.S. Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt. Risks include rising interest rates or other economic factors that may negatively affect the value of the underlying bonds. Sharpe Ratio: Measurement of the risk-adjusted performance. The annualized Sharpe ratio is calculated by subtracting the annualized risk-free rate - (3-month Treasury Bill) - from the annualized rate of return for a portfolio and dividing the result by the annualized standard deviation of the portfolio returns. You cannot invest directly in an index. Benchmark performance should not be considered reflective of Fund performance.

News: Companies News
Site: companies.einnews.com

Alibaba Group Holding Limited (NYSE:BABA) Q4 2020 Results Conference Call May 22, 2020 7:30 AM ET Good day, ladies and gentlemen. Thank you for standing by. Welcome to Alibaba Group's March Quarter and Full Fiscal Year 2020 Results Conference Call. At this time, all participants are in a listen-only mode. After managements' prepared remarks, there will be a question-and-answer session. I'd now like to hand the call over to Rob Lin, Head of Investor Relations of Alibaba Group. Please go ahead. Good day, everyone, and welcome to Alibaba Group's March quarter 2020 and fiscal year 2020 results conference call. With us are Daniel Zhang, Executive Chairman and CEO; Joe Tsai, Executive Vice Chairman; Maggie Wu, Chief Financial Officer. This call is also being webcast from our IR section of the corporate website. A replay of the call will be available on our website later today. Now, let me quickly cover the Safe Harbor. Today's discussion will contain forward-looking statements including revenue guidance. These forward-looking statements involve inherent risks and uncertainties that may cause actual results to differ materially from our current expectations, including risks and uncertainties related to the COVID-19 pandemic. For detailed discussions of these risks and uncertainties, please refer to our latest annual report on Form 20-F and other documents filed with the U.S. SEC or announced on the website of the Hong Kong Stock Exchange. Any forward-looking statements that we make on this call are based on assumptions as of today and we do not undertake any obligation to update these statements except as required under applicable law. Please note that certain financial measures that we use on this call such as adjusted EBITDA, adjusted EBITDA margin, adjusted EBITA, adjusted EBITA margin, marketplace-based core commerce adjusted EBITA, non-GAAP net income, non-GAAP diluted earnings per share or ADS, and free cash flow are expressed on a non-GAAP basis. Our GAAP results and reconciliations of GAAP to non-GAAP measures can be found in our earnings press release. Unless otherwise stated, growth rate of all of the stated metrics mentioned during this call refers to a year-on-year growth versus the same quarter last year. In addition, during today's call, management will give their prepared remarks in English. A third-party translator will provide simultaneous Chinese translation on another conference line. Please refer to our press release for details. During the Q&A session, we will take questions in both English and Chinese and the third-party translator will provide consecutive translation. All translations are a convenience-purpose only. In the case of any discrepancies, management statement in their original language will prevail. With that, I will now turn the call to Daniel. Thank you, Rob. Hello, everyone. Thank you for joining our earnings call today. We have finished an extraordinary quarter and delivered an outstanding fiscal year. Despite the impact of COVID-19 pandemic, Alibaba achieved a historical milestone of US$1 trillion in GMV across our Digital Economy this fiscal year, a strategic goal that we set for ourselves five years ago. We, at Alibaba, have always been aiming for the stars while keeping our feet on the ground. The $1 trillion GMV milestone reflects the [volatility] of Alibaba Digital Economy, and as well as strong execution against the clear strategic vision. Our scale has now reached one-sixth of China's total retail sales, which was about US$6 trillion last year. And we believe there is still tremendous potential of growth. Digital adoption and transformation in retail are accelerating due to the COVID-19 pandemic, reshaping consumer behavior and enterprise operations. On the consumer side, shopping online has become a habit for more people and in more product categories. On the retail side, online sales is no longer an option but a necessity for the brick and mortars. We believe there is a new normal that will stay even after the pandemic is over. I would like to review the past quarter's performance in the context of the impact and recovery from the COVID-19 pandemic. On July 23rd -- on January 23rd, right before the Chinese New Year holiday, China announced the lockdown of Wuhan, the center of the pandemic. The lockdown measures implemented in other provinces and cities led to large scale economic disruption in late January and February, which negatively affected our domestic e-commerce business during the period. However, China quickly contained the pandemic by implementing measures such as strict social distancing, mass testing coverage, centralized mobilization of medical resources, and started to reopen the country for business in late February. By March 9, Cainiao announced full recovery of logistics operation national wide, except for Hubei Province where Wuhan is. And a normal life began to return for most of people in the country, when Wuhan 10 week blocked down was lifted on April 8th. Since March, we have seen a healthy recovery in our China retail marketplaces. As of March 31, 2020, annual active consumers on our China retail marketplaces reached 726 million, a net increase of 15 million versus the previous quarter. Mobile MAUs of our China retail marketplaces reached 846 million in March 2020, an increase of 22 million over December 2019. This reflects our strong consumer mindshare and healthy user stickiness. Since the new fiscal year began, in April, the quarter-to-date paid GMV of our China retail marketplaces has experienced year-on-year growth at the similar rate to the December quarter's level. For the past several years, we have been investing to grow our new retail business in fresh food and grocery. Freshippo and Taoxianda, which have played an important role in supplying daily necessities to people impacted during the pandemic and thus have become wildly popular among consumers. In the past quarter, both Freshippo and Taoxianda delivered stellar growth of more than 100% year-on-year. Approximately 60% of Freshippo's GMV came from online orders, up by 10 percentage points year-over-year. As locked down measures eased in China, starting in April, demand and the popularity of our grocery business have remained strong. We believe the consumer habit of buying fresh food and groceries online will continue after the pandemic, and online and offline integration will drive the new retail model to the next stage of development. We have been investing for years to build the new retail technology infrastructure, which will help us further strengthen our market leadership in this sector. As a leading cross-border import platform in China, Tmall Global has become an ever more important destination for Chinese consumers to buy imported products as they could not travel abroad during the pandemic. In markets outside of China, our international retail marketplaces such as Lazada and AliExpress attracted over 180 million annual active consumers as of March 2020. Lazada's order volume grew more than 100% year-on-year during the fiscal year and completed the March quarter with a strong finish, despite impact of the COVID-19 pandemic. During February and March 2020, our cross-border marketplace's AliExpress GMV growth was negatively impacted mainly by supply chain and logistics disruptions caused by COVID-19 pandemic. We are seeing signs of recovery in certain major markets starting in April but there are still uncertainties ahead. Revenue from our local consumer services business decreased by 8% year-on-year in the past quarter, due to the impact of COVID-19. In April, year-on-year growth of our food delivery GMV turned positive as lockdown measures eased, restaurants began reopening and people began returning to work in China. Alibaba Cloud continued its rapid growth in the past fiscal year, with revenue reaching RMB40 billion, an increase of 62% year-on-year. During pandemic, our public cloud business grew rapidly driven by increased consumption of video content, as well as web adoption of remote working and learning. Our cloud computing infrastructure and big data business has also played a key role in enabling business to quickly resume operation and production. We believe the pandemic will further accelerate digital transformation of enterprises. All industries, including public sectors, will choose to move their technology infrastructure to the cloud. DingTalk our digital collaboration platform for enterprises played a key role during the pandemic. Millions more enterprises and users in China are now using DingTalk to stay connected and work remotely. DingTalk also made significant penetration in the education sector, as schools adopt the platform for their teachers and students. In March 2020, DingTalk conducted an average of over 1 million active classroom sections on each school day. DingTalk's number of daily average active consumers during a working day grew significantly to 155 million in March. As offices and schools reopened in China, DingTalk's number of active users came down from the peak level but still maintained at more than 100 million DAU. In the past quarter, our digital media and entertainment business delivered healthy growth in paying subscribers and user time spent, as users' consumption of video content increased significantly during the pandemic. Youku will continue its focus on production and distribution of original and exclusive content, while ensuring cost efficiencies and return on investment. During the past quarter, we leveraged our platform technology and other resources across the Alibaba ecosystem to support populations impacted by COVID-19 pandemic within China and around the world. We also implemented a comprehensive set of financial and business support measures to help alleviate the near-term challenge faced by our business customers and partners. As of March 31, 2020, Alibaba together with Ant Financial has contributed approximately RMB3.4 billion in value in the form of donations, subsidies, and tech support. To name a few examples, we waived fees, reduced conditions and offered logistic subsidies to our merchants. We worked with Ant Financial and other partners to advance working capital funds to our merchants to provide liquidity and to facilitate one year loans with preferential interest rates. We used the RMB1 billion special fund, we established in January to procure medical and related supplies for parts of China affected by pandemics. Our logistics subsidiary Cainiao offered free delivery of medical supplies to destinations around the world through its extensive global logistics network. Our self-operated fresh food and grocery chain Freshippo committed to more than 200 remaining open for business even during a period where lockdown measures were in effect. Freshippo also worked with the supply chain to keep our commitment to not raising prices as well as maintaining adequate stock on the shelves. We made available AI technology to over 550 hospitals in China to help improving the speed and efficiency of their COVID-19 diagnosis using CT scans. The Alibaba Foundation, through combined efforts with Jack Ma Foundation, and the Joe and Clara Tsai Foundation donated over 200 million units of personal protective equipment, testing kits and ventilators to over 150 countries and regions. In April 2020, we further announced the 2020 Spring Thunder initiative, which aims to help export-oriented SMEs explore opportunities in the China domestic market through our China retail marketplaces;, and expand into new markets through our international wholesale and retail marketplaces such as Alibaba.com and AliExpress; to develop digitalized manufacturing clusters; to accelerate the digital transformation of China's agriculture sector; and alleviate financing challenges faced by SMEs by working with Ant Financial and its partners. The battle against the COVID-19 pandemic is not over, although China has made good progress in fighting and controlling the spread of the coronavirus. With most business reopening and people returning to normal life, the threat of the pandemic is still looming in rest of the world and the timing and the pace of recovery is still uncertain. At the same time, tensions between the U.S. and China have added another layer of uncertainty to the post-COVID-19 world. Despite the uncertainties in the macroeconomics and the geopolitical environment, there is one thing we can be certain, the world is moving towards digital-first and digital everything. In the past two decades, Alibaba has developed comprehensive infrastructure, and capabilities built on digital technology for business, financial services, logistics, cloud computing, and big data to prepare for this new era. We believe our infrastructure and capabilities will play an important role in enabling all industries to embrace digital transformation and the customers to embrace a digital lifestyle. In addition, we aim to empower SMEs around the world, including both in America to access the Chinese and other global consumer markets and create new jobs. This is a hard work that Alibaba must undertake to fulfill our vision to make it easy to do business anywhere. And it is also the fundamental assurance for our sustainable growth in the future. Now, I will turn it over to Maggie, who will walk you through the details of our financial results. Thank you, Daniel. Thank you, everyone, joining us. I'd like to start my prepared remarks by addressing COVID-19's impact on our financials and recent trends. Back in February, given the potential uncertainties of COVID-19 pandemic, we guided the market that our overall revenue growth rate would be negatively impacted for the March quarter and that some of the businesses such as China retail marketplaces and local consumer services might show negative revenue growth. I'm pleased to report we delivered better-than-expected March quarter results. The government took effective measures to limit the spread of the virus through lockdown, social distancing measures and travel restrictions. With the virus spread under control in China, these restrictions started to ease in early March, and this led to a recovery of supply chain and logistic delivery capacity. This in turn enabled a quick recovery for our China retail marketplaces, and improving fundamentals for local consumer service businesses. For our China retail marketplaces, Tmall online physical goods GMV, this is paid GMV, grew 10% in the March quarter. Although only 10% growth, we did see robust demand of FMCG and consumer electronics categories as homebound consumers cooked at home and upgraded their home appliance and 3C products. These two categories combined grew 25% our Tmall platform. On the other hand, discretionary product categories such as apparel and accessories, home furnishing and auto parts experienced negative growth. Starting in April, Tmall online physical goods GMV saw strong growth, strong recovery and have continued to further improve in May. Local consumer services recorded 8% decline in revenue this quarter, reflecting mass closures of restaurants and local merchants. However, social distancing measures also led to increased demand for groceries and other daily necessities. Starting in April, GMV growth of food delivery businesses turned positive as lockdown measures eased. Restaurants began reopening and people began returning to work in China. For our international commerce business, which represents around 7% of total revenue in fiscal 2020. The timing and pace of the recovery is uncertain as demand in countries outside China may be further impacted by COVID-19. So let's take a look at the March quarter financial highlights. Our total revenue was RMB114 billion grew by 22% year-over-year. The increase was mainly driven by growth of the China commerce retail business especially new retail businesses in grocery category and cloud computing. We continue to be successful at expanding product offerings on our platform that cater to the needs of different consumer segments. The decrease of non-GAAP free cash flow was due to a one-off of AliExpress payment service restructuring. So we have a full disclosure of this in our earnings release. This is mainly due to the overseas regulation requirement change as AliExpress began the process of restructure, so that it no longer hosts consumer funds before they are released to the merchants. If we take that impact out, our non-GAAP free cash flow would have been over RMB2 billion. Let's take a look at the revenue details. China commerce retail goods 21%; customer management revenue grew 3%. The growth of customer management revenue was primarily due to the increase in revenue from recommendation feeds and Taobao Live. This new revenue stream partially offset by a decrease in volume of paid clicks and average unit price per click. These are the paid click and PPC, I'm talking about is for the search business, pay per click. So this is impacted because of COVID-19. Commission revenues decreased 2% primarily due to effects of the COVID-19 impact. These impacts including cancellation of some orders as a result of logistic disruptions in February, weakness in apparel categories, our waver of annual service fees for the first half of 2020 as part of our support to merchant customers. In the national retail revenue grew 8% to RMB5.4 billion. The increase was primarily due to the growth of Lazada and Trendyol and partially offset by the exclusion of revenue from AliExpress Russia which was no longer consolidate since October 2019. So we have a JV in Russia right now. Cainiao revenue reached RMB5 billion growing at 28% year-on-year. This was primarily due to the increase in the volume of orders fulfilled from our fast growing cross-border and international commerce retail businesses. And our local consumer service experienced negative growth this quarter, I just talked about. So for Ali Cloud, it's still growing strongly at 58% and let's take a look at the March quarter cost trend. Cross-border revenue excluding SBC was 62% of revenue. The increase was some rally due to a revenue mix shift towards direct sales businesses, the new retail businesses, such as our new retail and also consolidation of Kaola and partially offset by a decrease in delivery cost of our local consumer services. Let's turn to segment profitability. Our market-based core commerce adjusted EBITDA reached RMB34 billion, decreased 2%, but core commerce adjusted EBITDA grew 2% to RMB28 billion. This is because losses in our four strategic commerce initiatives were narrowed compared to prior year driven by ongoing improvement of China logistic network, higher demand for Freshippo and the lower variable costs required for our local consumer service business. Now I would like to mention about the innovation initiatives. When you look, the adjusted EBITDA loss was RMB3.1 billion, which is up from RMB1.9 billion from a year ago. The increase was primarily due to our aggressive investment in net income to provide remote work collaborations capabilities to enterprises and the schools free of charge during the COVID-19. As a result, daily active users on DingTalk achieved a fourfold increase to over 100 million, the peak at about 155 million. So March quarter, other financial metrics, the share of results of equity investee in the quarter reached RMB3.5 billion. The year-over-year increase in share of results of equity investee was mainly due to our share of profits and financial in December quarter as we take it's profit in one quarter, partially offset by used by a decrease in our share of results of Suning. March quarter GAAP to non-GAAP net income, the GAAP net income attribute to shareholders was RMB3.2 billion. The year-over-year decrease was primarily due to a net loss in investment income mainly reflecting decreases in the market prices of our equity investments in publicly traded companies compared to net gain recorded in the same quarter of 2019. Non-GAAP net income attributable to shareholders increased by 12% to RMB25 billion. Now let's look at the physical 2020 full-year results. GMV as Daniel mentioned, the Alibaba digital economy achieved an important milestone of $1 trillion GMV, a target you probably remember that this is a target we committed to do five years to six years ago. User growth, annual active consumers in China reached 780 million including 726 million of China retail marketplaces. In other words one out of every two Chinese are buying our platform. 780 million of annual active consumers in China accounts for around 85% and 40% of the Chinese population in developed and the less developed areas. Our ability to attract users at a rapid pace reflects not only the diversity of product selection, but also the platform has become everyday destination for entertainment and discovery of new trends. We continue to achieve strong revenue growth across all businesses including core commerce, cloud computing, and other business. So total revenue grew 35% to RMB510 billion. To talk about the possibility in the last 12 months we grew adjusted EBITDA by 28% to RMB137 billion and generated RMB131 billion in non-GAAP free cash flow. This is significant firepower for our long-term growth. Okay. Let's turn to our business segments. All of the revenue we've talked about for each sector showed strong growth and then when you look at the adjusted EBITDA profit for the core are still growing strongly and the investment areas that these businesses, which are in the investment stage are progressing very well and loss get narrowed. Okay. So I would like to talk about our outlook, but before that I want to address the recent bill passed by U.S. Senate Holding Foreign Companies Accountable Act. The proposed legislation would essentially prohibit a foreign issuer from being listed on U.S. Stock Exchange, if the U.S. Public Company Accounting Oversight Board, this is our Peekaboo, is enabled to inspect all the work papers of the issuers auditors for three consecutive years due to certain reasons. We will closely monitor the development of this bill and I think it's important for investors to understand Alibaba's practice and issues raised under this proposed legislation. First, there is an existing framework of the Peekaboo conduct -- of the Peekaboo and for its conduct, an inspection of audit companies with Chinese operations. In this regard, we understand that there has been ongoing dialogs among the big four accounting firms China's securities regulator DSRC SEC and Peekaboo. With respect to the types of information that are permitted to be exchanged to issuers with Chinese operations while maintaining compliance with Chinese law. Number two, Alibaba's financial statements are prepared in accordance with U.S. GAAP and since our inception in 1999, we have been audited by PWC Hong Kong, PWC Hong Kong is the local affiliate of the worldwide PWC's firm and its auditing standards are overseen by the PWC national office in the United States. The integrity of Alibaba's financial statements speaks for itself. We have been an SEC filer since 2014 and hold ourselves to the high standards of transparency. Each year we have received and qualified by the opinion our financial statements from PWC. Third, trust is one of our core values and transparency and integrity are essential components of building trust with all of our stakeholders. All these years we have consistently aimed to grow the business for long-term, maintain compliance with all applicable laws and delivered value for our customers, employees and investors. Investors who bought our stock in 2014 IPO have tripled their investment over the past five and half years. Given the above, we will endeavor to comply with any legislation whose aim is to protect and bring transparency to investors who buy securities of U.S. stock exchanges. Looking ahead despite a challenging quarter due to pandemic, we achieved our guidance of over $500 billion in revenue and delivered healthy, sustainable profit growth in fiscal year 2020. The reason we have been able to deliver these results is that we sow seeds years ago by investing in technology, in innovation, and in businesses that required far sight and long-term patients. Today the Alibaba digital economy remains strong and growing. Looking ahead, we will continue the same strategy of delivering robust revenue growth and sustainable profit growth. Although, it is difficult to predict the uncertainty of global economic and geopolitical developments. Based on our current view of Chinese domestic consumption and enterprise digitization, we expect to generate over RMB650 billion in total revenue in fiscal year 2021. We believe our commitment to invest and deepen our value proposition to customers, thereby ensuring robust revenue and profit growth. That concludes our prepared remarks. Let's open for Q&A. Thank you. Thank you, Maggie. However, as this is our earnings call, you are welcome to ask questions in Chinese or English. A third party translator will provide consecutive interpretation for the Q&A session, as our management will address your questions in the language you ask. Please note that the translation is for convenience purposes only, in the case of any discrepancies our management statement in the original language [Audio Gap] So, operator, I'd like to open it up for questions. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Your first customer line of Binnie Wong from HSBC. Please ask your question. Thank you, Daniel, Maggie and Rob. My question is regarding your strategy in lower tier cities. I know that last week you issued a new release, a new patch release to Taobao providing new support for merchants as well as other new features and 70% of the uptake for that new patch release has in fact been from the lower tier city. So can you please speak to us about your strategy going forward for the larger cities? Thank you. And I will take that question. Given the size and the scale of Taobao as a retail platform and where it's at today, 700 million, the fact is that we've penetrated all segments of the market from the high end down to the low and the increase in the user base over the past year, 70 million -- 70% of that came from the lower tier cities. So what we're doing in the lower tier cities is deploying a more diverse and broad range of different services, including on Taobao with more value for money offerings, as well as live streaming and other kinds of engagement that are targeted for those users, especially those who are looking for good value for money. And as you've noted, we have a new special price addition of Taobao which is targeted for those users in lower tier cities with a focus on giving them value for money offerings. At the same time, we see significant potential for further growing our user base, the current figure for annual active consumers, 780 million, represents only 45 penetration -- 45% penetration on the population in lower tier cities and in the rural areas of China. So there still is lots of room to grow in those regions and we intend to do so together with Alipay in driving a digitalization strategy in those areas that will convert people into consumers. Thank you. Thank you. Our next question comes from the line of Eddie Leung from Bank of America. Please go ahead. Thank you. My question is regarding the long-term impact of live streaming on the industry and in particular celebrity host and KOL live streaming. The question is, if merchants need to pay these celebrities, these KOLs, will that impact on the profitability of platforms going forward? Thank you and that's a really good question. What we're seeing really is the emergence of live streaming as a new kind of sales methodology or a new kind of sales channel with the emergence of these KOLs and celebrity influencers online. The role that they're really playing in the context of retail is sales. They're serving the sales people and they make money by way of a sales commission. In the long-term, how this trend will play out, I think really comes down to whether the intrinsic commercial value in terms of having online influencers and KOLs do live streaming, be fully captured in an efficient and effective way. If you have a one-off sales event with a celebrity influencer, you get user to make a one-off purchase. Fine, but the question is, can you then keep that user in the long-term and continue to market to them and get the full value out of that relationship? So, I think it's important if you're paying money to these online influencers or celebrities that -- in part that's about supplanting existing channel costs and saving costs there. But more importantly, it's about getting the new consumer into your ecosystem so they can become a long-term consumer. And this is critical to Alibaba because we are a diversified ecosystem with multiple channels and formats for engaging consumers. So that's precisely what we're looking at doing with these kinds of live streaming approaches. It's just one part of an overall integrated approach through which we hope to develop long-term relationships and create long-term value. Thank you. Next question comes from the line of Piyush Mubayi from Goldman Sachs. Please go ahead. Thank you for taking my question. I have one question with regards to the guidance you provided for next year. What are the drivers of that growth assumption or guidance you provided. And in particular, what are the underlying macro assumptions you've made and more generally, the platform mix, like the 1P versus 3P mix that you're likely to see, that's underpinning that guidance? Thank you. I'll go back to the queue afterwards. Okay. Piyush, this is Maggie, let me try to answer your question. So we all know that we're facing risks and uncertainties, right? So many of which we're not able to predict or control. So whether there's going to be a certain way for when will the vaccine come, how much impact the geopolitical issue bring, we -- it's hard for us to factor in. So the guidance we give basically reflects assumption that we believe to be reasonable today. So then you talked about the recovery speed of each of our businesses, and particularly for like China retail, local service, and international business, et cetera. So, based on what we've seen today, and we see this -- quarter-to-date transaction volume and also user activities et cetera have already experienced similar growth at a similar rate to the December quarter level. So that's basic assumption that we used. And you mentioned about 1P, 3P. So you can see from our revenue breakdown, sort of 2020 fiscal year 1P business as a percentage of the total revenue already went up to around 16%, 17%. And we believe that percentage is going to continue to go up but not dramatically. But the important thing is that people are thinking about your revenue content, take a portion of 1P, that 1P normally represents low margin. But look at our profit growth. I think this is another point I want to make is that we are a group that has such a strong growth for the core and also has the multiple engines, not only Taobao, Tmall, China retail marketplace, but also cloud, New Retail, local services, logistics, right? So strong revenue growth brings in the powder for us to invest in those strategically important areas. And these investment areas, they're doing better and better which reflects into our profit growth. Thank you. Next question comes from the line of Alex Yao from JP Morgan. Please go ahead. Thank you. I noted in the earlier remarks your comments about advertising revenue in the first quarter performing well, driven by good performance of recommendation feeds. And in that context, I'd like to ask about your plans for monetization of recommendations. I imagine that in your answer, you'll talk about the need to balance the interest of merchants against the desire for monetization. So given that perhaps I could go ahead and just ask the second part of the question. Namely, is there any technical or technological method that could be adopted on the one hand, so as to fully protect the merchants' interests or even better serve the merchants' interests, while at the same time also providing more opportunity for monetization? And if so, is that something that could happen this year? Thank you. Well, I'll start with the latter part of your question and the answer is yes. There is technology that can do precisely that and the technology is AI, artificial intelligence, which can be applied and we are already working on applying it in a way that can ensure a good user experience in terms of balancing advertising content versus our free content for users, and also leveraging that technology for merchants to drive better return on their investment. So we're working in this direction, and I think we're already making good progress. So in general, we are moving forward cautiously in working on growing revenues from recommendation feeds, and with a hope that we can find ever better ways to do precisely what you mentioned in your question, namely finding the best possible balance leveraging on technology between user experience and creating value for merchants. Thank you. I'd just like to add a couple of points on top of Daniel's already very clear answer. And the key word I'd like to add in is multi-engine approach. So, if you look at our revenue over this three year period, revenue from CMR and commissions accounted for 70% compared against 40%. What this means is that our strategic investments are starting to produce new channels of revenue, new sources of revenue. So you can see this in our figures over the three year period for CMR as well, 90%, and that's down now by 20% to about 70%. So you have all of these different new revenue areas that can be tapped into including recommendations that we talked about, but also live streaming, also [Xinyu] and many other new sources of revenue. So, thirdly and in conclusion, going forward, yes, we will continue to -- as we said on Investor Day, to take a prudent approach in moving forward with monetization. Thank you. Our next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Hi, good evening. Thanks management for taking my questions. My question is more about the spending power of the buyers post-virus. Can management comment about the overall spending power of consumers these days? And with that, can you comment about the trend in ASP and all order frequency that we would expect as people speeding up the migration to online? Okay. Let me answer this question. First of all, I think on our platform -- we are such a huge consumer platform. We have different tiers of consumers around us. So, what we see that consumers are -- they are in -- they engage with us and find what they want in different categories at different pricing range. But we do see some shift of the product categories in this quarter because of the pandemic. For example, we see a very strong growth of food and grocery business. And because people -- when people stay at home, they have to cook at home. They don't -- they're unable to go to the restaurant. So they need more food and more groceries, which are all daily necessities. So that's why we see very strong growth in our FMCG categories and food categories. Our FMCG categories grow like -- take an example like in starting from the new fiscal year, our FMCG categories in Tmall grew nearly like 40 -- I remember 40% -- around 40%, which is a very strong indicator that people spend more on our platform in these categories. Well, because of the pandemic, people spend less on like apparel or like fashion because people wear face masks, and they don't even need these make-ups. So, I think the spending is still there, but the focuses are quite different. And -- but in terms of the general I mean spending power, I would say different -- China is a famous high saving rate country and we do see people are remaining their consumption -- remaining a very strong consumption power to continue their -- to maintain their lifestyle. So, we do -- so far we haven't seen any big change in terms of the consumption power. But as I said before, I think the category -- the product categories they try and we do see some are different. Let me clarify one point. When we talk about beauty, what we see is like skincare still remain very strong but for makeup, because of -- as I said when ladies wear facemasks, they may -- the need for makeup are getting lower. So that's basically the situation. Thank you. Our next question comes from the line that Jason Helfstein from Oppenheimer. Please go ahead. Thank you. I just want to go a little bit deeper into that last point. You said that online physical goods GMV grew 10% and then you did break down that you saw 25% in these categories that benefited or were more COVID related, offset by areas where they didn't spend money. What do you think is a kind of more reflective of a consumer health? Is it that 10% number, or really is it that kind of 25% and consumers have the ability right now to spend more, they're just not because they don't need the items consistent to what you talked about, not needing makeup, if you're wearing a mask, for example. And maybe talk about how that relates to your outlook for the next quarter? Thank you. Okay, let me answer this question. As we said before, our China retail -- our Tmall of grew like 10% are in the March quarter, and in Tmall, we have our FMCGs and consumer electronics, the combined growth rate in March quarter for these categories on Tmall was about 25%. If you want to get a big picture of the future development, I think in my remarks, I gave you a very clear I mean latest indicator which is like in -- starting from the New Year, the quarter-to-date, overall speaking our China retail marketplace growth rate is similar to those in December quarter. So I think that's basically the big picture of where we are today. But we do -- all people realize -- understand that there's still uncertainty about containing the pandemic. So we are closely monitoring the situation. So we strongly believe that the consumption power in China is still very strong and we will take our vantage in the digital platform to continue our leading position. Let me add one more point, which is like if you look at the past fiscal year, our -- we generated US$1 trillion GMV in our -- in Alibaba Ecosystem. But if you look at our China retail marketplaces, the GMV we generated last fiscal year is about like RMB6.5 trillion. And we -- if we look at what happened into the March quarter, I think we should have achieved a higher GMV, I mean it's without this pandemic obviously. And if -- but we are very confident that in the New Year, I think we will achieve another like a net add of like RMB1 trillion -- at least RMB1 trillion GMV in our China retail marketplace, which is I think still very strong number compared to the size of our business in China. Next question comes from the line of Gregory Zhao from Barclays. Please go ahead. Thank you. And congratulations on the strong performance. My question relates to cloud services. We know that internationally players like Microsoft and Google, who have already achieved significant scale in terms of their size and their revenues, continue to be able to maintain rapid growth in their revenues and even acceleration. Looking at China, however, in the cloud space, Alibaba and its competitors seem to be seeing a different trend where things are somewhat slower. So I'm wondering if you could compare for us, please, the China market versus the international market for cloud, what are the differences underlying that picture. And what are the short-term bottlenecks and how it would be possible potentially to make a big leap forward in terms of accelerating revenue and profit growth in cloud? Thank you. Well, first, I'd like to say that in the past year, Alibaba cloud intelligence hit a very important milestone, namely reaching revenue of RMB40 billion and even in the March quarter, achieving 58% growth. So we don't see slowdown at all. Conversely, we think that the growth is good. We see this growth coming from several different areas. One is the demand across all sectors of the economy to get on to the cloud. And if you look at Chinese IT spending, in the future, we can expect to see more and more spending going forward as organizations get themselves on the cloud. The second thing I would point to is that the cloud is not just a way of providing infrastructure -- infrastructure on the cloud to lower IT related operating costs. It's also an opportunity for companies to leverage on big data and cloud enabled computing capacity to achieve better efficiencies and drive value for the business. And different kinds of algorithms and analytics will be developed in the cloud for different sectors for different verticals, different products, solutions to meet those needs, and unleash new value for them. So it's not just about saving costs on IT infrastructure, it's about driving value as well. In Ali, the value proposition that we offer is cloud plus intelligence. So we're not just about providing cloud services, it's a combination of cloud plus intelligence. Now in different countries, cloud services are defined differently. It's true in China and internationally as well. There are different definitions. But to us if it's just about shifting traffic onto the cloud to save costs, that's kind of a low value-added offering and that's not really what Alibaba is about. We're looking at focusing on higher value-added cloud enabled offerings that can truly create value for clients in different sectors. And finally, on your question as to the differences that we see in the Chinese cloud market versus the cloud market overseas, I would say that in the U.S. and in other more developed markets, the SaaS and the whole ecosystem, developers are more mature already. Whereas in China, that developer ecosystem and SaaS is just starting to get going, and Alibaba very much looks forward to partnering with developers to jointly create a very robust ecosystem in China. Thank you. Next question comes from the line of Alicia Yep from Citigroup. Please go ahead. Congrats on the strong results. My questions is on -- so if you could give us some colors that are on the subsidy measure that you help provide merchants. Do you think that is actually more effective to the commission rebate? Or merchants actually prefer more free traffic? And given recommended feeds actually becoming quite effective for merchants, so if that means over the next few quarters we don't have to provide more preferential commission rates over time? Or is that -- it's a separate thing? And the CMR commission growth direction will still be a bit diverged? Thank you. Alicia, let me first answer your question, I think, first of all we are trying to help our merchants, especially SMEs during this pandemic. But we have to -- first of all, we have to give a very fair and transparent policy to all the merchants on our platform. So that's why we decided to use the subsidy to waive the annual fees and also give some reduced commissions in some of our business. This is applied to all the merchants on our platform. And in terms of the free traffic, this is a very interesting question. I will say when we decided to give this support to the merchants, we have to consider the user experience on our platform because we are a marketplace platform -- we are marketplace. We are a platform model. So we have to consider the interests of both merchants and consumers. So if we give free traffic to certain I mean merchants, I think they're -- I mean operating with their conversion rate, or their click through rate of the product may or may not be good enough to the customers. So that's why we don't want to do this one side effort. So we have to ensure good user experience on our platform. But at the same time, we want to share -- we want to satisfy our merchants to release their financial pressure. So that's how we think about this policy. Yes. Let me supplement a little bit, Alicia. So for the subsidy and preferential commission rate, these are two separate things. Subsidy, we are talking about like waving merchants' annual fee and Tmall platform that's a support during COVID-19, right, to help them to go through this difficult time. And this preferential commission rate is an ongoing effort that we have this package all through this year. And talk about either subsidy or preferential rate, I think our operational philosophy is that we're not a believer of just burning money to grow the GMV. We believe that whatever investment we make, it should be supporting the sustainable growth rather than just burn and throw away the dollar. So if you look at our profitability, right, this year we're talking about somewhere over RMB140 billion and we have like US$50 billion cash on our account. So they are money to invest. But we are emphasizing on helping merchants in an efficient and effective and sustainable way. Thanks. Final question comes from the line of Mark Mahaney from RBC. Please go ahead. If you were to talk about the biggest structural changes, do you think that will occur to your business or to the digital economy because of the COVID-19 crisis? What would you say they are? You highlighted increased shopping for groceries online. But including that, other things just step back, what do you think are going to be the biggest structural changes, permanent changes in the way that consumers around the world interact digitally because of this crisis? Thank you very much. I think on top of the new category penetration like in the food and groceries, I think more important -- the other very important change is education and the penetration in the customers who are not a very experienced Internet user or online shoppers before COVID-19. For example, what we see is that during the pandemic, many, many older people, they moved to online and buy everyday needs. And so it's not only about the category penetration, it is also about the user penetration. So we do see this change the lifestyle of many, many people. And the second thing is not about consumption, it's about change the way of working and the changing way of education. So that's why in my remarks, I said that our DingTalk experienced a very, very robust growth during the quarter, because of, they become a very important platform for people or for working of people who stay connected and improve their working efficiencies. And for students and schools, DingTalk become a very efficient platform for online classrooms. So I think this is all about change of the lifestyle, change of the way of working, change of way of education. So this is a very, very fundamental -- these are very fundamental changes. I will say this will stay ever I mean even after the pandemic. Okay. Thanks everyone for joining the call today. If you have any further questions, please feel free to contact the Alibaba IR team. Thank you very much. Thank you. Ladies and gentlemen, this does conclude our conference for today. Thank you for participating. You may all disconnect.

News: Companies News
Site: companies.einnews.com

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Ellington Residential Mortgage REIT 2019 Fourth Quarter Financial Results Conference Call. Today's call is being recorded. [Operator Instructions]. It is now my pleasure to turn the floor over to Jason Frank, Deputy General Counsel and Secretary Sir, you may begin. Thank you, and welcome to Ellington Residential's Fourth Quarter 2019 Earnings Conference Call. Before we begin, I would like to remind everyone that certain statements made during this conference call may constitute forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical in nature. As described under item 1A of our annual report on Form 10-K filed on March 8, 2019, forward-looking statements are subject to a variety of risks and uncertainties that could cause the company's actual results to differ from its beliefs, expectations, estimates and projections. Consequently, you should not rely on these forward-looking statements as predictions of future events. Statements made during this conference call are made as of the date of this call, and the company undertakes no obligation to update or otherwise -- or revise any forward-looking statements whether as a result of new information, future events or otherwise. Joining me on the call today are Larry Penn, Chief Executive Officer of Ellington Residential; Mark Tecotzky, our Co-Chief Investment Officer; and Chris Smernoff, our Chief Financial Officer. As described in our earnings press release, our fourth quarter earnings conference call presentation is available on our website, earnreit.com. Our comments this morning will track the presentation. Please note that any references to figures in this presentation are qualified in their entirety by the end notes at the back of the presentation. With that, I will now turn the call over to Larry. Thanks, Jay, and good morning, everyone. We appreciate your time and interest in Ellington Residential. On our call today, I'll begin with an overview of the fourth quarter. Next, Chris will summarize our financial results. And then, Mark will review the performance of the Agency RMBS market during the quarter, our portfolio positioning and our market outlook. And finally, I'll provide some brief closing remarks before we open the floor to questions. Accommodative monetary policy continued globally in the fourth quarter with a third rate cut from the Federal Reserve, the European Central Bank restarting asset purchases and additional policy support in China. Domestic equity indexes set new record highs and overall market volatility was low, with the VIX hitting its low point for the year in November and the 10-year U.S. treasury yield confined to a relatively narrow 41 basis point range during the quarter. Yield spreads in most fixed income sectors tightened during the quarter, particularly in December. Interest rates drifted up, slowing prepayments in November and December. And the yield curve steepened modestly going into year-end, which you can see on Slide 3 of the deck. All of these factors provided substantial support for Agency MBS. And indeed, during the fourth quarter, the Agency MBS sector posted its largest excess return relative to U.S. treasuries in more than 3 years. To capitalize on the value that we had seen in the agency mortgage basis coming into the quarter, we deliberately maintained a relatively low level of TBA short positions in our hedging portfolio. And so we were well positioned to benefit from the strong performance of Agency MBS in the fourth quarter. As you can see on Slide 4, Ellington Residential generated net income of $0.78 per share for the quarter, generated an economic return of 6.2% and grew book value considerably quarter-over-quarter. We had strong performance from both our long holdings as well as our interest rate hedges as medium- and long-term interest rates rose quarter-over-quarter. Core earnings increased $0.04 sequentially to $0.23 per share in the fourth quarter, while core earnings continue -- sorry. And while core earnings continues to run below our dividend rate, we believe that the prospects for expanding net interest margin and growing core earnings remain strong. With LIBOR rates declining and repo spreads tightening, our borrowing costs continue to fall as we reset our short-term repos, and asset yields remain attractive. Please note that for the sake of simplicity and focus, we are now presenting only one measure of core earnings rather than 2. I'll now pass it over to Chris to describe this particular change and to review our financial results for the quarter. Chris? Thank you, Larry, and good morning, everyone. Please turn to Slide 6 for a summary of EARN's financial results. For the quarter ended December 31, 2019, we reported net income of $9.7 million or $0.78 per share and core earnings of $2.8 million or $0.23 per share. These compared to net income of $3.7 million or $0.30 per share and core earnings of $2.4 million or $0.19 per share for the third quarter. Our strong net income resulted from excellent performance from both our long portfolio and interest rate hedges. You can see here on Slide 6 that in addition to the carry on the portfolio, we generated $9.4 million in net realized and unrealized gains on our RMBS and hedges, while our core earnings improvement was driven by lower borrowing costs, reflecting both lower LIBOR and tighter repo spreads, which more than offset lower asset yields. As Larry mentioned, starting this quarter, we will be presenting only one core earnings metric. As part of this decision, we have modified our definition and calculation of core earnings to exclude the effect of the catch-up premium amortization adjustment. This new definition of core earnings merely matches the definition of what we previously presented as adjusted core earnings, and so we will no longer present adjusted core earnings. As a result, starting with Q4 and going forward, you should compare core earnings against adjusted core earnings for prior periods. These changes are intended to help investors focus on what we believe is the more useful supplemental non-GAAP financial measure when measuring and evaluating our operating performance and when comparing our operating performance to that of our peers. Similarly, net interest margin or NIM for the fourth quarter of 2019 and for future periods should be compared against adjusted net interest margin as presented in earlier periods. A reconciliation of our core earnings to our GAAP net income can be found on Slide 25, where you can see that our catch-up premium amortization adjustment, which is excluded from core earnings and NIM, was negative $2.5 million in the fourth quarter compared to negative $1.6 million in the third quarter. During the fourth quarter, actual and implied volatility was low. Specified pools performed well, and Agency RMBS yield spreads tightened as prepayment rates declined in November and December. In addition, even though medium- and long-term interest rates rose quarter-over-quarter, pay-ups on our specified pools increased. Typically, pay-ups will weaken compared to TBAs in an increasing interest rate environment because they reflect the incremental prepayment protection that specified pools provide, but that didn't happen in the fourth quarter. Average pay-ups on our specified pools increased to 2.05% as of December 31 from 1.86% as of September 30. Finally, the quarter-over-quarter increase in medium- and long-term interest rates generated significant net realized and unrealized gains on our interest rate hedges. Also on Slide 6, you can see that our net interest margin for the quarter was 1%. The average yield on our portfolio declined 8 basis points to 3.13%, while our cost of funds decreased 27 basis points to 2.13%, driven by declining LIBOR and tightening repo spreads. Notably, repo rates were steady at year-end, which indicated that efforts by the Federal Reserve to stabilize that market were successful. At the end of the fourth quarter, our book value per share was $12.91, up $0.49 from the prior quarter. Our economic return for the quarter was 6.2%. Next, please turn to Slide 7, which shows the summary of our portfolio holdings as of December 31, 2019. Our RMBS portfolio increased slightly to $1.402 billion as of December 31 as compared to $1.395 billion as of September 30. Turnover in our Agency RMBS portfolio was 5% for the quarter as compared to 15% in the prior quarter. Our debt-to-equity ratio at the end of the fourth quarter adjusted for unsettled purchases and sales was 8.1:1, a decrease from 8.6:1 as of September 30. Next, please turn to Slide 8 for details on our interest rate hedging portfolio. For the fourth quarter, our interest rate hedging portfolio consisted primarily of interest rate swaps, short positions in TBAs and U.S. treasury futures. TBA short positions represented 13.6% of our hedging portfolio at the end of the fourth quarter as compared to 11.3% at the end of the prior quarter. Turning to Slide 9. You can see that our net long exposure to RMBS increased slightly, so did our equity. And as a result, our net mortgage assets to equity ratio declined slightly to 7.6:1 from 7.7:1. I will now turn the presentation over to Mark. Thanks, Chris. I'm very pleased with the EARN's performance during the fourth quarter and for the full year. For 2019, EARN had an economic return that substantially exceeded the performance of a generic-levered MBS mortgage portfolio, but without exposing shareholders to directional interest rate risk. To prove my point, note that the Bloomberg Barclays MBS Total Return Index had an excess return over treasuries of only 60 basis points for the year. With 7 to 8 turns of leverage, that implies returns between 6% and 7%. In contrast, EARN's economic return was more than double that at 14.6%. In the fourth quarter alone, we had an economic return over 6%. As in previous years, our returns were driven by superior security selection and a thoughtful and dynamic hedging strategy that's designed to protect book value from drawdowns caused by rising interest rate rates or volatility, while simultaneously putting us in position to take advantage of market dislocations. We entered the year with a 10-year note at 2.68%, and the Fed saying we were a long way from neutral. And we ended the year three easings later with the 10-year note at 1.92%, with the Fed seemingly content to sit on their hands for a long time. The sharp drop in interest rates and bouts of volatility necessitated dynamic hedge adjustments, which we see as a primary strength of ours. Prepayment risk made a similar U-turn. The refi index started the year below 1,000 and climbed to 2,700 by the summer. Prepayment protection went from being an afterthought to a must-have. And as a result, the pay-ups of our specified pools quickly repriced substantially higher. While the path of rates was unpredictable, the relative value opportunities were tremendous. EARN was able to avoid landmines and deliver solid performance. Many of the themes that we have discussed at length in previous years wound up defining the market dynamics in 2019, which I'll get into now. First, prepayments went from the wet blanket environment of the past couple of years to a full-fledged refi wave in 2019. Lower mortgage rates were the obvious driver, but technological changes from the GSEs such as Fannie Mae's Day 1 Certainty program also contributed significantly to prepayment speeds. A recognition of the implications of these technological changes played a big part in driving our portfolio positioning. Look at Slide 18, we kept our prepayment protection in place even when it wasn't popular. For the entire year and even at the beginning of the year when the refi index was below 1,000, we recognized that prepayment protection was consistently undervalued. And if rates were to rally enough, prepayment speeds would shoot up and so would the value of call protection, which would reprice even higher than it had in years past. Turn to Slide 10. This shows the 30-year mortgage rate during the second halves of 2016 and 2019. For 2016, the 3-month moving average troughed at 3.45%, while in 2019 it only got as low as 3.62%, more than 15 basis points higher. But now turn to Slide 11, and let's compare the speeds in these two periods. Here, we are comparing the worst to deliver 30-year Fannie Mae 4 in each period, which are the kind of pools you'd expect to get delivered from a TBA contract. While despite higher mortgage rates in 2019 than 2016, prepayment fees were actually significantly faster in 2019. As a result, the pay-up differential between specified pools and TBAs skyrocketed. Another consequence of these speeds was that the dollar roll levels plummeted. Since dollar rolls are generally priced that are cheapest to deliver or essentially the worst pools. We predicted this prepayment behavior based on the improvements in technology in the mortgage market. And accordingly, we positioned ourselves short dollar rolls via our net short TBA position, which was a great way to control interest rate risk. Another core view we had that really helped our Q4 results was that coming into the quarter, mortgage spreads looked pretty good on an absolute basis, but they looked very good on a relative basis. Investment-grade and high-yield corporate bond spreads had tightened dramatically during the year, far outperforming agency MBS. We held the strong view that if long-term interest rates marched higher in Q4 and prepayment risk subsided, mortgages would outperform treasuries and swaps. That's exactly what happened in Q4. Many of our holdings actually went up in price during the quarter, even though interest rates climbed and current coupon MBS prices dropped during the quarter. You can see this on Slide 6. We had gains on both our RMBS and gains on our interest rate hedges. So the yield spread tightening on our mortgages more than offset the interest rate increases. As Chris mentioned, pay-ups on our specified pools actually increased during an increase in long-term interest rates. And this shows just how undervalued our pay-ups were coming into the quarter. So given Q4 performance, how do things look now? Mortgages look pretty good, but not as attractive as at the start of Q4. The nearly 30 basis point drop in 30-year mortgage rates we have seen so far in 2020 has caused the refi index to perk back up, so prepayment risk is clearly back in play and the seasonal downturn in speeds will soon swing to a seasonal upturn in speeds. Repo financing terms have improved materially from Q4, and we think that these improved financing terms are here to stay because they are a result of systemic actions by the Fed designed to keep repo rates tracking the Fed funds rate. We think this could add 5 to 10 basis points on a nominal net interest margin to agency mortgages so as much as 80 basis points of return on a levered basis. Relative value opportunities abound, we are focused on delivering meaningful returns to our shareholders in 2020. Thanks, Mark. I'm extremely pleased with Ellington Residential's performance in 2019. Slide 5 lists some of the highlights. Thanks to our disciplined interest rate hedging and active portfolio management, we successfully navigated a surge in prepayment rates and several periods of volatility during the year and delivered an economic return of 14.6%. Remember, we did that while keeping our interest rate duration very low throughout the entire year, so we believe that this was not only a high return, but an extremely high-quality return. Looking forward to 2020, I really like how we're positioned, and I'm excited about the investment opportunities we're seeing. Lower funding costs are improving our prospects for margin expansion and core earnings growth. And despite tightening in Q4, yield spreads are still attractive relative to hedging instruments, and they look especially attractive on a historical basis relative to investment-grade corporate bonds. But our portfolio was not only fundamentally attractive, it's also extremely liquid. This is especially important given where interest rates currently are. The 30-year treasury yield is flirting with all-time lows as is the 30-year mortgage rate. The MBA refinancing index just hit a 6-plus year high. Keeping our portfolio liquid is a conscious choice we've made at Ellington Residential, precisely so that we have the potential to take advantage of extraordinary market opportunities such as could be presented in an extreme refinancing wave. For example, we are very light on IO product right now, and we'd love to add on significant weakness if we were to see the stress prepayment driven selling in that market. In summary, in 2019, we again demonstrated our ability to generate strong and steady returns in a diversity of market environments, including periods of volatility and of stability, rising and falling interest rates and widening and tightening yield spreads. In 2020, we see a market environment that we believe plays to our strengths, where pool selection, hedging choices and risk management will continue to drive performance. And with our highly liquid portfolio and strong balance sheet, we remain flexible and able to adapt to changing market conditions, and our smaller size allows us to act quickly. And with that, we'll now open the call to your questions. Operator? [Operator Instructions]. And your first question is from Doug Harter of Crédit Suisse. I guess as you look at kind of the market moves that we've seen so far in the first quarter, I guess, where do you see the relative value in kind of the coupon stack? And given where pay-ups are, kind of how do you view the relative attractiveness of specified pools versus kind of more generic collateral? Doug, it's Mark. So we still like specified pools. But I guess within the universe of specified pools, what we like more now are some of the lower pay-up stories, so we're not as big a fan of some of these things that are trading up 3, 4, 5 points from TBA. We have a big research effort here, and we've been very focused on a lot of pools where maybe the pay-ups are somewhere between 0.25 point to 1.5 points, but given our analysis of the data, we think, offer pretty material prepayment protection. So we still definitely prefer paying something over TBA to control the quality and the attributes of what we're buying, but we've rotated a little bit from the more popular prepayment stories, primarily loan balance into some of the other stories where we've analyzed the data, and it looks like these lower pay-up stories are undervalued. Great. And I guess, relative -- on the coupons, it seems like in the first quarter, there's been more divergence in terms of coupon performance. I guess, how are you thinking about relative attractiveness there? Yes. Some of that gets a little bit into the specifics of portfolio positioning that we normally don't go into on the call. But I guess, I would say that we're seeing certainly some attractive opportunities in 15-year space, which wasn't an area that was attracting a lot of our pool dollars last year. But I would say across the curve, it really changes a lot day-to-day that you have seen pretty big repricings within a week or within a two week period of time. So we kind of have a consistent framework where we look at the prepaid protection, and we look at where the cash flows are versus swaps or treasury hedges and see what that translates into a levered NIM. So we've been -- we cast a wide net, right? And so we bought things anywhere from 2.5s and 3s up to 5s in the past few months, and we've seen value in all of them. Your next question is from Mikhail Goberman of JMP Securities. I was wondering if you gentlemen could maybe give an update on where you're seeing prepays thus far in the first half of the first quarter and along maybe with an update on book value? I'll pass to Mark on prepays. Book value will -- we can talk generally about what's happened in the mortgage basis, but I wouldn't want to go into any more detail than that. But go ahead, Mark. Yes. In terms of prepayment, so the prepayment report that we got the fifth business day of February, that showed, as expected, a decline in prepayment speeds from the peak, but you're starting to get -- that was really reflective of higher mortgage rates than where we are now. Larry mentioned in his script that the last print of the mortgage index -- and given that that's a weekly time series and you can have -- make adjustments for day count and stuff that can be volatile. But the last print in the refi index was -- it jumped up substantially, right? And that's really reflective of sort of the current mortgage rates. So I think you've had this slower speeds so far in the prepayment report that was received by the markets at fifth business day at January and also slower speed than what we had at the end of '19 in the prepayment report that came out the first week of February. We expect the prepayment report that comes out first week of March still won't show a big uptick in speeds. When you get to the April report, we think you're going to see faster speeds than what we're in right now. And that will really be reflective of the lower mortgage rates that are in the market right now. Okay. And one question on operating expenses. I noticed you had a very nice quarter in terms of improvement in the expense ratio from about, say, 3.5% of average equity to maybe 3.25%. Is there more appetite to drive that ratio downwards maybe into the two handle range? Or how much room do you guys have? Yes. Obviously, that was welcome. And the -- that downtick was just thanks to some slightly lower professional fees. But in all candor, at the current capital -- at our current capital base, I don't see much potential for trimming that below -- that G&A expense ratio below 3%. But look, I mean, this is not an S&P 500 index fund, where you're going to compare companies based on -- based largely on those expense ratios. We'd love it to be a little bit lower. But if you look at all the different decisions that we're making, how we position the portfolio during the month, I mean, there's a huge divergence in the industry in terms of returns. We think that our small size, obviously, one con on that is a higher G&A expense ratio, slightly higher, but we think that we make up for it in the nimbleness of the company to react to changes in the market. And we think that in the long run, given our -- what we think is a unique strategy of keeping interest rate duration so low. I mean, I think we're unique in the extent to which we do that. And also our, at times, very heavy use of TBA short positions, obviously, we were not as heavy in TBAs in the fourth quarter. But that's something, if you look back to 2018 and earlier years, we were, at times, very heavy in that sector. So these are things that I think differentiate EARN from a lot of the other companies in the space, and I think will make a big difference and will eventually lead to outperformance over market cycles. We're not going to be -- as we've sort of said before, when there is a tailwind in the mortgage market, we're not going to be the highest performing company in the space. But at 14.6% last year, that certainly is an excellent return. And we think that over market cycles, we'll have much less volatility and a greater total return in the long run. So yes. So I don't see much improvement from where we are now, but I think there's a lot of countervailing benefits as well. Thank you. This does conclude our Q&A session for today. We thank you for your participation. Please disconnect your lines at this time, and have a wonderful day.

News: Business Wire Energy News
Site: www.businesswire.com

HOUSTON--(BUSINESS WIRE)--Kinder Morgan, Inc. (NYSE: KMI) announced today that investment funds managed by EIG Global Energy Partners (EIG) have become a 49 percent joint venture participant in Elba Liquefaction Company, L.L.C. (ELC) which will own 10 liquefaction units and other ancillary equipment to be constructed as part of the Elba Liquefaction Project at Kinder Morgan's existing Southern LNG Company, L.L.C. Elba Island LNG facility near Savannah, Georgia. To acquire its membership interest, EIG has made an upfront cash payment of approximately $385 million, consisting of: a $215 million reimbursement to KMI for EIG's 49 percent share of prior ELC capital expenditures, excluding capitalized interest; and a payment of approximately $170 million in excess of capital expenditures in consideration of the value created by KMI in developing the project to this stage. EIG has agreed to fund its share of future capital expenditures necessary to complete construction and commissioning of the liquefaction facility, subject to the terms and conditions contained in the applicable agreements. The total project cost is estimated to be approximately $1.3 billion, excluding capitalized interest. "We are excited that EIG will become an equity owner in Elba Liquefaction Company as construction continues at Elba Island. The project, which began construction on Nov. 1, 2016, is supported by a 20-year contract with Shell," said Steve Kean, Kinder Morgan president and chief executive officer. "As we have told the market in past months, this JV is another strategic step towards achieving our stated goals of strengthening our balance sheet and positioning the company for long-term value creation," Kean said. "This is a tremendous project that builds on our long-standing and extensive experience in LNG and LNG-related infrastructure," said Wallace Henderson, Managing Director of EIG. "We are delighted to partner with Kinder Morgan and its outstanding development team to make the Elba Liquefaction Project a reality." Initial liquefaction units are currently expected to be placed in service in mid-2018, with final units coming on line by early 2019. In 2012, the Elba Liquefaction Project received authorization from the Department of Energy (DOE) to export to Free Trade Agreement (FTA) countries, and on Dec. 16, 2016, the DOE issued non-FTA export authority. The project is expected to have a total capacity of approximately 2.5 million tonnes per year of LNG for export, equivalent to approximately 350 million cubic feet per day of natural gas. Barclays acted as the exclusive financial advisor to KMI during this transaction. Kinder Morgan, Inc. (NYSE: KMI) is one of the largest energy infrastructure companies in North America. It owns an interest in or operates approximately 84,000 miles of pipelines and 155 terminals. The company's pipelines transport natural gas, gasoline, crude oil, CO and other products, and its terminals store petroleum products and chemicals, and handle bulk materials like coal and petroleum coke. For more information please visit www.kindermorgan.com. EIG specializes in private investments in energy and energy-related infrastructure on a global basis and had US$14.4 billion under management as of December 31, 2016. Since 1982, EIG has been one of the leading providers of institutional capital to the global energy industry, providing financing solutions across the balance sheet for companies and projects in the oil and gas, midstream, infrastructure, power and renewables sectors globally. EIG has invested US$23.1 billion in more than 310 portfolio investments in 36 countries. EIG is headquartered in Washington, D.C., with offices in Houston, London, Sydney, Rio de Janeiro, Hong Kong and Seoul. For more information, please visit www.eigpartners.com. This news release includes forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995 and Section 21E of the Securities and Exchange Act of 1934. Generally the words "expects," "believes," anticipates," "plans," "will," "shall," "estimates," and similar expressions identify forward-looking statements, which are generally not historical in nature. Forward-looking statements are subject to risks and uncertainties and are based on the beliefs and assumptions of Kinder Morgan and EIG management, based on information currently available to them. Although Kinder Morgan and EIG believe that these forward-looking statements are based on reasonable assumptions, the firms can give no assurance that any such forward-looking statements will materialize. Important factors that could cause actual results to differ materially from those expressed in or implied from these forward-looking statements include the risks and uncertainties described in Kinder Morgan's reports filed with the Securities and Exchange Commission, including its Annual Report on Form 10-K for the year-ended December 31, 2015 (under the headings "Risk Factors" and "Information Regarding Forward-Looking Statements" and elsewhere) and its subsequent reports, which are available through the SEC's EDGAR system at www.sec.gov and on its website at ir.kindermorgan.com. Forward-looking statements speak only as of the date they were made, and except to the extent required by law, Kinder Morgan and EIG undertake no obligation to update any forward-looking statement because of new information, future events or other factors. Because of these risks and uncertainties, readers should not place undue reliance on these forward-looking statements.

News: PR Newswire, Heavy Industry & Manufacturing
Site: www.prnewswire.com

"In addition to paying consistent, tax-efficient distributions, totaling more than $7.42/share since inception, TI+ has delivered appreciation along with industry-leading performance in risk-adjusted returns, a key data point to measure both total return and volatility," reported Jeffrey Schwaber, Chief Executive Officer of Bluerock Capital Markets.1 TI+ has delivered risk adjusted returns (as measured by the Sharpe Ratio) of nearly four times higher than leading stock, bond, and REIT indexes2. From its inception through May 2018, TI+ has generated total annualized returns of 8.21%, with lower volatility and lower correlation to the broader markets2, and has paid 18 consecutive distributions at the current annualized rate of 5.25%*. Trailing year through March 2018, 2017 and 2016, TI+ generated the highest risk-adjusted return (as measured by the Sharpe Ratio) among all 1,200+ global open-end, closed-end, and exchange traded real estate funds in the Morningstar universe1. TI+ provides an opportunity for individuals to invest in institutional real estate alongside some of the nation's leading institutions, in a portfolio of nearly 2,900 Class-A properties throughout the U.S. and more than $165 billion in underlying real estate value. The fund utilizes its partnership with Mercer Investment Management, Inc. to select top-rated institutional private real estate managers, including AEW, Blackstone, Morgan Stanley, Principal, Prudential, Clarion Partners, J.P. Morgan, Invesco and RREEF, among others. Mercer is the world's leading advisor to endowments, pension funds, sovereign wealth funds and family offices globally, with over 3,300 clients worldwide, and $11 trillion in assets under advisement. TI+ offers individual investors access to a portfolio of institutional real estate securities managed by top-ranked fund managers. The fund seeks to provide a comprehensive real estate holding designed to provide a combination of current income, capital preservation, long-term capital appreciation and enhanced portfolio diversification with low to moderate volatility and low correlation to the broader equity and fixed income markets. TI+ is widely available through the independent broker-dealer network, registered investment advisors, and on numerous platforms including TD Ameritrade, Schwab, and Fidelity. The minimum investment in the fund is $2,500 ($1,000 for retirement plans) for Class A and Class C shares. Please visit the fund's website for details at www.bluerockfunds.com. 1 Morningstar Direct, annualized geometric Sharpe Ratio, based on daily data from 2016-2018. Using Morningstar data compiled by Bluerock Fund Advisor, LLC, TIPRX received the highest Sharpe Ratio among 1,200+ open end, closed end, and exchange traded funds in the global real estate sector equity category for the two year plus period ending 12/31/16, 12/31/17, and 3/31/2018. TIPRX A Shares; no load. Sharpe Ratio is only one form of performance measure. The Sharpe Ratio would have been lower if the calculation reflected the load. 2 Indexes with respective Standard Deviations and Sharpe Ratios (inception through 3/31/2018): Stocks: S&P 500, 14.92%, 1.40; Bonds: Bloomberg Barclays U.S. Aggregate Bond Index, 3.76%, 0.54; REITs: MSCI U.S. REIT Index, 17.60%, 0.58; TI+ Fund: 1.96%, 5.88. TI+ Correlations (inception through 3/31/2018): Stocks: S&P 500, 0.33; Bonds: Bloomberg Barclays U.S. Aggregate Bond Index, 0.13; MSCI U.S. REIT Index, 0.48. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate, so that shares, when redeemed, may be worth more or less than their original cost. For performance information current to the most recent month end, please call toll-free 1-888-459-1059. Past performance is no guarantee of future results. The total annual fund operating expense ratio, gross of any fee waivers or expense reimbursements, is 2.38% for Class A, 3.12% for Class C, 2.15% for Class I, and 2.69% for Class L. The Fund's investment adviser has contractually agreed to reduce its fees and/or absorb expenses of the fund, at least until January 31, 2019 for Class A, C, I and L shares, to ensure that the net annual fund operating expenses will not exceed 1.95% for Class A, 2.70% for Class C and 1.70% for Class I, and 2.20% for Class L, per annum of the Fund's average daily net assets attributable to Class A, Class C, Class I, and Class L shares, respectively, subject to possible recoupment from the Fund in future years. Please review the Fund's Prospectus for more detail on the expense waiver. A Fund's performance, especially for very short periods of time, should not be the sole factor in making your investment decisions. Fund performance and distributions are presented net of fees. The Total Income+ Real Estate Fund invests the majority of its assets in institutional private equity real estate securities that are generally available only to institutional investors capable of meeting the multi-million dollar minimum investment criteria. As of the end of the second quarter, the value of the underlying real estate held by the securities in which the Fund is invested exceeded $165 billion, including investments managed by AEW, Blackstone, Morgan Stanley, Principal, Prudential, Clarion Partners, J.P. Morgan, Invesco and RREEF, among others. The minimum investment in the Fund is $2,500 ($1,000 for retirement plans) for Class A, C, and L shares. For copies of TI+ public company filings, please visit the U.S. Securities and Exchange Commission's website at www.sec.gov or the Company's website at www.bluerockfunds.com. Investing in the Total Income+ Real Estate Fund involves risks, including the loss of principal. The Fund intends to make investments in multiple real estate securities that may subject the Fund to additional fees and expenses, including management and performance fees, which could negatively affect returns and could expose the Fund to additional risk, including lack of control, as further described in the prospectus. The Fund's distribution policy is to make quarterly distributions to shareholders. The level of quarterly distributions (including any return of capital) is not fixed and this distribution policy is subject to change. Shareholders should not assume that the source of a distribution from the Fund is net profit. A portion of the distributions consist of a return of capital based on the character of the distributions received from the underlying holdings, primarily Real Estate Investment Trusts. The final determination of the source and tax characteristics of all distributions will be made after the end of each year. Shareholders should note that return of capital will reduce the tax basis of their shares and potentially increase the taxable gain, if any, upon disposition of their shares. There is no assurance that the Company will continue to declare distributions or that they will continue at these rates. There can be no assurance that any investment will be effective in achieving the Fund's investment objectives, delivering positive returns or avoiding losses. Investors should carefully consider the investment objectives, risks, charges and expenses of the Total Income+ Real Estate Fund. This and other important information about the Fund is contained in the prospectus, which can be obtained online at www.bluerockfunds.com. The Total Income+ Real Estate Fund is distributed by ALPS, Inc. The prospectus should be read carefully before investing. Bluerock Fund Advisor, LLC is not affiliated with ALPS, Inc. * The Fund's distribution policy is to make quarterly distributions to shareholders. The level of quarterly distributions (including any return of capital) is not fixed. However, this distribution policy is subject to change. The Fund's distribution amounts were calculated based on the ordinary income received from the underlying investments, including short-term capital gains realized from the disposition of such investments. Shareholders should not assume that the source of a distribution from the Fund is net profit. A portion of the distributions consist of a return of capital based on the character of the distributions received from the underlying holdings, primarily Real Estate Investment Trusts. The final determination of the source and tax characteristics of all distributions will be made after the end of the year. Shareholders should note that return of capital will reduce the tax basis of their shares and potentially increase the taxable gain, if any, upon disposition of their shares. There is no assurance that the Company will continue to declare distributions or that they will continue at these rates. MSCI US REIT Index (Public REITs): A free float-adjusted market capitalization weighted index comprised of equity REITs that are included in the MSCI US Investable Market 2500 Index, with the exception of specialty equity REITs that do not generate a majority of their revenue and income from real estate rental and leasing operations. The index represents approximately 85% of the US REIT universe (www.msci.com). Returns shown are for informational purposes and do not reflect those of the Fund. You cannot invest directly in an index and unmanaged indices do not reflect fees, expenses or sales charges. Risks include rising interest rates or other economic factors that may negatively affect the value of the underlying real estate. S&P 500: An index of 500 stocks chosen for market size, liquidity and industry grouping, among other factors. The S&P 500 is designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe (Investopedia). Bloomberg Barclays U.S. Aggregate Bond Index: A broad-based flagship benchmark that measures the investment grade, US dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS and CMBS (agency and non-agency). Provided the necessary inclusion rules are met, US Aggregate eligible securities also contribute to the multi-currency Global Aggregate Index and the US Universal Index, which includes high yield and emerging markets debt. Risks include rising interest rates or other economic factors that may negatively affect the value of the underlying bonds. Sharpe Ratio: Measurement of the risk-adjusted performance. The annualized Sharpe ratio is calculated by subtracting the annualized risk-free rate - (3-month Treasury Bill) - from the annualized rate of return for a portfolio and dividing the result by the annualized standard deviation of the portfolio returns. You cannot invest directly in an index. Benchmark performance should not be considered reflective of Fund performance.

News: Companies News
Site: companies.einnews.com

Restaurant Brands International Inc. (NYSE:QSR) Q4 2019 Results Earnings Conference Call February 10, 2020 8:30 AM ET Good morning and welcome to the Restaurant Brands International Fourth Quarter 2019 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation there will an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Chris Brigleb, RBI's Head of Investor Relations. Mr. Brigleb, please go ahead. Thank you, operator. Good morning everyone, and welcome to Restaurant Brands International's earnings call for the fourth quarter and full year ended December 31, 2019. As a reminder, a live broadcast of this call maybe accessed through the Investor Relations webpage at investor.rbi.com and a recording will be available for replay. Joining me on the call today are Restaurant Brands International's CEO, José Cil; COO, Josh Kobza; and CFO, Matt Dunnigan. Today's earnings call contains forward-looking statements, which are subject to various risks set forth in the press release issued this morning and in our SEC filings. In addition, this earnings call includes non-GAAP financial measures. Reconciliations of non-GAAP financial measures are included in the press release available on our website. Let's quickly review the agenda for today's call. José will start with some opening remarks and highlights for the fourth quarter and then discuss our performance at Tim Hortons, Burger King and Popeyes. Josh will then provide an update on technology at RBI, both as a review of what we've accomplished thus far and a frame for key areas of focus moving forward. To conclude, Matt will review our financial results before opening the call up for Q&A. I'd now like to turn the call over to José. Thanks, Chris and good morning everyone. Thank you for joining us on today's call. I'll begin my remarks today with a summary of our performance in 2019, which reflected the underlying strength of our global business and the power of our growth algorithm. I will then share my views and the key drivers of our performance last year, as well as our specific plans and priorities for 2020. On a consolidated basis we delivered strong results in 2019. Our system-wide sales grew over 8% to $34 billion for the full year and nearly 10% to approximately $9 billion in the fourth quarter. Our 8% system-wide sales growth in 2019 included 5% unit growth to over 27,000 restaurants worldwide combined with over 3% consolidated global comparable sales growth. Our unit growth this year represents a solid continuation of growth relative to the goal we shared with you at our Investor Day in May of reaching 40,000 restaurants in 8 to 10 years as we grew our global unit count by over 5% for the third year in a row. The consolidated system-wide sales growth of over 8% that we delivered in 2019 was driven primarily by Burger King where system-wide sales increased over 9% and Popeyes where system-wide sales grew over 18%. At Tim Hortons, system-wide sales dropped slightly in 2019 as our performance in Canada came in below our expectations. Despite the challenges at Tim's we were able to achieve system-wide sales growth in the high single-digits on a consolidated basis reflecting an important vantage of our scale and diversified model. Within our 8% consolidated system-wide sales growth we generated consolidated comparable sales growth of over 3% which reflected a very healthy contribution from Burger King where comparable sales grew approximately 3.5% and an especially strong contribution from Popeyes, where comparable sales grew over 12% for the full year. At Popeyes comparable sales growth accelerated to over 34% in the fourth quarter driven by the re-launch of the Chicken Sandwich in November which led to nearly 38% growth in the U.S. This has been a very exciting time for the Popeyes team and in fact has been an exciting time for all of us who spent a long time in QSR and have never seen the kind of guest response for a single product launch like the one we had for our Popeyes chicken sandwich. At Tim's comparable sales of negative 1.5% again primarily reflected weak topline performance in Canada and represented a drag on our otherwise healthy consolidated growth rate. Comparable sales at Tim's included meaningful deceleration in the fourth quarter to negative 4.3% globally and negative 4.6% in Canada. On top of our consolidated comparable sales growth, in 2019 we delivered over 5% growth in net units across our brands. At Burger King we expanded our network by nearly 6% while at Popeyes we delivered unit growth of nearly 7%. At Tim's unit growth was approximately 2% and for both Popeyes and Tim's our unit growth in 2019 reflected the very early stages of several recent and significant international development deals in key Asian markets. Turning to franchisee profitability, we saw a slight year-over-year drop at Burger King in the U.S. due to cyclically high commodity prices, but unit economics remained at a very healthy level as we closed out the year. This is true especially for our new developments which have sales averaging over 60% higher than those at the legacy restaurants and the closure program that we discussed at our Investor Day. At Popeyes, franchisee profitability increased substantially on top of an already strong baseline, boosted by the incredibly strong launch of our Chicken Sandwich. And finally, at Tim's lower sales combined with some pressure from labor costs in parts of Canada resulted in lower franchisee profitability year-over-year. However, franchisee profitability remains very healthy at Tim's in Canada and the related unit economics are still some of the very best in the industry. I'm going to start my brand commentary with Tim Hortons this morning. Our approach to product innovation and promotions over the last couple of years has led us to disappointing results for the quarter and the year. There's clearly a sizable gap between what this brand is capable of and the performance we've delivered and I'm going to spend some time this morning sharing what we are doing now to return the business to the growth track it should be on given the strength of the assets we have. Our year-over-year decline in comparable sales of negative 4.6 in Canada was primarily driven by the investments in our Rewards Program we're making to attract millions of Canadians to join and participate in our Tim's Loyalty Program which contributed approximately negative 3% to our reported comparable sales figure. Our pursuit of a best-in-class loyalty program is focused on increasing the already exceptionally high level of engagement, deep relationship, and personalized connectivity with our guests. Given Tim's existing dominant market leadership position in brewed coffee, we believe this powerful marketing tool has the ability to not only help us defend, but continue to grow market share over time. We're building a platform that understands what our guests want and engages and rewards our guests for their loyalty with exciting offers and great value for money. We think this platform will help us deliver continued long-term growth for the brand by driving incremental traffic and increased check average in our restaurants. Our loyalty journey involves two important phases. Our first phase has seen us attract more than 7.5 million active loyalty members and for the last 10 months they've been receiving a simple and compelling offer that provides a free coffee or baked good after seven visits to a restaurant. As we have previously noted, we've attracted far more guests to our loyalty program, far more quickly than we had planned, and we currently have about 25% of these guests who have registered and share their contact information with us. Our second phase of loyalty will encourage much higher levels of registration by making most of the menu accessible for redemptions and adding exciting, tailored offers based on your purchase history. We are shifting from a visits program to a points program where each purchase occasion earns you points that you can redeem from most of our menu items. Our central priority in the second phase is to drive digital registration and a lot of powerful tools like sales intelligence and one-to-one marketing that we'll use to develop stronger relationships with our guests and drive incremental sales over time. Our extensive research with guests indicates that a large majority of our guests will register over time to take advantage of our great offers and fuller menu of rewards. This will in turn allow us to evolve the program into an engine that delivers incremental value to guests while generating incremental sales for the system. Guests who choose not to register will shift from a free reward after seven visits to a free reward after 12 visits. The timing of the shift to the second phase is now. Last Friday we initiated a major shift in our marketing around the program designed to communicate simple ways to register via mobile or on the web and also highlight the extra benefits available when you register. We expect that loyalty will continue to be a drag on sales for the coming several quarters as we convert loyalty guests to register loyalty guests and start deploying incremental offers at scale. We will be delivering a more personalized experience to our guests that should bring more benefits and generate incremental sales in the latter part of 2020 and beyond. In addition to the impact of loyalty, our comparable sales in Q4 also reflected softness in lunch food which contributed approximately negative 1% to our reported comparable sales figure. Our weakness in this area is attributable primarily to the sandwich and wrap category where offerings this year did not match strong sales from our crispy chicken wrap in 2018. Over the past several months, I've made Tim Hortons in Canada my top priority and I've examined our performance and processes in detail. The team has spent months dissecting every part of the business, conducting extensive new research, spending considerable time with our restaurant owners, identifying the underlying causes of our weak performance, and zeroing in on the large areas of opportunity to drive sustained long-term improvements in the business. After several months of hard work, our team has emerged with a clear view of what we need to do to accelerate growth and profitability for owners and for the brand. It is useful to start by acknowledging what made Tim Hortons the dominant brand and market leader in Canada. Tim Hortons had five informal founding values that we have spent quite a bit time thinking about. Each value has been key to our success in Canada over decades and remains relevant today, albeit in a refreshed and modernized way. When Tim's was founded back in 1964 these values embody the ethos of a brand that would grow over decades to become one of Canada's most loved. First, Tim's has always been obsessed with freshness and quality. Second, we made things simple for everyone. Third, we offered great value for money. Fourth, we believe personal relationships matter, and fifth, we've always given back to the communities where owners live and work. In our review of our tactics going back several years, it's clear we strayed from these core values and we must now adjust our strategy to reconnect with them. With that as a backdrop, I'd like to now summarize our plans for 2020. It starts with reorienting and reinforcing our team under Axel Schwan, who many of you have not had a chance to meet yet, but has tremendous experience having served as Global CMO, Burger King, and more recently as Global CMO of Tim's where he has led the development of our fresh brewers, welcome 2020 and the innovation café. Axel and I have been working shoulder to shoulder focused on building an experienced team of Canadians that have deep expertise in the most critical areas of the restaurant business in Canada and North America. We've announced a number of meaningful changes, including recently, the appointment of a Canadian industry veteran as Chief Sales and Marketing Officer in addition to well-established Canadian experts to lead our development, restaurant technology and communications efforts. I have been working hard with a full team to put together a roadmap for 2020. Our plan reflects a return to Tim's founding values and is designed to reinforce the core product categories that have made us famous over the years. There is not catchy name to the plan, reflecting our mentality to simplify the business as we return to being the best at our basics and embracing our heritage, all while infusing some more modern features. As we move forward we've focused our efforts around three key principles. First, elevating the quality of our core categories; second, innovating for growth from our core categories; and third, continuing to invest in modernizing the brand. Within this framework we've identified initiatives to support each of our principles, some of which we've already seen progress against during the first quarter of 2020. Let's go through each one by one. Elevating core quality is about reinforcing the most fundamental elements of our menu and raising the standard for products to bring millions of guests into Tim Hortons every day. Coffee sits at the very heart of Tim's identity and is one of the most important contributors to sales. Breakfast food is another huge part of our business and has been one of our strongest growing categories for the past five years. While we already have a market leading position in both areas, we plan to build on this leadership by committing ourselves to serving the absolute best products in Canada. In coffee, Tim's has an incredibly rich history as Canada's local coffee shop and our cup is unambiguously the category benchmark. On the supply side, we truly have some of the best sourcing, blending, and roasting capabilities in the world. We sourced 100% premium Arabica beans which adhere to strict standards for grade and taste and have a long-standing in-house team of coffee experts that carefully monitors our roasting and grinding to ensure we meet the highest standard of quality. While we meaningfully differentiate ourselves in this respect, we have continued to use decades-old brewing technology while the industry has evolved in ways that both enhance consumer tastes and improve efficiency in restaurants. We are addressing this opportunity head-on with the rollout of fresh brewers and growers and wonderful tracing [ph] systems at every store across Canada which we began towards the end of 2019, but is accelerating in 2020. Compared with the coffee prepared in our traditional glass pots, our guests have told us that the quality of coffee from our fresh brewers is significantly better and more consistent on multiple dimensions. The fresh brewer system is already in place at over 2000 restaurants and we expect to complete the accelerated rollout in the first half of this year. In parallel we will be on air across Canada with TV, digital, and other marketing that highlights our leadership in coffee quality in a way that the Canadian public hasn't seen or heard for many years. Taking coffee prep a step further, we also need to respond to changes in consumers taste preferences over time. Based on our research, a substantial percentage of Canadian consumers prefer skim milk with their coffee and a growing percentage, particularly among younger guests, prefer nondairy alternatives like almond milk. Up to this point, we have not offered these options to our guests and have lagged behind competitors. We're working quickly to address this and are launching these alternative dairy options into the market this spring. These adjustments may seem basic, but that's the point, being the absolute best at the basics that we're already famous for. You've already seen progress around several initiatives to bolster our brewed coffee platform, including last year's packaging update, and you'll see considerably more progress as we move through 2020. Improving our brewing technology in-store, enhancing options to customize, and putting coffee front and center in our brand messaging are among our most important near-term areas of focus and there's more to come. Let's talk about breakfast, which has been a core strength for us for many years. While our research has demonstrated our unequivocal leadership in sweet foods, it is also pointed to an opportunity to improve our savory offerings and we're moving quickly to execute against it. In core offerings like our bacon breakfast sandwich for example, we're working to enhance the taste, texture, and overall quality of our bacon, which as the headline ingredient must be outstanding. Similarly, we're moving to significantly improve the bread carriers for our breakfast sandwiches, which our testing has indicated represents a key opportunity to make our savory breakfast food more satisfying and cravable. The second pillar of our plan is innovating for growth in our core categories. As I mentioned earlier, it clear to us that our recent approach to innovation has lacked the focus necessary to resonate with guests. In 2019 we launched nearly 60 LTOs, three times our level from 2017, which added complexity to our restaurants, cluttered our menu and diluted our marketing communications. Some new products over the last two years strayed too far from our core categories that we've always been famous for. Going forward, new launches will be more targeted and will build on our core categories. Our recently launched dream donuts line is a great example of the type of innovation you will see more of. We first tested this new line of elevated premium donuts at our Innovation Café in Toronto where it generated strong and sustained sales at a premium price point of $1.99. After its success at the Innovation Café, the line gained momentum in market tests and from an operational perspective fits seamlessly into our core baked goods assortment. We launched three dream donuts flavors nationally in January and so far results have been encouraging. And you will continue to see us drive innovation for growth from our other core categories. For example, alongside our work on brewed coffee, we have an opportunity to enhance our cold beverage category through improvements through our iced coffee offering. In recent years, iced coffee has emerged as an increasingly important core growth category and we believe we are well-positioned to build on top of our already meaningful base. We've developed a new method that results in a much more flavorful brew which will be rolled out in coming months. We will support the rollout with a marketing campaign that showcases our leadership and quality and believe this platform will be an important source of incremental growth. The third pillar of our 2020 plan is to continue our investments to modernize the brand. We've spoken recently about our growing digital capabilities at RBI which Josh will discuss later. At Tim's we're moving this year to integrate technology into our most important touch points with guests. Consider the drive-through. In the past five years growth in the drive-through has outpaced growth at the front counter and today we generate more than half of our total sales in Canada from drive-through. We believe we're uniquely well-positioned to capitalize on growth in this channel given our network of over 2600 drive-through locations across Canada. Further, our research has identified speed and reliability of the drive-through as being especially important to our convenience oriented guests. Despite the increasing importance of the drive-through however, our drive-through experience hasn't seen a meaningful update in decades. In 2020 we're moving forward with an important initiative to modernize the drive-through experience by deploying outdoor digital menu boards through the majority of our drive-through locations. Our current paper-based menu boards cost millions of dollars each year to print and update and they require manual changes by team members multiple times per day. Switching to digital menu boards in the drive-through will free up time for team members to focus on serving guests while ensuring that the proper information is always on display. These outdoor digital menu boards will also allow us to tailor offerings depending on location, time of day, weather and more. We will be able to offer complimentary products and combos to guests based on the items they've selected and at a future stage we believe personalized offers will provide another important layer of growth. We have already installed outdoor digital menu boards in several hundred stores and consistent with prior funding structures, the Tim Hortons Canada ad fund will invest over $100 million Canadian to complete the installation across most drive-through locations over the next 12 to 18 months. Where we've installed the outdoor digital menu boards already, we've started to see some benefits to sales even before considering the potential future benefits of future tailored offerings. We've also seen a positive impact to speed of service and we know throughput is very important for sales given the heavy ticket volumes of our business. On top of this investment to update our drive-through experience, we will also continue to invest alongside our owners to modernize our restaurant network through reimages. In recent years we've contributed to several hundred renovations per year at locations where we own or sublease the real estate and we expect to continue investing at a similarly healthy pace in 2020. We've shared in the past I believe that cultivating digital relationships with guests will be a critical differentiator going forward. And on my initial comments and shifting into the second phase of our Tim's Reward Loyalty Program will sit at the center of our strategy to advance into this new age of digital engagement and personalized interaction with our guests across Canada. Following the rollout of our new Tim's Rewards Program, we'll also be updating our iconic [indiscernible] program when it returns in the coming weeks. This year's program will tie into our focus on digital and will be another valuable tool to help drive digital adoption and guest registration and the Tim's Rewards Program. We will be announcing more details on the program soon. In Canada, Tim Hortons continues to have one of the strongest market positions in all of QSR globally and some of the industry's best unit economics, but we cannot be complacent. We have not performed to expectations and have not properly put the strength of the Tim Hortons brand to work. Despite our recent results, we have a clear plan and believe it's within our control to restore Tim Hortons to growth in Canada. To do so, we will embody the brand's founding values and execute on each of our principles around elevating core quality, innovating for growth, and modernizing the brand. Over the past two weeks I've traveled to seven cities across Canada with the entire Tim Hortons leadership team. We've met with more than 1000 restaurant owners and have participated in more than 12 hours of collaborative and engaged open format dialogue and Q&A. In each session we've talked at length about the profitability, our priorities for 2020, and our mutual commitment to providing guests with a great experience every time they visit Tim Hortons. I also shared my commitment to work closely with our team and community of owners in Canada as we execute against our plan. I'm glad that coming out of these town hall meetings we all shared a sense of urgency and have rallied behind the plan to refocus on what made Tim's famous. I'd like to turn now to Burger King, where our global business generated strong results in 2019. But before I do, I wanted to quickly comment on the unfolding situation in China. Our immediate focus is the health and well-being of our partners and guests, and cooperating with local and government officials working to contain the coronavirus. For reference, in 2019 Burger King in China accounted for approximately 2% of our consolidated system-wide sales. While it's too early to say how long the impact on our business there will last, we're monitoring the situation very closely. Now back to our results at Burger King. In 2019 system-wide sales grew over 9% to nearly $23 billion, including comparable sales growth of over 3% and net restaurant growth of just under 6%. Our results for the full year included another very strong contribution from our international business where system-wide sales expanded over 15%, increasing over $1 billion year-over-year. Within that figure, international unit growth reached almost 10% and propelled global unit growth to over 1000 net new restaurants for the third consecutive year. In addition, international comparable sales continued to grow at a strong pace of nearly 5%. This growth was broad-based, but system-wide sales growth was especially strong in markets like France, Spain, Korea, China, Brazil and Mexico. As we outlined during our Investor Day, we believe we have a great deal of runway for Burger King around the globe, especially internationally. In fact, we've see that as our presence grows in different regions, our brand awareness and convenience increase as well, powering this virtuous growth cycle. With system-wide sales of nearly $13 billion, up from $8 billion five years ago, our international business now represents a majority of Burger King global sales. And with double-digit growth in each of the last three years across regions, we expect Burger King's international operations will continue to be a powerful engine of growth going forward. In the fourth quarter specifically, international system-wide sales at Burger King expanded almost 15% with strong growth across several markets in Asia fueled by comparable sales growth, increased penetration of digital channels and substantial unit growth. In Europe, our partners in Spain and France also delivered double-digit system-wide sales growth driven by healthy net unit additions and comparable sales performance. I highlight these large and fast growing markets, but again, our growth for the full year and in the fourth quarter was broad-based across regions. In the U.S. we continued to see healthy momentum in our core offerings and strong performance from the Impossible Whopper during 2019. Our comparable sales increased 1.7% for the full year and we saw solid growth across our menu. Digital sales also continued to increase at a healthy pace. We now have over 4200 stores in the U.S. with delivery integrated directly into the POS and of these a majority offer delivery via multiple aggregators. As I mentioned the Impossible Whopper was a big highlight of 2019 and continued to be an important sales driver in Q4, generating healthy levels of incrementality at a premium price point. Given the sustained performance of the Impossible Whopper, we're confident that plant-based food represents a new platform for the brand and one that we can build in communications, day parts, products and proteins. We know that the premium price point has limited some guests from trying the Impossible Whopper, so in January, we Impossible Whopper to our core 2 for 6 promotion. The product clearly resonates with our guests and we plan to invest behind our leadership in the fast growing plant based segment. While we did see a deceleration in comparable sales growth in the U.S. from the third into the fourth quarter, our core business continues to perform well and absolute sales levels remained very healthy. In the fourth quarter we didn't run as many price oriented promotions as compared to last year like dollar nuggets and consequently saw softer year-over-year growth. In the first quarter of 2020, we're running several compelling offers, including our 5 for 4 deal and our 2 for 6 deal with the Impossible Whopper that we believe will bolster our value layer. Turning to development, our global net unit growth for Burger King was approximately 6%, which was driven primarily by our international operations where we grew by nearly 10% and expanded our system by more than 1000 restaurants to nearly 11,500. In 2020 we will continue working closely with our great network of partners in markets like Spain, Russia, Korea, Brazil, China and India, to build our pipeline and open new restaurants. It's worth noting that our net restaurant growth of 1042 stores for the year also reflected the impact of our U.S. closures program we discussed at Investor Day, which included about 200 planned closures in 2019 with a similar number expected in 2020. You may recall that we're targeting underperforming restaurants with average sales of about 850,000 for closure and replacing them with brand new Burger King of Tomorrow restaurants, which have averaged over $1.4 million in sales. While it's brought an uplift in sales, the program is also an important part of the evolution towards Burger King's new image. On that front, in 2019 we delivered more than 800 restaurants in the Burger King of Tomorrow image, slightly ahead of the target we shared at Investor Day. In short, 2019 was another strong year for Burger King distinguished by the continued performance of our large and rapidly growing international business, along with strong core sales and the launch of a brand-new product platform at home in the U.S. which has brought many new guests with attractive demographics into our restaurants across the country. Now let's turn to Popeyes, where, in our view, 2019 was a pivotal year for the brand. Globally, system-wide sales grew over 18% for the full year and a remarkable 42% in the fourth quarter. As you might expect, a good deal of this growth was driven by the launch of the Chicken Sandwich, which surely ranks among the greatest product launches in the history of QSR. In the U.S., comparable sales grew 13% in 2019 and nearly 38% in the fourth quarter, largely driven by the relaunch of our Chicken Sandwich on November 3. As we've shared in the past, the Chicken Sandwich has been a great way to introduce many new guests to the brand and our research shows that Popeyes often shoots to the top of the list in preference once a guest has tried our products. While we're very encouraged that the Chicken Sandwich was an important driver of sales in the fourth quarter, our other core offerings also performed very well. And for the vast majority of our guests purchasing the sandwich, we saw that they actually spent more on other products than on the sandwich itself, resulting in very healthy check levels and incredibly valuable awareness and trial. Also driving awareness and trial was the amazing reaction to the relaunch on social media. During the relaunch, we trended number one on Twitter and became the top search on Google. We also had billions of media impressions and generated earned media worth considerably more than the size of our entire annual U.S. ad fund spend. On development, our healthy unit growth of nearly 7% of Popeyes does not reflect the potential embedded in the unit economics of Popeyes stores in the U.S. following the brand's step change in 2019, nor does it reflect the impact of our recently announced major international agreements in key Asian markets. In the U.S., we've seen a significant increase in interest for new Popeyes restaurants following the brand's remarkable success in 2019. As I noted earlier, the increase in sales across categories helped drive a material improvement in franchisee profitability and we believe the brand's highly attractive unit economics will support a long runway for growth across the U.S. You may recall that our pipeline for new restaurants follows a longer 12- to 18-month cycle, so we expect development agreements we've put in place last year to begin delivering units this year and next. In the coming years, we see a huge opportunity for Popeyes to grow from a brand with cult status into a true mainstream player in the U.S., all while maintaining its unique Louisiana heritage. On the international side, we made good progress in 2019 ramping up the Popeyes brand in Southeast Asia, particularly in Vietnam and the Philippines. The strong sales performance we've seen so far tells us that the brand resonates in the region. We also signed a key agreement to bring Popeyes to China this past year, with our existing partners for Burger King in the country and spent a great deal of time preparing for the launch, which we expect in the coming months. With a target to build 1,500 restaurants in the next 10 years, we believe Popeyes China has massive potential. Our partners have nearly achieved this mark with Burger King in China in just the past eight years and last year opened over 300 Burger Kings in the country. We're confident they are the right partners to establish Popeyes as a serious player in the world's largest chicken market. In conclusion, our results in 2019 were solid on a consolidated basis and consistent with the growth algorithm we presented at our Investor Day, even with one of our brands underperforming. Tim's remains our key point of focus in 2020 and we're committed to delivering stronger results. It's been an exciting first year at the helm for me, full of learning, but also with many accomplishments that we will build on moving forward. As a team, we're excited about the outlook for our three iconic brands and are confident that we have all the resources and capabilities needed to realize their potential for growth all around the world. With that, I'll hand it over to Josh to provide some more color on our technology initiatives. Thanks José and good morning, everyone. We haven't had a dedicated section on technology in the past, but we think it's appropriate to share some thoughts with you today given what an important priority technology represents for us and the significant progress we have achieved. We started about two years ago on a new journey to make technology a core competency at RBI. Digital adoption in the restaurant space is very advanced in Asia and is accelerating now in the U.S. and other parts of the world. It is our view that in order to be successful as our industry evolves we must offer industry-leading digital experiences, integrated with our physical restaurants and technology in order to win with guests going forward. Today, I'll share a brief update on what we've accomplished so far, and where we are going in 2020. Over these past two years, we have made significant progress to catch up with key competitors in core technology offerings, and I'll breakdown our efforts in four key initiatives. First, we have built a strong team led by our CIO, Frank Liberio who has over 20 years experience overseeing some of the largest global restaurant technology networks and who joined our team in 2019. As well as Teddy Sherrill, our CTO who joined in late 2018 after building an educational technology firm he cofounded and who currently leads software development of our guest-facing platforms. Together with Frank and Teddy, we recruited from leading tech companies to build out Miami and Toronto-based teams in engineering, product and design, as well as digital teams within the brands to drive guest experience in new digital sales channels. Second, we have made and continue to make investments in core infrastructure improvements to enable the future of digital ordering and e-commerce. The consolidation of the Popeyes POS system from about 40 systems down to two was a great example of this initiative without, which delivery and online ordering would have been impossible. We also launched a new and more modern front-end code base that replaced many of our legacy mobile apps and websites allowing us to move faster going forward and have end-to-end control over our digital interface with guests, particularly in our home markets. Finally, we integrated delivery into our POS systems across brands, which has greatly improved in-store order fulfillment and helped accelerate growth. Many more of these projects related to POS modernization, network upgrades and systems reliability are ongoing. Third, we enabled digital delivery for guests across all three of our brands. Today there are more than 4,200 Burger King Restaurants offering delivery in the U.S. and over 9,000 globally, representing a run rate business of over $1 billion on an annualized basis. Popeyes has also ramped up delivery significantly in the U.S. to over 1,600 restaurants and drove its strong increase in sales this year, especially following our highly successful Migos promotion. Today, delivery of Popeyes in the U.S. represents about a $250 million business on an annualized basis. Fourth, we have used delivery, our mobile apps, new websites, loyalty programs, kiosks and other channels to drive digital engagement and digital sales. At the end of 2019, digital sales at BK and Popeyes were in the high single digits as a percentage of system-wide sales in the U.S. and at Tim's they represent more than 10% of sales in Canada. Looking ahead to 2020, there are four core priorities that our teams will be focused on, all of which are centered on guest experience. The first is driving amazing end-to-end guest experience in our proprietary digital channels. We now have mobile apps, web ordering and white label delivery services, with these white label delivery services, now allowing our guests to order food directly through our app with delivery fulfillment from one of our aggregator partners. We've made many other digital experiences available to our guests as well and we are quickly bringing focus on refining both the software experience and integration with our restaurants, so that we are confident that we are able to deliver a reliable and pleasant experience every time. The second initiative for 2020 is to revolutionize the drive-through experience at Burger King and Tim Hortons through the rollout of outdoor digital menu boards on an expedited basis. This year, we plan to complete the rollout to approximately half of Burger King locations in the U.S. and a majority of the Tim Hortons system in Canada. Our teams are already running tests with dynamic content to offer guests more location or situationally appropriate menu suggestions, as well as personalized offers. We expect to deploy this layer of technology as we complete the hardware rollout. Third, we plan to deploy an intelligence platform behind each of our digital guest experiences that allows us to capitalize on the system we've built over the past two years. We now have the backbone of customized and algorithm-based offers and in 2020, we expect to roll out personalized one-to-one marketing across all brands and touch points. As José mentioned, this is especially relevant for Tim Hortons, as we transition to the second phase of the Tim's Rewards program in the coming weeks. All of these initiatives ladder up to our big priority, which is to drive the penetration of digital sales across each of our brands. It's our view that future success in our space will be increasingly dependent on digital capabilities and platforms. So it's critical to establish our brands as leaders in their segments, particularly with younger guests as we navigate the digital transformation of QSR. This list is just a subset of many projects that we are making progress on, but I think it provides useful context around what we are working hard to achieve in technology. I look forward to sharing more developments in the future and I'd now like to turn the call over to Matt. Thanks Josh. As you may recall, during our Investor Day, we set up a simple historical growth algorithm that laid out the key components of how our business grows. In the algorithm, we shared our historical template of 2% to 3% consolidated comparable sales growth combined with approximately 5% global unit growth has historically produced system-wide sales growth of about 7%. And after normalizing for the impact of acquisitions, this sales growth has translated into mid- to-high single-digit organic EBITDA growth. This year even despite seeing some softness in our sales at Tim Hortons, we were able to deliver results very much in line with this framework. In 2019, our system-wide sales growth of 8.3% led to consolidated adjusted EBITDA of $2,304 million, up 6.5% organically year-over-year. And in the fourth quarter, consolidated adjusted EBITDA grew 7.8% on an organic basis, representing our highest growth rate in eight quarters dating back to 2017, primarily attributable to healthy year-over-year sales growth at Burger King and Popeyes. In our view, this demonstrates both the underlying strength and consistency of our business model, as well as the added benefit from diversification that we get from having a multi-brand model with significant operations in all regions around the world. At the segment level, Tim Hortons 2019 adjusted EBITDA was $1,122 million, which represents a 1. 5% organic increase year-over-year. This growth was driven primarily by an increase in supply chain sales, the biggest drivers of which were shifts in product mix, growth in our retail business and growth in equipment sales. In addition, our EBITDA growth also reflected lower segment G&A expenses year-over-year. In the fourth quarter, Tim Hortons adjusted EBITDA was $297 million, representing a decrease of 0.2% year-over-year. This variation was driven primarily by a decrease in global comparable sales, which was partially offset by the same factors I just mentioned for the full year. At Burger King 2019 adjusted EBITDA was $994 million, which represents a double-digit organic increase of over 10% year-over-year. This increase was driven primarily by strong system-wide sales growth of over 9% with continued momentum in global net restaurant growth of nearly 6%, including almost 10% internationally and global comparable sales growth of nearly 3.5%. In the fourth quarter, Burger King adjusted EBITDA was $266 million, representing an increase of over 9% year-over-year. This increase was driven primarily by global system-wide sales growth of 8.4%, including comparable sales growth of nearly 3% and net restaurant growth of nearly 6%. Finally at Popeyes, 2019 adjusted EBITDA was $188 million, which represents an organic increase of over 20% year-over-year. This increase was driven primarily by strong system-wide sales growth of over 18%, among the brand's strongest growth rates in the past few decades. The system-wide sales growth included net restaurant growth of nearly 7% and global comparable sales growth of over 12%. In the fourth quarter Popeyes adjusted EBITDA was $59 million, representing an organic increase of nearly 63% year-over-year. This increase was driven primarily by global system-wide sales growth of over 42%, including comparable sales growth of nearly 35% and net restaurant growth of almost 7%. Our full year adjusted net income was approximately $1.27 billion, which compares to prior year results of $1.24 billion. This year-over-year increase of 3% was driven primarily by adjusted EBITDA growth and an additional benefit from the reduction to interest expense from our refinancing transactions, which was partially offset by an increase in stock-based compensation and a sizable impact from unfavorable FX movements. In addition, our adjusted effective tax rate was slightly higher year-over-year at nearly 20%, but came in a bit better than the low 20% range we shared at the beginning of last year, which we believe remains the appropriate expectation for 2020. Our full year adjusted diluted EPS was $2.72 and compared to $2.63 in the prior year, representing growth of 4%. This increase includes a significant headwind from unfavorable foreign exchange rate movements, which reduced our adjusted EPS growth rate by approximately 3 percentage points. Now, let's discuss our cash generation and capital allocation for the year. We generated over $1.4 billion of free cash flow in 2019, calculated as the sum of cash flows from operating activities less payments for property and equipment. In 2019, we also paid a total of over $900 million in common dividends in partnership exchangeable unit distributions. In addition to this, we continued to make progress on key investment projects, including the expansion of our Tim Hortons supply chain network in Canada as well as our previously announced remodel programs at both Tim Hortons and Burger King. In 2020, we will continue to invest in support of these initiatives which we believe reinforced the long-term health and growth potential of our business. After making considerable progress on the build-out of our Canadian distribution centers last year, we expect to finish the project in the second half of this year. Once the project is complete our distribution coverage will increase from about 75% to nearly 90% of total delivered cases which we believe will help us meaningfully improve service levels to owners by reducing complexity through few deliveries per week and improving delivery times. In terms of restaurant reimaging, we expect to maintain a similar path of investment as 2019, in which we contributed to several hundred Burger King of Tomorrow and Tim Hortons Welcome renovations. As José mentioned earlier, over the next 12 to 18 months, our owners will also invest over CAD 100 million to revolutionize the drive-through experience, through the deployment of outdoor digital menu board technology at Tim Hortons drive-through locations across Canada. This investment will be funded by the Tim Hortons Canada advertising fund, similar to how our indoor digital menu board initiative was funded several years ago. Now turning to the capital structure, as of December 31, 2019, and our total debt outstanding was $12.3 billion. Our net debt, calculated as total debt less cash and cash equivalents of $1.5 billion, was $10.8 billion and our net debt to adjusted EBITDA leverage ratio decreased further to 4.7 times. In October, we took advantage of favorable market conditions to execute our second refinancing of the year, through which we reduced the size of our $6 billion Term Loan B to $5.4 billion, extended our maturity by over two years to 2026 and reduced our interest rate from LIBOR plus 225 basis points to LIBOR plus 175 basis points. We funded the transaction by issuing $750 million of second lien notes due 2028, which priced tightly behind our recent first lien bond issuance at an interest rate of 4.375%. Additionally, we were able to extend our floating to fixed interest rate hedges, locking in favorable rates through 2026. Through these transactions, we generated significant interest savings, extended our maturities and further improved our flexibility going forward. Altogether, these fourth quarter transactions are expected to generate approximately $25 million of run rate interest savings. And when combined with our third quarter refinancing initiatives, add up to approximately $50 million of estimated run rate benefits, some of which we started to see flow through our results in the fourth quarter. In addition, we were also pleased to receive upgrades on our corporate credit rating from both S&P and Moody's to BB and Ba3 on account of continued improvement in our business, leverage profile and free cash flow generation. 2019 also represented the continuation of a strong multi-year period of capital allocation and ongoing reduction of leverage, driven by our highly capital-efficient growth model. Over the past five years, we've generated almost $9 billion in total unlevered free cash flow, allowing for a considerable reduction in our net leverage from 7.5 times to 4.7 times adjusted EBITDA, along with continued and meaningful reinvestment in key business initiatives, such as remodels alongside our restaurant owners and the build-out of our digital capabilities. We've also been able to deploy our cash flow to return over $3 billion in cash common dividends, invest over $1 billion in cash for share repurchases and acquire another iconic brand in Popeyes for $1.8 billion in cash. As we've shared in the past, we will maintain a balanced approach to capital allocation, allocating excess capital where we believe it will create the most incremental long-term shareholder value. Currently, our capital structure affords us significant financial flexibility and optionality to drive meaningful long-term shareholder value creation. This morning we also announced that the RBI Board of Directors declared a dividend of $0.52 per common share in partnership exchangeable unit of RBI LP, payable on April 3, 2020 and a target of $2.08 in total dividends to be declared in 2020. This announcement represents a 4% year-on-year increase in declared cash dividends and our eighth consecutive annual dividend increase. Since we first paid a dividend in 2012, our quarterly dividend has increased by 13 times its original level, reflecting our commitment to maintaining a balanced approach to capital allocation as we've grown. Thank you everyone for joining us on the call this morning and for the continued support. I'd now like to open the call for questions. Operator? Thank you. We will now begin the question-and-answer session. [Operator Instructions] The first question today comes from Dennis Geiger with UBS. Please go ahead. Good morning. Thank you. José thanks for all the insights and the [indiscernible] details on Tim Hortons, just wondering if you could talk a bit more about the changes made to the loyalty program, specifically maybe if you could highlight different customer behaviors that you may be able to affect the financial impact from the adjustments? Your focus on app download and utilization is clear, but maybe just anything that you look for from the tiered loyalty system benefits there across dayparts, whether the recent drag that you've seen from the program changes some and anything else on your research and testing of the program? Thank you. Hey, Dennis thanks for the question. I'm going to have Josh walk you through some of those details. Yes. Hey, Dennis good morning, and thanks a lot. So we've done a lot of work thinking about where we take the loyalty program next and we're very excited about the changes that are coming up here just in a few weeks actually. And I think if you go back, we were really pleased with the initial adoption of loyalty program as we've talked about a bunch. We saw a huge reaction from our guest and I think they were really pleased with the rewards that we were able to bring to them. And now I think we're ready to take our next steps with loyalty in the new year here. We've done a lot of research together with both with our guests and with some of the best experts across the loyalty industry and spent a lot of time looking at some of our peers both here in Canada and other geographies in the U.S. to think through where we should take the program next. Really with a big focus on our guests and how we take the business forward in the best way in the long run. And I think some of the exciting things, some of the key features about where we're going to take loyalty are; one, we're going to be able to open up the menu and bring rewards across a number of additional menu items. That was one of the big pieces of feedback that we heard is that we have many guests who want to be able to be rewarded across many other categories in our menu. And one of the great features of the new program is that we'll be able to offer rewards in terms of food items, in terms of donuts, in terms of ice cap. So we're really able to broaden the rewards that we can give. I'd say the other really big feature that we're going to enable with the new version of rewards is that it's going to become a much more digital program. So we're going to strongly encourage our guests to register with the program and we're going to provide a lot of encouragement to guests to interact with us on the mobile app. And I think that's going to allow us to better understand how our guests interact with our brand and use our brand. And I think also allow us to provide even better benefits as we understand how our guests interact with our brand and provide more personalized benefits to those guests. So I think those are some of the most exciting things for us in terms of what we're going to change. If you think about the underlying mechanics of it and the underlying rewards, it's not really going to change very much. We're going to keep the underlying benefits to our guests pretty similar for the most part. It's really evolving to allow more options to the guests and to make the program more digital. And I think as you think about it and as we go kind of further into this year, especially in the back half, that's where we see a big opportunity for the program. If we can make the program a lot better for our guests, open up more of the menu and be able to bring more personalized offers to our guests over time, that's where we see the big opportunity to really bring a big business benefit from Tim's Rewards, probably later into this year and as we go on into future years. The next question comes from Nicole Miller with Piper Sandler. Please go ahead. Good morning and thanks for the update. I want to ask about Tim Hortons and a couple of things. First, how is Canada overall as a region? How is the peer performance there? Even if you know it, it's better, the same or worse, context would be helpful? Second, I wanted to simplify the dollars going into the plan. So the $100 - or excuse me $100 million of ad funds, does that reduce other aspects of advertising? I just want to understand that or other financial means to support the plan? And then just third, and I'm sorry it's a little harsh, so I apologize. But I was trying to compare and contrast these comments back to the Analyst Day and there was commentary at the end of the prepared remarks today about things generally being the same from that plan. But if that's the case, I mean why now on Tim's this is going to work? I'm assuming there's going to be some elements that are being reprioritized and just essentially saying, what do you want us to expect? It's okay, if you're going to buy comp through loyalty this way to get the data, but then we should be understanding that maybe this quarter is an anomaly in terms of same-store sales? Thank you very much. Hey, Nicole, thanks for the question. I think I'll start with kind of the third and fourth questions around the Tims - or the third and fourth sub-questions on Tim's plan and what we shared in May. And as I've mentioned, I've spent probably 60%, 70% of my time in Canada since October, working closely with Axle and the team to address some of the gaps that we have in the plan and in the team. We've hired a lot - a number of strong leaders, Canadians with expertise in key areas of the business including marketing, loyalty and rewards, real estate development, restaurant technology as well as communications and a few other areas. We've also over the last 60 days conducted the biggest consumer research study that Tim's has done in nearly two decades, which has helped us understand better how Canadians are deciding where to spend their money, where to go - or where they go when they want brewed coffee or specialty coffee or where they go when they want a breakfast sandwich versus a sweet baked good. And what's important about this and one where this is creating an important pivot for us from a strategic standpoint is that the research confirmed first and foremost that Canadians absolutely love Tim Hortons. And additionally, it's helped us sharpen the lens and focus on a plan with a heavy, heavy emphasis on the core being great at the things that made Tim's the incredible brand it is today. I think it's a bit different or quite different from where we were a few months ago, and I think I mentioned in my prepared remarks that the brand and the business in Canada has spent quite a bit of energy on limited time offers. We've introduced more than 60 limited time offers in the year 2019 which is nearly 3x what we've done in the past. I'm not sure what the right number of LTOs is, but we know with certainty that what we need to be doing is focusing on the fundamentals that created this amazing brand and business in Canada. And what I've touched on in my prepared remarks is what we're focused on today and we'll be focused on going forward, elevating core quality, innovating for growth and modernizing the brand. So for us this pivot is an important one as a leadership team, and it's an important one that we've shared and aligned with our owners across Canada. I spent - along with the team, I spent the last two weeks visiting 7 cities and talking to more than 1,000 owners about the plan, about the direction of the business, and about our focus on what made Tim Hortons famous in Canada and there's a lot of excitement. A lot of work to do for sure, but we feel confident that if we put all of our energy and resources behind this plan, we're going to get the business and this great brand back on-track from a growth standpoint. I think you touched on - you asked about Canadian peer performance. We don't comment on others in these or any other discussions, but obviously the market - we feel very good about the market and the long-term prospects of growth in Canada and we continue to focus all of our energies on driving growth here for the long term. As it relates to capital and kind of the uses of ad fund to help drive the initiatives and drive-through, I'll have Matt answer that question. Yes. Hi, Nicole. It's Matt here. In terms of the capital investment I think as José mentioned, we think this is an important part of the overall plan at Tim's to drive sales over the long term and the right place to invest our resources. And so with the CAD100 million investment that will be made over time over the next five to six years and as a result of that, I think we'll also see some pretty significant savings within the ad fund, saving millions of dollars per year on menu printing and delivery. So overall, we don't really expect a material impact on ad fund spending. And just to come back to your final question on performance. As you know, we don't provide guidance. But that said, we see no - there's been no material change in initiatives or performance Q1 to-date versus Q4. The things, we've talked about are structural changes and investments we're making around coffee, breakfast, loyalty 2.0 drive-through outdoor digital menu boards, coffee communication all the time. And these initiatives are aimed at providing layers of sales growth over time throughout the year and beyond and we're confident that these will have an impact on the topline in the coming years. Thank you so much. The next question comes from Jeffrey Bernstein with Barclays. Please go ahead. Great. Thank you very much. Another question on Tim's. José, I'm just wondering if whether you could talk about franchise relations. It sounds like you've met with, like you said, 1000-plus owners in recent weeks. So I'm just wondering how you'd describe that today and whether or not the recent comp headwinds, and like you said, the profitability down this year has kind of overrode the prior successful efforts it seemed like in improving relations with franchisees. And on the base of that, just can you just provide us the percentages in terms of the percentage of the system that, like you said, invest to modernize, but where the system is in terms of remodeling the entire units and whether the franchisees in your discussions are keen to invest on that or whether they'd be a little bit more hesitant to do so ahead of their required remodel cycle? Thank you. Great. Thanks, Jeff. Yes look despite our recent performance relationships with our owners continue to improve in Canada and we're communicating with them more than ever. And as I mentioned just last week, I finished traveling the country. I was in Vancouver, Calgary, Toronto, London, Ottawa, Montréal, and I went all the way east to Halifax and we shared our plan with over 1,000 owners at these town hall meetings that we hosted. Our Tim's owners they're super passionate about their amazing Tim's brand and not surprisingly they have - and as they should, they have high expectations of us as leaders of the Tim's brand and business and that's what I love about our owners. The community engagement, op simplification, fewer more impactful new products, sharper brand communications, and of course, restaurant profitability, these are top of mind in our priorities for our owners in Canada. I'll tell you they voiced support for the plan to refocus our efforts on the core and to reconnect Tim's with its roots with what made Tim's famous. And they also share our sense of urgency and we look forward to working closely with them throughout the year as we implement our plan in 2020. We have confidence that if we - as I said earlier, in response to Nicole's question, if we focus on these core elements of the business, the basics, the things that made Tim Hortons famous and made it the brand it is today, we're confident that our owners are going to be successful and our guests are going to be happy, and we're going to continue to grow this great brand in Canada. As it relates to renovations or remodels in Canada, we've made some progress with the evolution of our Welcome Image. We had a - we were in 2018, 29 [ph] versions of it. And now we've evolved to a 2020 image - Welcome Image package, which takes forward some of the ideas and innovations that we saw at the Innovation Café. It has - it's got a sharper image and really a modern look and feel. We've opened the first one in the West Coast of Canada and we've seen some good results and some encouraging feedback from our owners. We feel good about the potential of this image package and there's engagement and support from the owners around continued investment in remodels. So we don't expect any shifts or changes in the progress we're making on renovating the fleet. Thanks so much. The next question comes from Patricia Baker with Scotiabank. Please go ahead. Thank you very much. Good morning, everyone. Not surprisingly I'm also going to ask a question on Tim's and you may have partially answered it, but I'm still going to ask it. I really appreciate all the color you've provided on what your plan is for 2020 to try and close the gaps on Tim's current performance and where you think it will go to. In 2018 you launched the Winning Together plan. I'm just curious, looking back it would be obvious I think that where Tim's is performing now is not where you thought it would be when you launched the Winning Together plan. So can you talk about the Winning Together plan, what worked, what didn't work? And when you kind of take a look backwards, should you have included more of that focused on the core when you did the Winning Together plan? Thanks Patricia. Yes, I think I touched on our strategy and our game plan going forward and some of the reflection after a few months of assessment of our current performance and kind of our history over the last several years. I think I've touched on the things that we identified as opportunities and how we're going to move forward. I think the key for us is that, we're famous, an incredibly well-penetrated brand in Canada. People love this brand. They love the experiences they have there and consider it a second home in many cases. And I think what we didn't do well in the past - in the recent past is that we spent too much time trying to create initiatives on the fringes that were not initiatives or limited time offers or innovations that supported the core of our business around coffee. The - kind of the expanding definition of what coffee is around breakfast and around baked goods. And so we feel that the initiatives and the plan that we have around elevating our core, focusing on innovating for growth in our core and modernizing the brand with loyalty 2.0, as well as enhancing the drive-through experience, which is a big and growing part of our business, which really hasn't been touched in decades. We think the initiatives that we have in our sites and that we're focused on, and removing everything else from the periphery is going to allow us to drive growth in this great brand for years to come. Thank you. The next question comes from David Palmer with Evercore ISI. Please go ahead. Thanks. Good morning. And thanks for that commentary on Tim's. Question on that brand, as you reposition the loyalty program, how confident are you in the testing of that phase two loyalty and how are you doing that differently than the previous version? And relatedly, I would assume the loyalty shift will help franchisees regain some lost margin from phase one, but is it also fair to say, there will be some sales sacrifices initially as you push consumers to a mobile relationship? Just some of these consumers will be less keen to make the leap to the phone. And then lastly, as you think about that 3 point drag from phase one rewards, do you think that could become a tailwind by the second half of the year maybe making positive comps more likely in that second half? Thank you. Hey, Dave, it's Josh. Thanks for the questions. So as we noted a little bit earlier, we think that loyalty is contributing right now about negative 3% to our overall comp. And as we think about what's going to happen with the next phase of loyalty, the goal is really about driving the - about two things as I said earlier, right? One is being able to open-up the menu and give more options and the other thing is about moving more into a digital form of a program. So we have done a lot of research, and I mentioned earlier, we've done research both with our guests and worked a lot with experts in the industry. So we think, we've done as much research as we can do trying to make sure that we have the right form of the program going forward that our guests are going to respond well to, and that we have a pretty good understanding of how our guests are likely to respond to the program. There's always uncertainty with these programs about how exactly they'll respond. I'd say, we don't - we don't expect to see a material change as I mentioned earlier in terms of our overall investment in rewards as we move forward into the next phase of the program. That's not the intent and that's not our expectation. But as you think about how the impact of the program is likely to evolve as you move through the rest of the year, obviously in Q1 of the year nothing will have changed too much. But as we move into Q2, you'll be lapping the prior year when we had the existing version of the program in place. But we had a bit of a traffic benefit, due to the initial excitement in Q2 of 2019. So I'd say it was more sales neutral. And we think that as you get into the second half of 2019 as we're lapping that, as we got further into the second half of 2019, we think some of that incremental traffic have - it faded away as some of the excitement came off. So as we get into the second half of 2020, we think that some of the year-on-year investment could farther into the second half of 2020 start to become somewhat less of a headwind. And we hope that some of our initiatives around personalization and trying to make the program more incremental could start to become more of a benefit. So hopefully that helps to think through of how we think about the program and how it could evolve as we move through 2020. The next question comes from Sara Senatore with Bernstein. Please go ahead. Good morning. This is actually Elijah for Sara. So I just had a quick one on BK. I think you mentioned that the Impossible Whopper stayed strong, but also that you saw strength across the core menu, but the comps were still soft. So it seems like that lift from the Impossible has quickly dissipated, can you just talk about that? And then also, the competitive environment in general? Thanks. Yes. Thanks Elijah. Our sales levels in Q4 at Burger King in the U.S. were very healthy and in line with what we saw in Q3. We continue to do well in the premium segment. However, we were lapping as I mentioned in my prepared remarks, we were lapping strong traffic in the same period in 2018 driven by dollar nuggets, King Box and also $0.89 pancake promotion. We feel really good about our plan at Burger King in the U.S. long term. We have a strong core offering. I think the addition of Impossible Whopper in the 2 for $6 platform gives us an opportunity to address one of the points of feedback we received from many guests which is the price point was a little high for the QSR consumer. So having it available in the 2 for $6 platform gives folks more access to it which is really exciting and we're seeing that to be an important point for consumers long term. We also have initiatives around breakfast. We have initiatives around value long term. So we feel good about the business plan for BK in the U.S. and look forward to keeping you posted on our progress in the coming quarters. The Next question comes from Brian Bittner with Oppenheimer. Please go ahead. Thanks, good morning. For Popeyes, I think this is the first time ever that Popeyes has opened over 100 units in a single quarter. And you talked in your prepared remarks that the backlog is really going to start unlocking maybe this year next year and the year after. How do you want us thinking about Popeyes unit growth in 2020? And what portion of your new openings is going to come from the U.S. versus international over the next couple of years? Thanks Brian. We don't break out on a go-forward basis where the development is going to come from. But obviously the performance in the U.S. of the Popeyes business and as we shared for Q4 and for the full year has created a lot of excitement with our existing franchise partners here in the U. S., as well as with new prospective investors that are very interested in being part of this system, which is quickly becoming one of the more exciting franchise business models in all QSR in the U.S. So we think, long term there is a lot of room for growth for Popeyes in the U.S. Obviously, internationally we think there's a tremendous opportunity for growth. Clearly, Asia is a place where fried chicken and chicken in general does quite well and we think we can be a really compelling second offer in the region. We have a huge size gap or penetration gap versus the market leader in Asia. And we think we have a really compelling offer from a product standpoint to do some important growth there in years to come. And - but it's not just Asia. In the U.S., we think Europe is an exciting and growing market. We've opened in Spain. We have other markets as well in Europe that have potential for growth. Latin America is a market where fried chicken does quite well and we've opened in Brazil and had a really exciting growth rate in 2019. I think it's just the beginning of growth for the Popeyes brand in Latin America, in Europe and Asia, and especially in the U.S. as well. So we're excited about the prospects and we're working hard to build our team's capabilities from a development standpoint and working with our partners to ramp up growth over time. Thank you so much. The next question comes from Peter Sklar with BMO Capital Markets. Please go ahead. You're late this year in terms of calendar, the roll-up to win promotion at Tim Hortons. You indicated in your commentary that you will be proceeding with it. Just wondering why you're late? And especially in the context of one of your principal competitors, I believe, started with their dollar coffee promotion today. So the concern would be that you're going to lose some momentum this quarter because you are late with the program? Hey, Peter it's Josh, good morning and thank you for the question. So the phasing of roll up is mostly due to making sure that we have the right timing with respect to the next phase of Tim's Rewards and then bringing in roll up after that. So we'll have news on roll up to come I think in the quite near future, and we just want to make sure that we give time for our guests to have things in a proper order and kind of understand each of those new pieces of news. The next question comes from David Tarantino with Baird. Please go ahead. Hi, good morning. My question is on Popeyes. And I was just wondering if you could help us understand the very impressive comps performance that you had in the fourth quarter? And how much of that was maybe trial around the relaunch of the Chicken Sandwich versus maybe a sustainable improvement in traffic or customer counts? And I'm just asking in the nature of sort of level setting what we should be assuming going forward in terms of the sustainability of the trend you saw in the fourth quarter? Thanks, David. As they say a rising tide lifts all boats. Well in Q4, we saw the tide rise at Popeyes quite a bit and the traffic driven by the demand of the Popeyes Chicken Sandwich helped drive growth in our entire menu in the quarter. Just to give you an idea about that, following the launch of the chicken sandwich in November, only about 50% of total tickets of Popeyes in Q4 contained a purchase of the Chicken Sandwich, which means a lot of the growth came from growth in other categories in our menu, which is quite exciting. We're also encouraged by the fact that on a significant majority of the tickets with - that included Chicken Sandwich, guests spent more on non-sandwich items than on the Chicken Sandwich itself, which led obviously to very healthy ticket levels and growth across the menu. We're super excited and super encouraged with the levels that we saw from the gross sales and levels of volumes that we saw from the Chicken Sandwich in Q4 and throughout the quarter. We think long-term this is obviously a platform that's going to give us an opportunity to engage more guests with Popeyes. We've mentioned several times in past calls and other sessions that when people try - when guests try the Popeyes product whether it's bone and chicken or boneless or even the sandwich that our ranking shoot up in terms of preference amongst all players in the chicken QSR space. And the chicken sandwich launch or re-launch in Q4 gave us an opportunity to engage more guests and we saw the reaction was very positive. It's just the beginning. We think this is a great opportunity for us to continue to introduce the brand to many consumers in the U.S. and across the globe and look forward to continue to share with you our progress on the brand. Thanks so much for the question and thanks everyone. Overall, as mentioned, we had a strong 2019 with more than 8% system-wide sales growth and adjusted EBITDA growth of about 6.5%. While we have a lot of work to do at Tim's, we saw the benefit of our diversified global business model with strong performance from BK and an amazing Q4 and 2019 from Popeyes. We're excited for 2020 and look forward to sharing the progress of each of our iconic brands over the coming quarters. Thanks again to all of you for joining us this morning and thank you again for your support. Have a great day. This conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

News: Companies News
Site: companies.einnews.com

Welcome to CN Fourth Quarter and Full Year 2019 Financial Results Conference Call. I would now like to turn the meeting over to Paul Butcher, Vice President, Investor Relations. Ladies and gentlemen, Mr. Butcher. Well, thank you, Patrick. Good afternoon everyone and thank you for joining us for CN's fourth quarter and year-end 2019 earnings call. I would like to remind you about the comments already made regarding forward-looking statements. With me today is JJ Ruest, our President and Chief Executive Officer; Ghislain Houle, our Executive Vice President and Chief Financial Officer; Rob Reilly, our Executive Vice President and Chief Operating Officer; Keith Reardon, our Senior Vice President, Consumer Products Supply Chain; and James Cairns, our Senior Vice President, Rail Centric Supply Chain. Once again, I do want to remind you to please limit yourself to one question so that everyone has the opportunity to participate in the Q&A session. The IR team will be available after the call for any follow-up questions. It is now my pleasure to turn the call over to CN's President and Chief Executive Officer, Mr. JJ Ruest. Well, thank you, Paul and good afternoon everyone and welcome to our fourth quarter earning call. I'm very proud of the CN team and our resilience in the face of challenge during the last quarter. Let me start briefly by ceding the last quarter. In October, solid railroading operating metrics combined with the rollout of a solid plan to reduce asset costs, labor costs, fuel costs, in line with what we had discussed during the third quarter earning call. In November, we had a very disruptive eight days national strike, a nine days work stoppage in total that was not only very disruptive on the Canadian economy and impacted the Canadian GDP for November but also was very disruptive to our November operating costs, our asset utilization, and our fuel efficiency's program. In December, to support our customers, the team deployed all the resources required to move the economy and enable our customers to fully recover from the strike. So, the fourth quarter, we produced adjusted EPS of $1.25, down 16%; the revenue ton-mile volume was down 13%; the revenue at $3.6 billion was down 6%; and our adjusted operating ratio of 65.2% was up 400 basis point. Let me now go into 2020. During last fall, we did what we said we would do to right-size the business to current weaker demand. We removed almost 5,000 railcars from the network and return the lease locomotive. We sequentially ended the fourth quarter with approximately 1,300 less people. We have vacated the targeted 75,000 square feet of lease office mostly in Downtown Montreal. We are taking a $31 million provision in our results, mostly related to permanent management cutback and we are reengaging into our industry best fuel efficiency program. Also based on feedback we received from investors, we have decided to provide annual guidance on free cash flow. We are also launching three customer service index one for each of our three rail product line customers index which are very relevant the way customers define service. Rob will introduce them in a few minutes. As per our guidance for 2020, James and Keith would produce GDP plus RPM growth and rail inflation plus pricing with a base assumption of improving freight and trade environment in the back half of this year. 2020 will also be a year of further initiative to contain and reduce costs in operation but also in function. In the next few minutes, Rob will cover operations and technology, James and Keith will cover their market, and Ghislain will cover the financial and the guidance. I will now turn it over to Rob. Rob? Thank you, JJ. First, thanks goes out to the women and men of CN who helped deliver this quarter's results. The team showed again the ability to quickly react to conditions whether it was the softening volumes entering Q4 or the quick recovery of our network following the nine day work stoppage. The team remains focused on running a safe and efficient railroad and despite the challenges of the fourth quarter brought on by the work stoppage, the team still delivered a strong year of results. Some of the highlights include; car velocity improved 5% in 2019; network train speed improved 3%; our dwell reduced 5%. For 2019, we delivered an all-time record for fuel efficiency and we will deliver even better results in 2020 as we continue to focus on fuel costs and CO2 emission reductions as the industry leader. And as a reminder, CN consumes approximately 15% less fuel per gross ton-mile than the North American industry average. And over the past 25 years, we have reduced our locomotive emission intensity by 39% thus avoiding over 45 million tons of CO2 emissions. Our active inventory online was reduced by 5% as a result of greater car velocity and our aggressive program in the second half of the year to scrap sell and return approximately 5,000 railcars. With the increased reliability in our locomotive fleet along with improved velocity, we were able to rid ourselves of all 125 leased locomotives we had at this time last year and therefore not carry that cost forward for the rest of 2020. In addition to this we've been able to retire 39 older less reliable locomotives from our fleet. As we move into 2020 we have made organizational changes that further strengthen our team and further assist us in running a safe and efficient railroad led by very capable leaders. In December, we transitioned from three operating regions to two with James Thompson leading the Western region and Derek Taylor leading the Eastern region. We are also centralizing all of our Canadian crew calling and train dispatching under the leadership of Doug Ryhorchuk, our Senior VP of Network Operations. This brings all of our day-to-day resource management under one leader as we run the railroad as one network safely and efficiently. Doug, Derek, and James are all seasoned scheduled railroaders that continue to provide strong leadership to our transportation team and take us into a new decade of rail leadership. Jim Sokol, our VP of Mechanical continues to streamline our mechanical footprint across the network as the reliability of our locomotives increase. These structural changes allow us to get locomotives to the correct shops for maintenance, reduced materials inventory online, and achieve this more effectively with fewer people. From a safety standpoint, we continue to leverage technology to drive a safer railroad for our employees, our customers, and the communities we operate in. In November, we completed conversion of all of our mandated subdivisions to PTC capability. This was a full 13 months prior to the deadline at the end of this year and we continue to make solid progress on interoperability with other railroads. Considering where we started on this initiative this was a tremendous accomplishment by the team. Also we now have eight autonomous track inspection cars operating on our railroad. By the end of this year, these cars will cover 100% of our core mainline operation in the U.S. and in Canada. From New Orleans to Chicago to Vancouver and Prince Rupert and all the way back east to Halifax. These cars will provide coverage of nearly 90% of where our annual GTMs operate and we're already seeing safety benefits as they operate in existing revenue train service. By operating in regular train service, the frequency of testing across the track has increased dramatically, allowing us to find defect sooner and improve corridor capacity versus the man geometry cars operating with a separate locomotive today. In addition we have seven autonomous inspection portals built and we are seeing more and more benefits as the algorithms are developed and mature. Over a recent 45-day period our portals found over 3,000 actionable car defects. All of these defects were not found by the comparable manual inspection. High-resolution cameras linking to proprietary algorithms is a path forward in the long-term. As we move further into 2020, we will develop more proprietary algorithms to increase the coverage of what can be found via automation and make our railroads safer and more cost effective. As JJ mentioned in his comments, we are also introducing a customer service index for our three rail product lines intermodal bulk and merchandise traffic. This index takes service measurement beyond the limits of a simple trip plan which has been in place for many years at CN and encompasses factors that are more important to our customers such as order fulfillment of what they need to ship, the wasted dwell time sitting at port terminals with containers missing trains, left behind is intermodal hubs, and the consistency in our last-mile delivery to the ultimate user waiting for goods. This index will allow us an all-in metric to assist in providing the relevant service our customers need and allow them to grow their business with the CN supply chain. As we look forward to the remainder of 2020 and as I've said previously, we remain committed to running a safe and efficient railroad that is poised to continue to grow with our customers. With that, I'll turn it over to James Cairns. Thank you, Rob. 2019 is now in the rearview mirror and we're focused on delivering growth in 2020, while preparing to capitalize on specific growth opportunities, starting in 2021. Keith and I will spend the next few minutes going over 2019 performance and the 2020 outlook for a few specific commodities, as well as highlight some of the projects under development on our network that we expect to deliver solid volume growth in 2021 and beyond. Let's start with crude. For the full year 2019, we grew crude carloads by 20%. We expect significant year-over-year growth in crude carloads for the balance of Q1 and crude will continue to be a growth driver in 2020, with about one-third of our volume being heavy undiluted crude, which is less dependent on price spreads than diluted bitumen. We will begin to lap the structural decline in BC lumber production in Q2 this year and we expect a relatively steady run rate for the balance of 2020. We do have the ability to flex up, if we see a market rebound this year. In Q4 2019 we introduced new frac sand services designed to smooth out demand and protect rail share versus truck. We finished December strong with 44% year-over-year revenue growth. Increased January rig count in Western Canada is a positive indication that we may see a mild rebound in frac sand carloads in the coming months. As we move into the second wave of the energy renaissance in Western Canada, spurt on by new drilling to support LNG exports, frac sand will be the first rail commodity to ramp up and we are well positioned with our unique unit train service that directly connects desirable Wisconsin sand with end markets in Alberta and BC. Propane volume was up 17% in 2019. We will continue to see growth in CN's unique propane export services in 2020, with the commissioning of the second Canadian West Coast propane export facility to be built by Pembina at Watson Island, scheduled to start-up Q4 this year and the full year impact of the first Canadian West Coast export facility built by AltaGas at Prince Rupert that started out Q2 of last year. Our efficient single line service seamlessly connects propane production with export facilities in Prince Rupert, creating a superior product for our customers and a long-term structural advantage that simply cannot be replicated. This past season was another banner year for Canadian grain. We moved 8% and 2 million metric tons more in the 2018-2019 crop year compared to the previous crop year. In 2019, five new CN served high throughput loop track facilities came online, significantly increasing CN's exclusive loading spots in the country. The current crop year started off slow, with the delayed harvest resulting from wet weather. We expect to see full impact of customer and CN investments in the grain supply chain, which will position us to move even more grain more efficiently in 2020. In addition to significant investments in new elevator capacity and waterfront export terminals physically built on CN line, the new G3 unit train facility on the North Shore in Vancouver will be fully operational in Q2 this year and will be the only loop track to loop track grain supply chain in Canada, allowing G3 and CN to move more grain using fewer resources. We grew Canadian coal carloads by over 30,000 in 2019 and we will continue to see growth through 2020 as our client Coalspur significantly ramps up volume through the year. Ridley Terminals expanded capacity from 14 million to 16 million tons in 2019. And with new private sector ownership, we see potential for terminal capacity to double, if the market demand is there. Prince Rupert is a gift that keeps giving. It's been a great new story for our intermodal business and also a growth driver for our carload business. Between propane, coal, plastic resin and wood pellets, we grew carloads to Rupert by 11% in 2019 and we expect another solid performance in 2020. Looking ahead, 2020 will be a transition year for our carload franchise, as we prepare for new met coal business with Teck to start-up in 2021. Teck will invest $800 million in their West Coast supply chain, with new export capacity at the CN-served Neptune terminal and an increased capacity secured at the CN-served Ridley Terminal. In 2021, we'll see the full year impact of the Pembina, Watson Island propane export facility, as well as new facilities in place that will increase carloads of sulfur, diesel and plastic products. Thank you. And now I'll turn it over to Keith. Thank you, James, and good afternoon, everyone. The consumer markets saw multiple headwinds negatively impact volumes in the fourth quarter. The GM strike as well as CN's 8-day strike caused supply chain to either look for short-term transportation alternatives or stop shipping until the end of the work stoppages. In addition to the multimodal impact of the GM strike, the closed GM Oshawa facility produced its last finished vehicles in December. For the international intermodal business we saw 24 blank sailings to the West Coast. The blanks, coupled with the effects of the pull forward of the international intermodal volumes in Q4 of 2018, created year-over-year comp challenges. Despite the Q4 related short-term headwinds, we continue to drive forward with our strategic initiatives to leverage our unique network reach and our consistent high levels of customer focus. Starting with automotive, we are seeing some short-term volume challenges for the industry. Our key strategies of increasing the number of automotive storefronts, leveraging our great franchise of finished vehicle manufacturing facilities that are on or close to our network, as well as providing a consistent solid supply of railcar capacity, will be key enablers to CN continuing to produce volumes at rates greater than the industry averages. We will continue to make gains with our Vancouver Autoport facility, which is producing solid expected results and we look forward to the late fall opening of our new automotive facility in New Richmond, serving the Minneapolis and St. Paul markets. Now to our other key consumer market, intermodal, and starting specifically with the international intermodal business. Our structural and network advantages, coupled with our focus on close collaboration and solution mindset with supply chain partners, will continue to allow us to be less impacted than most, by the headwinds facing the industry. In fact, at Prince Rupert, we grew our volume by over 11% in the fourth quarter. A great amount of work has and continues to be done with both of our partners on the West Coast, the DP World and GCT, to strategically fill the capacity that they have created at their terminals in their latest tranches of expansions. We will see some volume swings in Vancouver during the first half of the year, as the Yang Ming and the ONE contract transitions occur. We expect that in late April, we will begin seeing upside in our business mix and West Coast volumes versus last year. Our new intermodal storefront in Regina, a partnership with Mobil Grain, is providing our export customers with additional opportunities for reach and gateway choice. This new storefront has been generating impactful additional Saskatchewan export volumes to markets around the world. With many of the ocean lines, we continue to develop a solid pipeline of import and export opportunities that will grow volumes in Saskatchewan over the coming quarters. The close collaboration that we have established with all of our terminal partners, whether they are East Coast, West Coast or Gulf Coast, will continue to pay dividends as we extend our reach to the hinterland with additional storefronts, additional export supply chains and round-trip economics that support our ocean line partners. Finally, let's move over to domestic intermodal. Despite the volume challenges of the CN 8-day strike, which impacted our domestic business for close to a month, we have seen many of our strategic initiatives developing and gaining traction. The TransX and H&R integration plans are going very well. The EMP program, our retail door-to-door program, our CargoCool temperature predictive services and our close collaboration with our U.S. partners such as J.B. Hunt and Schneider, have all been growth engines for us in the fourth quarter. Those segments are set up to gain momentum as we lead into 2020. We're also continuing to gain momentum with our Canadian-based wholesale partners, as Rob and his team working with our intermodal ops teams have improved service levels continuously over the last several quarters. To wrap this up for the consumer products segment, the short, mid and long-term strategies and structural advantages that we have developed, acquired and partnered with others to employ are providing our customers with solutions that add significant value to their supply chains. We look forward to working with all of our customers and partners to drive growth in 2020. Thank you and I will now turn it over to Ghislain for the financial aspects of the quarter's results. Thanks Keith. Starting on Page 11 of the presentation, I will summarize the key financial highlights of our fourth quarter performance. We continue to witness weaker volumes driven by softness in the general economy and we're also impacted by the conductor strike in the quarter. We continue to rightsize our resources to the weaker demand, while still being conscious of our CN-specific opportunities some cautious optimism for the second half of 2020 and most importantly for our mid and long-term structural opportunities. Revenues for the quarter were down 6% versus last year at slightly lower than $3.6 billion. Operating income came in at $1.218 billion down $234 million or 16% versus last year. While our reported Q4 operating ratio came in at 66%, we recorded a provision of $31 million related to workforce reductions in Q4 2019 and had a similar $27 million provision in the prior year. Excluding those provisions, operating income was $1.249 billion with an adjusted operating ratio of 65.2%. Net income was $873 million and reported diluted earnings per share was $1.22. Excluding the impact of a noncore asset sale in 2018 and the provisions in both years related to workforce reductions, our adjusted diluted EPS was 16% lower than last year. There is no impact of foreign currency in the quarter. Turning to expenses on page 12, our operating expenses were essentially flat versus last year at $2.366 billion. I will now cover some of the key highlights. Labor and fringe benefit expenses were 5% lower than last year. This was mostly the result of lower incentive compensation of close to $50 million and lower pension expense of $15 million partly offset by lower capital surcharge credits of $40 million as our capital investment program was completed earlier than last year. Purchased services and material expenses were 11% higher than last year. This was mostly the result of higher trucking and transport expenses due to the inclusion of TransX. Fuel expense was 13% lower than last year mostly driven by a 12% reduction in workload and a 3% decrease in fuel prices. Let me now turn to our full year results on Page 13. I am very proud of our performance of delivering positive earnings in a negative volume environment. We completed 2019 with revenues close to $15 billion almost $600 million or 4% higher than 2018. Our operating expense at $9.3 billion was 6% higher than last year producing a 2% increase in operating income versus 2018. Our reported operating ratio stood at 62.5%. Adjusting for provisions for workforce reductions in both years and a charge related to the replacement of our positive train control, back office system, our adjusted operating ratio was 61.7% and or 20 basis points higher than last year. Net income was down 3%. Excluding onetime nonrecurring items in both years, our adjusted diluted EPS came in at $5.80 up 5% versus 2018. Now moving to cash on Page 14. Free cash flow was almost $2 billion for the full year 2019. Our capacity investments are completed and our capital envelope finished close to $3.9 billion aligned with our budget. We have purchased 154 locomotives advancing 14 locomotives on our order for 2019. Finally let me turn to our 2020 financial outlook on Page 15. The demand environment remains soft in most sectors. However, we continue to see some support from consumers and from CN-specific opportunities that James and Keith have talked about. This environment should translate into low single digit volume growth in terms of RTMs for the full year versus 2019 with pricing continuing to be ahead of rail inflation. With this, we expect to deliver EPS growth in the mid single digit range versus 2019 adjusted diluted EPS of $5.80. After two years of elevated investment levels, our capital envelope for 2020 is estimated at approximately $3 billion. With that we expect to deliver free cash flow in the range of $3 billion to $3.3 billion which will drive a significant improvement in free cash flow conversion. A number of key assumptions underpin our 2020 outlook, including a Canadian to U.S. dollar average exchange rate of approximately $0.75, WTI in the range of $55 to $60 per barrel and the full year effective tax rate of approximately 26% a step-up from 25% in 2019. We continue to pursue our shareholder return agenda. In 2019, we returned to shareholders almost 80% of our adjusted net income through dividends and share repurchases. And our current buyback program of up to 22 million shares will be completed by the end of January. We are pleased to announce that our Board of Directors, approved a 7% dividend increase for 2020 demonstrating our confidence in the future. In addition our Board of Directors approved a share buyback program of up to 16 million shares for an amount of up to $1.5 billion to be returned through a normal course issuer bid from February 1, 2020 to January 31, 2021. In closing we continue to manage the business to deliver sustainable value for our customers and shareholders today and for the long term. On this note back to you JJ. Well thank you Ghislain. And just before we open it up for the Q&A I'd like to highlight four things which are example of our focus on leveraging our unique infrastructure and building sustainable long-term business growth. First I want to be sure everybody recognized that we continue to -- our relentless focus on PSR costs. For example Rob is centralizing crew calling and network dispatching. He is also rightsizing our maintenance shop and a function also looking at -- deeper to see if we can outsource some activities which are not core to the railroad. Second, we invest to push technology to modernize PSR. Doug McDonald right now and his team is on track to create an inspection algorithm with our tech partners and these intellectual properties and many others will eventually become part of the next secret sauce of PSR railroading in North America. On growth, we are building new platform of long-term growth. Over the past 10 years CN's revenue had nearly doubled to reach $15 billion last year, while our operating ratio improved from 65% in 2010 to 61.7% last year. It did not happen by waiting for the economy to bring us the freight. And therefore we intend to continue to grow a platform of growth through the acquisition of M&A to our core platform to our domestic intermodal platform or the things that we do when we successfully find out some rail short line that we can add into our network. And finally I think what's very important especially as we look at 2020 and beyond for the ESG investors out there you will find the value in CN. We're very proud of our leaders and very comprehensive sustainable report it's worth the read. So maybe let's turn it back Patrick to the Q&A right now. [Operator Instructions] The first question is from Ken Hoexter from Bank of America. Great. I guess Rob that was a great rundown on kind of some of the savings you're seeing already from the portals and track inspection. Maybe you could just delve into that a little bit more in terms of the potential from that. Is there another phase? Is there another level of savings or another advantage post the PTC investments you've made? Yes that that's a great question Ken. So, on both the portals and the autonomous track inspection cars we're just on the cusp right now. So we're going to see benefits as these continue to grow. On the portals this -- these results that I quote that I quoted there are the results of about nine algorithms. In 2020 we're going to have about 10 times of that many algorithms produced and producing further results. And each one of those algorithms makes our railroad safer. Obviously when we put in an algorithm, it's got to develop it's got to mature it's got to get a lot of experience in it. But as time continues as they get more data in there, we find more defects. And humans do a lot of things better than computers. There's other things that computers and machines can find better than humans. This is one of those. And with the cameras we have it certainly makes us safer. That's great rundown. And I guess for my follow-up maybe I don't know JJ I'll throw it at you and pass around. But just given the cold weather and the start that you had to the year maybe is there -- can you talk about how you get to that low single digit volume outlook? How -- what kind of growth do you need to inflect and at what point to make that target? Yeah. So I'll give you maybe just the short version. Definitely we think the second half will be more conducive than the first half. The first half will be a challenge. You saw that for the industry including CN December run rate was not great. So, obviously, the month of January is also going to be challenging. We had a cold snap, very cold snap in Western Canada of about seven days where those of you who follow our carload really saw the big dip for these seven days. And we're at -- right now we're not quite current on the Canadian West Coast. We hope to be current by -- in the next few days. So, yeah, second half and I think James gave you some color earlier when he talked about crude, when we talked about some of the coal projects. We'll have to do quite a bit of our self help. Thank you. Thank you. The next question is from Brandon Oglenski from Barclays. Please go ahead. Hey, thanks for taking my question everyone. And I guess JJ, I wanted to ask a more strategic question here because we are getting a pretty interesting divergence from some of your competitors south of the border that think they can run CapEx closer to maybe or even sub 15% of revenue. And I think you guys, obviously, you spent a little bit more in the last two years but you're guiding to let's call it the high teens maybe close to 20% of revenue this year. I mean, how do you discuss this with investors? Obviously you guys have been able to get more core growth I think over the past than your peers. But is the higher level of spending the way to run a railroad now? So the -- we invest for growth and we invest for cost. So when you look at this over time Brandon. Look at this over time in the last 10 years, look at the revenue growth of all the railroad. And take the time to compare them. And then this is where you see that at some point, some of us have been able to grow. Therefore, we need to reinvest CapEx. Some of us haven't grown as much. So, therefore, they don't need to invest as much CapEx. But growth does not come by itself you have -- we have to go and chase it. As I said earlier, growth is not just given by the economy it's driven also by things that we do and when we're successful in attracting that growth, we need to actually put in the asset. So this year it's about 20% in that range. And I think definitely we're comfortable in that rate. PSR creates some growth for short period of time but eventually if they're successful in growing their business and eventually they will need to invest. You want to add something, Ghislain? Yeah, JJ. I would add Brandon the fact as well is that the way that we've explained our capital allocation strategy to investors have been very disciplined and very consistent. And long-term investors like that. So we've always said that our first use of cash is towards the business. And then the second is to have a strong balance sheet when there's soft economic conditions or to give us an opportunity to do a strategic move if there's one available. And the third is the shareholder distribution starting first with dividend, not the amount of growth but the consistency of growth and then we use a share buyback as a way to get to a targeted leverage. And that's -- so our first use of cash is towards the business. And when there is project at CN that delivers a return on invested capital that's higher than our internal threshold then, obviously, this is good use of shareholder money and that's what we do. Thank you very much. Thank you. The next question is from Fadi Chamoun from BMO Capital Markets. Please go ahead. Okay, thank you. Just a question on 2020 guidance a little bit. I mean, you seem to have a lot of positive here going into the next 18 months in terms of operationally you've made the investment you have the capacity. And I'm just wondering the top line growth and the EPS growth doesn't really underscore that there is a lot of operating leverage that we would expect this year. Are there things on the cost side that you want to highlight? Or what's behind the lack of operating leverage implied in the guidance? Would you like to offer some color Ghislain? Yeah, I can. Fadi I can offer some color. Yeah there are some cost headwinds that we have in 2020 that are specific to CN. If you look at my prepared remarks, our tax rate, our effective tax rate is going up by 25% -- from 25% to 26%. If you look as well on the pension side and this is something that's specific to Canadian railroads. Last year the discount rate like in December of 2019 finished at 3.1% and the year before it was at 3.77%. So that creates a pension headwind in the range of about $60 million to $70 million. And then, of course, if you look at this year from a variant standpoint, our incentive compensation was a positive variance. And that -- the accrual for incentive compensation including bonus has to be reconstituted and that is another give or take about $90 million to $100 million. So you have about $300 million to maybe even close to $400 million of cost headwind that we have to address. And that's, obviously, all embedded into the guidance that we just provided. That's right. It's only guidance tax pension and replenishing the incentive compensation program. Thank you Fadi. And I would say the last one is depreciation, which you can do the math but the depreciation with two years of high elevated CapEx. Depreciation is, obviously, year-over-year step up as well. Thank you. The next question is from Cherilyn Radbourne from TD Securities. Please go ahead. Thanks very much. Good afternoon. A question for Rob. I also wanted to dig in a little bit on some of the automated inspection technologies. Just curious what your discussions are like with regulators on both sides of the border and what you think you're going to have to demonstrate in order to substitute technology for manual inspections. Right. Thank you for the question Cherilyn. So, specific to the autonomous track inspection cars. Obviously we operate in two different countries. So two different regulators. We are working with both. On the autonomous track inspection cars, we've already made a submittal to the FRA in terms of our phased approach plan, which really allows us to run them more and ultimately take some of the high rail inspections off to an extent and really turn our track inspectors from finding things to really fixing things and being responsive to that. So we continue to work with the FRA and transport Canada. The same holds true with the autonomous inspection portals, again a little different regulations north of the border versus south of the border. But they're in tune with everything we're doing and we continue to work with them every month whether it's Ottawa or Washington DC. Thank you. That's my one. Thank you. The next question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead. Yes, thank you very much, gentlemen. My question is for Ghislain. When we look at your free cash flow this year, it's expected to be up at $1.3 billion. So just aside the dividend increase in NCIB where would you like to -- the main focus for 2020? Is it to reinforce the balance sheet given the uncertainties? Or do you see other investments to be made in the current business? Yeah, I think -- Merci Benoit. Thanks Benoit for your question. I think you're right, free cash flow will be up. Obviously the CapEx is coming down and it's coming down to historical levels, which was what we have told the market. So I think it's all balanced. When you look at our capital envelope, when you look at the share buyback, when you look at the dividend then that puts us again in a strong balance sheet. And as you know we've said that our target in terms of leverage adjusted debt-to-EBITDA is in the range of 1.7% to 1.9%. And all those things bring us 2020 into that -- close to that range. So it's all balanced. And that's how the numbers stick together. Yeah, that's great color. Thank you very much. Thank you. The next question is from Chris Wetherbee from Citi. Please go ahead. Yeah, hey, thanks very much. I appreciate the time. So I guess I wanted to ask a question about the operating ratio. So I guess for 2020 given some of the puts and takes Ghislain that you mentioned it seems maybe difficult to potentially improve on a year-over-year basis. I wanted to get a sense of your view on 2020s, the potential for improving the OR in 2020. And then maybe bigger picture, if I look at the last kind of three-ish years even the last two years you've been running over 61%. This year maybe it's going to be over that again. We'll see. Longer term, do you think once we get past 2020 and some of the cost headwinds are there that there will be the opportunity to leverage some of the top line growth to kind of see a return to something closer to 60% or maybe sub 60%? Or is it more focused on sort of top line growth and potentially sort of expanding the markets that you're addressing? I think again thanks for the question. I think Chris the – like we've said before the – we're not enamored at CN by the OR. We'd rather be a $20 million or $25 billion business with a 60% OR than be a $14 billion business at a 59%. If you look at what JJ quoted in some of his remarks I mean, our strategy is working quite well. I mean when you look our – in 2010 from – since 2010, we grew the top line by 80% while maintaining our scheduled railroading foundation and even improving the OR going from 65.4% to 61.7%. So I think this strategy is working. Obviously to your point, for us the OR is the result of everything we do. And my view is with the cost headwinds we have in 2020, obviously it's going to be difficult to get to the high 50% OR which was our long-term more or less guidance that we provided at the Analyst Day. But definitely as volumes come back up and as those technology investments are producing value and some of what Rob is saying is actually it's coming in. We can see the results. It's very exciting. I think we're still confident over the – like mid long term over the next two to three years to get back to the high-50% range and this is what we told you at the Analyst Day. So our view is we're pretty confident of that. Thanks for the question, Chris. Thank you. The next question is from Scott Group from Wolfe Search. Please go ahead. So can you give us a little bit of color on pricing? Maybe would you characterize the pricing environment is stable, slowing maybe improving? And then can you give us any color on what to expect for headcount this year? So maybe James would you like to comment on pricing? Yes absolutely. So we continue our long-term strategy at CN the price ahead of railway cost inflation. This has been something that we've been doing for many, many years and there's no reason to divert from that strategy. At the end of the day our customers have come to expect from us a level of service that requires us to invest back in our infrastructure and network. In order to do that we need to have very consistent, reliable and predictable long-term approach to pricing. Yes. Listen on headcount, if you look from a sequential basis at the end of Q4 versus Q3, our headcount is down around 1,500 people. So we will continue to rightsize our resources. We're following demand closely. And we'll rightsize either up or down. I mean, I think there's opportunities this year that James will work hard on. Crude is a good example. And if – and we might have to hire a little bit if volumes go up. And if we're successful in getting some of that business. So again stay tuned on headcount. But I think we've shown in 2019 that we're quite resilient and we've shown as well that we are moving and we can move swiftly on rightsizing our resource, whether it's headcount, whether it's locomotives or whether it's cars. And we are going to continue as a team to do that for sure. Okay. Go ahead. Can you just clarify where you ended the quarter on headcount if it was meaningfully different than the average? Yes it was. I mean if you look at on average in the quarter and you've got to be careful that you've got to look at the fact that we have onboarded TransX employees. So if you look in Q4 for example on average, headcount is slightly up by about a few hundred people but if you adjust for the 1200 people of TransX that we onboarded our headcount is actually on average it's actually down close to 800 people. Look at it sequentially to Q3 to Q4. Because we had TransX in both quarters. Yes. And sequentially the headcount was down around 1300 people. Thank you. The next question is from Walter Spracklin from RBC Capital Markets. Please go ahead. Thanks very much. Good afternoon. I just want to come back to the CapEx question. I know the last question was framed around your CapEx being higher than typical railroad. However, it is down quite a bit this year 25% roughly, almost $1 billion. What my question is by reducing your CapEx as much as you have and I plaud it. But at the same time I want to be mindful that the capacity constraints that we saw a little while ago aren't going to rear their head again. Can you – and so in that line of thinking what are you not going to be spending on this year in that 25%? And do you have any sense of what your available capacity? I know there's a tough question but you're roughly – how much volume could you take on? And what capacity do you have to take it on from your current level of – and your CapEx spend for this year? So it's – thank you. Thank you, Walter. I'll start and then Rob can talk about capacity. But basically we have replenished capacity in the last two years. So we're not spending as much CapEx on capacity in 2020, because we did spend capacity on CapEx in 2018 and 2019. So that's one of the lower run rate. That's not that we're not spending capacity on CapEx next year. This year we are going to be still doing some work especially on Rupert in Vancouver. And number two, remember PTC was a big too big of a piece of the pie the CapEx envelope. We now are caught up on PTC. We're no longer catching up and the run rate of CapEx will also come down. You want to talk about how much capacity we have and if we're concerned with capacity Rob? Yes, absolutely. And what I've seen in my seven months here is that the capacity we added in the last two years has been very beneficial in terms of the resiliency of the network. Whether it's post strike, whether it's coming out of the winter blast, we just had here in the second week of January, it's paid benefits. What I see right now is that we're in a good position to handle more volume with what we did. We are adding capacity as JJ said it's not like we're not adding capacity this year. We are adding capacity in the critical spots on the West Coast. And we prepare – if we start to see forecasts change going into the years in advance where we're going to add capacity. The other thing about our CapEx over the past few years that also included locomotives. We brought on 260 locomotives and we're at the end of that. We're getting the last of those locomotives here in the first quarter. And that – when I talked about mechanical reliability, a lot of that has to do with the updated and upgraded fleet we have. Okay. Appreciate the time. Thank you. You are welcome. Thank you. The next question is from Allison Landry from Crédit Suisse. Please go ahead. Thanks. Ghislain I know you talked about the free cash flow and leverage guide as being balanced. And you raised dividend, buybacks up a little bit but it's still seems like you'll have some incremental dry powder. So considering all that could you maybe speak to how you're thinking about potential for M&A this year? Well I can start and then JJ you can jump in on M&A. Thanks, Allison. I think again we – as you saw we acquired TransX. We closed H&R. We're very pleased about that. And whatever else is out there that can create value that can feed the network. It's got to feed the network. It's got to bring us into markets that we don't do today. The Massena line that we bought from CSX is another good example where it's bringing us – it's bringing CN to the New York state market where we didn't go before. So we're always on the lookout. That's one of the reasons why we believe that a strong balance sheet is a good thing to have because not only is it good when times are soft like you have them today but also that when these opportunities come along we can go and jump on them very quickly. So we're going to look. But again it's about feeding the beast is what we call it here it's not about diversification. It's got to fit with our network. It's got to either extend our reach or bring more business on the rail. And that's the notion. And we're going to continue to look for opportunities to add value for our shareholders. JJ you want to add anything? Yes. So I mean briefly again to the point I made earlier we're not waiting for the economy to bring us the freight. So we also need to as an industry this is not just over three months. But if you look out at this year and next to the year after, we need to self-help and go and get some freight creation product to do that. So definitely if the opportunity presents to the acquisition in the world of what I would call domestic intermodal, the port platform or adding some small short lines to the CN network we would do that. Because the economy in itself, I think that's true for the whole rail industry eventually will only get us so far. Thank you. The next question is from Jason Seidl from Cowen and Company. Please go ahead. Thank you, Operator. Afternoon guys. I want to talk about capacity and a little bit of a different light. Can you talk about the different levels of capacity in both the Eastern and Western network? Are you guys still in balance out east compared to your Western network? And how should we think about you going after business to help rebalance sort of that imbalance that you do have? Yeah. So thank you Jason. So I think that's – it's a theme we've socialized among ourselves with the Board, but also a number of investors. So like any other railroad, we have some of our – part of our network which is running hard, because there's a strong regional demand to run the network that would be out West. And right now, the places we have the fastest growth is Edmonton to Prince Rupert of all the stuff like James and Keith are working, namely on propane coal, liquid grain and intermodal. And then, we have part of the network which is looking for business, which would be the Eastern network. I would say, Halifax to Chicago, we got capacity galore meaning as the industrial space in North America is in slow decline for the last 25 years we need to be relevant to who to the consumers and the consumer generate freight that is a typical container freight. And that's why our focus on the core platform as well as the focus on the domestic intermodal. So as the economy evolves we need to invest. And at CN we believe it's the case and we do that at 20% this year. And in our case, it will either be East to find ways to work with partners they would feed on network. And in the West, it's more about investing in our rail network because we have partners like Teck with Vancouver who are investing I think it's about $800 million into a coal terminal and we're going to be investing behind them so we can feed it. Do you think the pending ELD regulations in 2021 will help some of that eastern truck competitive traffic find its way back to the rail network? Do you want to comment on that Keith? What we're seeing on the ELDs when it first came in in the states and now coming into Canada is a lot of the folks that are hauling that freight today already have ELDs. Your larger firms are – have all that in place. I'll tell you where we're seeing some opportunities for to move truck traffic over to the rail. And that is with a lot of the insurance issues that the trucking market is having right now. So we're not waiting for either of those to occur. That's why you heard me talk about our E&Ps, our temperature-controlled business, our door-to-door retail product. All of those are firing on all cylinders and we're going after that traffic today. But the ELDs, it could have some impact, but I do not think that that's going to be a huge impact. All right. Fair enough. Appreciate the time as always gentlemen. Thank you. The next question is from Seldon Clarke from Deutsche Bank. Please go ahead. Hey. Thanks for the question. I know you don't give quarterly guidance but could you just give us a sense of maybe how you think volume should trend throughout the year? And just remind us of some of the nuances in regards to contract wins and maybe where you are as it relates to the government crude by rail contract? So we're not getting into the – we did provide a sense of volume for the year. And if you look at the month of January, we're below last year at this time. So we would hope to see some ramp-up between first half and second half. And when you look at our comparable for the second half, especially the last few months of last year namely our labor issue the comparable also getting better by the time you get to the fourth quarter. But at this point, anybody, who's really trying to forecast that level of precision. Eventually as you end up eating your own crystal ball. So we're not going to do that. I think the guidance we give for volume this year is as good as they can be in terms of how we can predict the economy and some of our initiatives. Thank you, Seldon. Can you just talk about some of the contract roll-offs? And how that shifts in like intermodal in particular? Yeah, nothing really new. I mean, you want to repeat what we've already said? Keith? I'll repeat my comments earlier is that as the two big ones that are exchanging hands this first half of the year the Yang Ming and the ONE. We'll start to see upside as I said in that late April and on into the second half of the year, as the mix in the volumes exchange hands there. Yeah no change on that. Yang Ming moved out and ONE eventually moved in late spring. Thank you. And then if I could just follow-up on the $3 billion of CapEx this year. You talked about the 40 locomotives coming in the first quarter are those already paid for? Or is that in this year's budget? Okay. So when you guys refer to historical levels of CapEx, are you talking to the sort of $3 billion number? I mean, you didn't really give that much specifics at the Investor Day or I know you don't like to guide as a percent of revenue, but how should we think about that historical level of CapEx? Is $3 billion like the right number moving forward? Or should we assume it stays similar – ? Yes. Well, and this would be your last question. So, historical means historical, if you go back at our history you would see that we were in the range of 19%, 20%. Okay. Appreciate it. Thank you. Thank you. The next question is from Konark Gupta from Scotiabank. Please go ahead. Thank you and good afternoon. Just wanted to understand in your low single digit RTM growth assumption is carload growth positive or negative? And what are your assumptions for crude by rail in that because obviously crude by rail has a big impact on RTMs versus carloads? Thank you. So, James do you want to do that? Yeah carload growth is positive. If you think about crude by rail, we expect to exit the first quarter March at a run rate close to our record run rate of 250,000 barrels a day. So very positive for the first quarter, a little bit of unknown coming into the second and third quarter it's really going to depend where the differentials lie. So we're not planning on big breakout volume in Q2 and Q3. Q4 again, I think is going to be extremely strong volume for crude by rail. Again, this is a seasonal piece of the business where you see the differentials widen out as pipe capacity gets constrained with additional diluent being added to the diluent blend in order to make sure that the product can flow in the pipelines. Okay. Thank you. Thank you. The next question is from David Vernon from Bernstein. Please go ahead. Hey, guys. Thanks. And only two questions JJ. First one would be on framing the forest products volumes for the year. I know you mentioned something about a secular shift in there. Is there a way that you can kind of give us a sense for what you'd expect the car loadings to be in that segment for 2020? Just so we can kind of understand how big of a secular ship that is. Yeah 2019 is behind us. And I'm very grateful for that on the forest product side of the business. About two billion board feet of production capacity came out of the BC forest products industry. What we're expecting for 2020 is a more stable run rate kind of what we've seen in the first quarter here. And we're projecting for that to be relatively stable for the balance of the year. Hopefully, we're right. We'll see where it ends up. Second your question. It felt like over the course of the last half of 2019 it felt like a little bit of a battle of doing press releases. Every couple of weeks we get something from you or from your competitor about great big share wins and this is obviously a fairly consolidated market. How – can you comment at all about how difficult or how more competitive it is to find new opportunities to kind of drive traffic on the network? I mean, are we going to see increasingly this become a little bit of a zero-sum game? Or do you think that there's still opportunity to kind of push with your existing customers in each – leverage your own unique franchises in ways that don't kind of step on each other's toes as much? Yeah. So it's a good question. It's a fair question. And we're very mindful that for the rail industry to be successful, including at CN we need to grow the pie, right? So, just exchanging piece of the pie that's not a long-term solution. The long-term solution is yes we have to have a product that compete and yes railroad do compete and we don't shy about the fact that we compete we're proud of it. But at the same time, as I said a number of times earlier we need to have a platform for growth beyond what just economy might bring in or not bring in. So the port platform, the domestic intermodal platform which is to compete with the highway and then if we can buy some short line or increase on network that would be part of what we want to do. That's why we're very focused on what can we do that has nothing to do with contract win or contract loss long-term. That's how we view the success of CN. And I think if you look back last 10 years, we must have done something right because CN is the railroad that drove it on a steady basis operating ratio down. But in terms of revenue growth we had the biggest one by far. Thank you. It's getting late. So I want to make sure everybody gets a chance to ask their one question. Thanks. The next question is from Steve Hansen from Raymond James. Please go ahead. Yeah. Thanks guys single one I promise. Just localized question here pertaining to the North Shore of Vancouver perhaps Rob or JJ. Just curious, if you're worried at all about the huge amount of volume that your customers are looking to push on to the North Shore? I'm thinking G3 and Teck specifically. I know that bridge over the North Shore is pretty limited. I'm just trying to understand the fluid of the opportunity or risk that might lie on that North Shore corridor? Yes G3 and Teck two major expansions in the North Shore. Rob? Yes. So you point that out and we are very well aware of that with working with James and keeping us advised to that. When we talk about capacity improvements for this year, part of that is directly a result of that business. So we're prepared for it and we're well aware of the growth there and we welcome it and we've taken the necessary steps. Yes. And if I may add, you've seen some of our press release in the past in terms of how we've been able to leverage funds from the Federal Fund and fund from the Port of Vancouver. And our program to invest into the North Shore has actually been in support of two other source of money which is a federal government and the Port of Vancouver. So these are good projects and we love the fact that customers come in put up their major capital plan on CN because we're -- as a physical carrier who can physically deliver to their facilities as long as we invest in the asset that you talked about, it gives us a long-term advantage from a service point of view. Thank you. All right. Thanks guys. Thank you. The next question is from Brian Ossenbeck from JPMorgan. Please go ahead. So question for you Rob. Obviously, fuel efficiency is a focal point for you not only from the cost side, but on like on the ESG as well. The network already being the most efficient in North America. What else do you think you need to do to keep driving that? And how far you think you are from more of a steady state? What else specifically are you going to be doing besides adding the new locomotives to drive that? And then if you could just clarify the comments on the automated train inspection portal, if there's anything in the near-term from a regulatory perspective any sort of time line as to when you might be able to move away from more manual inspections on a full network basis? Thank you. Okay. Thank you. On a fuel efficiency standpoint as I mentioned all-time record. But when you look at the year-over-year comps, obviously the first quarter last year was very difficult with the winter fourth quarter was impacted by a strike. So when we look at going into next year just looking at those comps, we have the ability to improve. A lot of it's based on discipline in terms of throttle limiting and isolation of locomotives as we move trains across the network. And there is an ability for technology here as that continues to develop to help our engineers out there in terms of saving fuel across the network. So we're very optimistic that we'll improve here going forward into 2020. On the autonomous inspection portals like I said with Cherilyn, we are working with the regulators. There's nothing imminent at this time, but we've continued to keep them very well in the loop in terms of what we're doing, what we're finding sharing the data with them. And we'll continue that. And it's really -- it's about making our network safer. And it's also about our employees can now turn from inspecting and finding things to really repairing and fixing things. So that's really where we want to be. It allows us to repurpose the individuals that are out there ultimately. Makes us safer, services more reliable and you actually freed up capacity because of service -- because the network is more reliable. Thank you, Brian. Okay. Thank you. Thank you. The next question is from Tom Wadewitz from UBS. Please go ahead. Yeah, good afternoon. So I wanted to ask you a bit -- perhaps JJ just about view on second half. I think you pointed to improvement in activity in second half? I know you have a lot of idiosyncratic things. But I guess we heard from CSX kind of not much visibility to improvement UP said trade agreement gives you some lift. How are you thinking about what drives strength in volume in second half? Are you optimistic on economy or trade agreement impact? Or how do you think about it? Thank you. Yes. So we definitely -- we know pretty much about today. Today being January first quarter, because we're in it. And the first quarter, it has its own challenge in the volume growth year-over-year. As you go later in the year, definitely the USMCA agreement has been passed. I mean that can only be positive. I know it's not going to be a huge positive. But rather than going backwards, we're going to be moving forward. And eventually there should be momentum coming out of that. The fact that there's an agreement for at least for the first phase between China and United States is also a positive, I know there's another question about these things as to how much impact that will be, but that's definitely a better environment and having an increased tension. So we're now heading into a mode where maybe China United States will make some progress, especially as we get closer to the election in the United States. So I think the trade agreement -- the trade environment, when you look at how negative it was last year and how things seems to be at least turning that at some point in the months to come or quarters to come that we will start to see some of the positive of that. I know at the same time nothing is guaranteed, but our view that we will build our plan and our capacity in-house as well as our employee resource effort is we're looking at the second half at a time where we might be a little more -- we'll have a little more business coming out of the first half. Can you offer a quick thought on inventories with respect to intermodal whether they're kind of at the right levels now or are they still a bit too high? Yeah. We're actually seeing in some parts, I've seen some customers say that their inventories are depleted and they need to fill stock again. So there's a mixed story out there. And I think JJ is correct that the trade agreement Phase one or the USMCA. All of those things are having our customers with much more positive attitude. If you look at the ocean liners, they're -- although that they're -- they've been blanking some sailings, there's a lot of boxes that want to get on those. And as I said, we've done very, very well in Rupert. We've done well on the East Coast also. So there's a lot of sentiment that says that the inventories need to be restocked. Yeah. Okay. Thank you, Keith. Thank you. The next question is from Justin Long from Stephens. Please go ahead. So I was wondering if you could provide an all-in EPS impact from the labor strike in the fourth quarter. I just wanted to get a better sense for what a more normalized 2019 EPS number would look like that would be more comparable to that 2020 EPS guidance. And maybe as we think about the cadence of earnings over the course of the year, it's a bit tricky with the fluctuations we're seeing in the comps. Is your best guess high level that first half earnings are down low single digits, mid-single digits? Is there just a ballpark way to help us frame that up? Yeah. Thanks Justin. This is Ghislain. On the strike your question related to the strike. As you know, we did issue a press release and we did estimate at the end of November that the strike would have an impact of about $0.15 on EPS. I can tell you that -- and we did put a little caveat in there that some of this dependent on how the network would recover in December. And I can tell you that Rob and the operating team did a hell of a job recovering the network and that the network recovered much faster than we thought. So, the impact of the strike I will say is not as much as the $0.15. It came in better. But I mean I'm not going to go into the detail about how much it did cost. But you can you can do the math, but we did move more business in December than we would have otherwise, which was business that was -- that should have been moved in November, but it was not moved because of the strike. So we did better, but I'm not going to give you a detailed number. And some of this estimate by the way as you know is more an art than a science. In terms of the – again, the EPS cadence. I mean, you heard JJ and the team talk a little bit about volume. So you can make your model here and we've said that, we saw more optimism in the second half than the first half. So, again, we're not going to go into detail about quarterly EPS guidance. We're very comfortable at this point with what we know that that we can deliver the mid single-digit EPS growth. And frankly, when we look at the long-term past 2020, we remain still quite bullish on our long-term structural growth opportunities and we did talk about this and we'll continue to talk about it, but whether it's Rupert, whether it's Ridley now being owned by the private sector that James talked a little bit about, whether it's stock it, whether it's working closely with PSA to bring a lot of business coming to Halifax on our underutilized Eastern network. Whether it's -- and then lastly whether it's the strategic long-term partnership that we're extremely proud of to have with Teck. So I think again, from -- we're consciously optimistic for 2020, but we're still quite bullish for 2021 and for the mid to long-term basis. Okay. Great. Thanks for the time. Thank you, Justin. I think that was the last question, operator? Okay. Well, thank you Patrick and thank you for all of you who join us tonight. Sorry, if we took a little more time than usual. And I want to take this occasion to also give a very special thank from myself to all of the CN employees, who are really, really, really worked hard in the fourth quarter facing some unusual challenge for railroad. So, kudos to all of you for working through that, and we're now in good shape to start 2020. So thank you. This is the end of the call.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

Gypsum Management and Supply (NYSE:GMS) Q3 2019 Results Earnings Conference Call March 5, 2019 8:30 AM ET Greetings, and welcome to the GMS Inc. Fiscal Third Quarter 2019 Earnings Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Leslie Kratcoski, Vice President, Investor Relations for GMS Inc. Thank you. You may begin. Thanks, good morning and thanks everyone for joining us this morning for GMS' earnings conference call for the third quarter of fiscal 2019 ended January 31, 2019. I'm joined today by Mike Callahan, President and CEO; and Lynn Ross, Chief Accounting Officer and Interim CFO. In addition to the press release issued this morning, we have posted presentation slides to accompany this call in the Investors section of our website at gms.com. On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements address matters that are subject to risks and uncertainties, many of which are beyond our control and may cause actual results to differ from those discussed today. As a reminder, forward-looking statements represent management's current estimates and expectations. The company assumes no obligation to update any forward-looking statements in the future. Listeners are encouraged to review the more detailed discussions related to these forward-looking statements contained in the company's filings with the SEC, including the Risk Factors section in the company's 10-K and other periodic reports. Today's presentation also includes a discussion of certain non-GAAP measures. The definitions and reconciliations of these non-GAAP measures are provided in the press release and presentation slides. Please note that references on this call to third quarter and fiscal 2019 relates to the quarter ended January 31, 2019, and the fiscal year ended April 30, 2019, respectively. With that, I'd now like to turn the call over to Mike Callahan. Mike? Thanks Les. Good morning, and thank you for joining us today. I will begin today's call with a review of our operating highlights and some market commentary and then Lynn will cover our financial results in more detail. We will then open the line for your questions. Now turning to Slide 3, we are pleased to deliver a solid third quarter highlighted by record net sales and adjusted EBITDA for both our reported and base business results. Our organic sales increase of 6.6% reflects strength and balance in both our product offering and the markets that we serve. We did face some challenges on the sales front however, including lost shipping days associated with some abnormally wet and extremely cold weather conditions in the quarter and further softening in the Canadian single family residential construction market. Organic revenue growth was broad based across each of our product lines with 3.9% growth in wallboard sales, 10.6% growth in ceilings and 13.1% growth in steel framing. Other product net sales were also up 4.5% organically. Now on the profitability front, we generated 41.5% year-over-year increase in adjusted EBITDA to a record $59.7 million for the third fiscal quarter. The increase reflected contributions from Titan, increased operating leverage including benefits from the cost savings initiatives undertaken earlier this fiscal year, continued pricing improvement, and favorable lease accounting. Let me touch on a few of these areas next. In the third quarter there was some further softening in the Canadian single family residential market which resulted in sales for our Canadian business declining low single digits on a constant basis with further impact from about 5% depreciation in the Canadian dollar year-over-year. Nonetheless, Titan continues to be very accretive to our consolidated operating results. Our long-term strategic rationale for the acquisition of Titan including increased scale in footprint in North America, geographic expansion into the highly attractive and fragmented Canadian market, and creation of a well-balanced platform for growth remains very compelling. The integration continues to progress well as we have continued to work closely with our key suppliers to generate purchasing synergies and take advantage of our scale and the power of our North American platform. With the commencement of our annual purchasing programs in January 2019 we began to realize our purchasing synergies at the run rate associated with our previously announced $10 million target for purchasing synergies. And we continue to expect to exceed our original $10 million estimate for fiscal 2020 and we continue to look for even more synergies with our cross-border suppliers and through other non-purchasing initiatives. We have also continued to make progress on our previously announced strategic cost reduction initiatives in the U.S. as demonstrated through the 130 basis points of operating leverage achieved during the fiscal third quarter, which excludes the impact of the change in lease accounting. As expected we achieved full run rate savings as of January 2019 and are on track to realize the full $20 million annual benefit of these initiatives in fiscal 20. We generated strong free cash flow of $55.6 million during the quarter which enabled us to reduce our net debt by $32.8 million and repurchased 11.5 million of our common stock under the repurchase authorization announced last quarter. We also opened a Greenfield location just outside Akron, Ohio and this morning announced the acquisition of Commercial Builders Group LLC subsequent to the end of the quarter. This tuck-in acquisition operates two facilities in the Greater New Orleans and Baton Rouge, Louisiana markets adding coverage of two important top 100 metro areas in the U.S. As evidenced by all of these actions we are executing on our stated and balanced capital allocation strategies of debt reduction, disciplined growth through acquisitions in Greenfields and opportunistic share repurchases. I'd now like to spend a few moments explaining our current view of the end markets that we serve. Now as a reminder, we estimate that approximately 55% of our consolidated revenues are through the commercial construction markets and approximately 45% is related to residential construction, with just less than half of that 45% related to new single-family residential construction. Since the latter part of calendar 2018 there's been a great deal of speculation with respect to the current macroeconomic outlook and the potential impact on residential and commercial construction. From our perspectives we remain encouraged by what we are seeing across our business and in the broader economy. As it relates to residential construction while it's still early in the traditional spring selling season we believe the late 2018 slowdown in new single family residential construction was related to a confluence of factors, including a rise in interest rates, home price appreciation, and resulting affordability issues and geopolitical uncertainty. Like others, while we expect that this market may take a pause, we do not currently believe it will be prolonged or particularly deep. Jobs and income growth remain at very healthy levels and many of the major markets in the U.S. continue to have limited housing supply as building remains below historical averages, all of which bodes very well for the mid to long-term outlook. On the commercial front which represents the majority of our business, most indicators and estimates point to continued growth against the backdrop of an economy that remains healthy. We are seeing that in our own business with strong backlogs in quote activity. In my recent visits to many of our locations in multiple geographies I've heard from our own people and peak commercial customers that pipelines are strong extending through calendar 2019 and in some cases even into calendar 2020. While it's impossible to predict what levels of growth are ultimately realized near term in the markets we serve, we remain focused on controlling what we can. We believe our market leading position and the distribution of interior building products, our balanced product portfolio and our diversified exposure across commercial and residential new and R&R construction markets which we believe continue to exhibit healthy long-term fundamentals, will enable us to continue to take advantage of growth opportunities across our business, both now and in the future. Looking to the balance of fiscal 2019 and beyond, we remain committed to growing our business both organically and through selective acquisitions with an emphasis on profitability and free cash flow generation with which reducing debt remains our priority. Now with that, I will turn it over to Lynn for a more detailed review of the financial results. Lynn? Thanks Mike and I would also like to thank you all for joining us on the call today. We were pleased to deliver a solid third quarter highlighted by record net sales and adjusted EBITDA performance and strong free cash flow generation. Looking at Slide 4, we grew net sales of 23.6% to $723.9 million and increased our base business sales during the quarter by 6.6% compared to the third quarter of last fiscal year. Our wallboard net sales increased 16% to $297 million in the third quarter compared to the same period last year which was driven by acquisitions and pricing. The 3.9% growth on an organic basis was comprised of a strong pricing gain of approximately 4% and flat volume, the latter of which was due in large part to the lost shipping days in the U.S. and lower sales in Canada. Our third quarter ceiling sales increased by 16.4% year-over-year to $105 million as a result of pricing improvements, higher organic volumes resulting from increased commercial business, and a positive benefit of acquisitions. The 10.6% organic increase was comprised of price increases of approximately 7% as well as higher volumes of approximately 3%. Our steel framing sales increased during the quarter by 21.4% year-over-year to $117.4 million. This was driven by strong pricing gains, acquisitions, and higher organic volumes from greater commercial business. The 13.1% organic increase included price gains of approximately 10% and an uptick in volume of approximately 3%. Our sales of other products which consist of insulation, joint compound, tools, suckers and other complementary products totaled almost $204 million and were up 43.6% compared to third quarter of last year. The recent acquisition of Titan has expanded the breadth of our product offerings while at the same time our 4.5% increase in our base business sales of other products reinforces the success of our efforts to continue to grow this other product category. Our gross profit increased almost 20% to $234.2 million on higher sales including the positive impact from acquisitions. Our gross margin of 32.4% declined from 33.4% a year ago primarily due to increased product costs as well as changes in product mix. Also last quarter's third quarter gross margin was a tough comparison being the highest gross margin level of any quarter last fiscal year and positively impacted by higher level of supplier incentives associated with a larger level of wallboard pre-buy. Rising product costs over the past year included two wallboard increases, multiple steel and ceiling grid increases, as well as various freight surcharges. On a sequential basis gross margin improved 20 basis points from the second quarter and slightly exceeded the 32.2% guidance we indicated in last quarter's call, which we continue to believe is a reasonable benchmark for the remainder of this fiscal year. Related to wallboard increase, we believe we are well-positioned to respond quickly to any changing price cost dynamics. Turning to Slide 5, we reduced our adjusted SG&A as a percentage of net sales by 210 basis points year-over-year to 24.2% in the quarter, a 130 basis points of the reduction was the result of increased cost efficiency primarily due to the cost reduction initiatives taken during this fiscal year as well as contributions from the Titan acquisition. These were partially offset by continuing inflationary pressures, primarily in logistics costs as well as higher costs operating with the weather disruptions Mike referenced earlier. The remaining 80 basis points of the reduction was driven by changes to lease accounting. As we discussed we've made significant progress on these reduction initiatives and we continue to find many opportunities to further streamline our business. As a result, we would expect fourth quarter adjusted SG&A as a percentage of sales to decrease year-over-year at least by the level we experienced in the third quarter. We delivered $59.7 million in adjusted EBITDA in the third quarter. This was up 41.5% year-over-year from $42.2 million in the prior year quarter. Adjusted EBITDA margin was 8.2% as a percentage of sales or 7.4% if you exclude the impact of our lease accounting which was up 20 basis points from 7.2% a year ago. Turning to Slide 6, during the third fiscal quarter we generated over $55 million of free cash flow. This enabled us to reduce our net debt by $33 million as well as repurchase 11.5 million dollars of our common shares. As of January 31, our net debt to LTM pro forma adjusted EBITDA was 3.8 times. This was consistent with the level as of the end of Q2. We intend to continue to delever through strong free cash flow generation and as a reminder our current leverage ratio post Titan compares favorably to 2014 when our ratio was six times as well as just prior to our May 2016 IPO when it was 4.3 times. Additionally, of our total long-term debt, approximately just over 75% is not due until 2025. Also in order to hedge against potential future interest rate volatility, in February we entered into an interest rate swap agreement. This agreement effectively provides a fixed rate on $0.5 billion of our first lien term debt. Our balance sheet remains healthy with $74.3 million cash on hand and $220 million available under our ABL facilities. This results in substantial liquidity for the business. Now, let me turn the call back over to Mike before we open the line for questions. Thanks Lynn. I have just a few additional comments before we open the line for questions. We are pleased with our third quarter performance and believe that as the market leading distributor of interior building products with significant scale advantages combined with local expertise. We are poised for continued growth. Our third quarter results provided further evidence of this with sales and adjusted EBITDA growth of over 23% and 41% respectively. We continue to take advantage of our multiple levers to drive this growth through organic growth, Greenfields, M&A and operating leverage. We believe our large, diverse end markets continue to exhibit healthy fundamentals providing us with significant growth opportunities across our business both now and in the future. And then finally and probably most importantly our great network of dedicated GMS employees in both the U.S. and Canada continue to embrace our strong entrepreneurial culture to deliver the outstanding service to our customers that we believe will deliver profitable growth over time to our shareholders. And with that operator, we are now ready to open the line up for questions. Thank you. [Operator Instructions] Our first question comes from the line of Michael Wood with Nomura Instinet. Please proceed with your question. Hey guys, this is Ryan calling in for Mike. Did logistics surprise you, was there sudden and could you just explain how logistics hurt SG&A whether this is freight rates or inefficiencies? Right, it think the short answer to that is as I mentioned there was definitely some impacts from weather related and the reality is that when you're dealing with production challenges just in terms of getting loads out your logistics and efficiency in terms of labor utilization is impacted. So I would say that that really was a key factor in how logistics impacted us in the quarter. Okay, thank you and then just one followup, how did flat organic wallboard volumes compare to industry sell through in your view? Yes, thanks for the question. In terms of how we compared to the industry the Gypsum Association data, our read on that data is that we believe that we maintained share. We believe that most of the both year-to-date decline and quarter-over-quarter decline at the Gypsum Association was due to the impact of pre-buy. So looking at that we believe our flat volumes indicate that we are on par with our market share. Thank you. Our next question comes from the line of David Manthey with Baird. Please proceed with your question. Hey good morning. First off you mentioned that your gross margin percentage was lower due partly to higher product costs, but clearly your realized selling prices were higher also. I guess this implies due to the price cost relationship is negative, could you talk a little bit about that relationship and why did that happen? Yes sure, thanks for the question. Related to the year-over-year decline in gross margin this was due to like we said some changes in product cost and mix. In addition, the prior year comp was really impacted by higher level of volume incidents that we realized in the third quarter of prior year due to the December 3017 pre-buy. Okay, thank you. And then second, what is your outlook for price in the coming 12 to 18 months, I guess we should assume a little bit less leverage on SG&A if your pricing moderates down, is that your assumption? No, that's not our assumption at this point. I mean as you know Dave our price in terms of wallboard the price increase is literally rolling out as we speak and it took effect in the first part of March. So there haven't been announced increases. As always it takes a period of time for it to settle out. But our assumption right now is to continue to look to the pending increase of the existing increase and see how it settles in. But we're not baking in a lower price environment for the year. I just meant more moderate price increases than last year. Steel for example. Oh I'm sorry. Possibly I would say yes, I probably would say generally speaking, I think if you look at steel prices, they certainly have moderated kind of flattened out, but I think that's a safe assumption, yes. The only caveat to that might be insulation, I think insulation is still on the bubble as it relates to the inflation. Thank you. Our next question comes from line of Trey Grooms with Stephens Inc. Please proceed with your question. Just real quick, I guess kind of following up with that, the last question is the - looking out on pricing, you mentioned maybe a little bit more moderate price increases, were you talking specifically just for clarity around wallboard pricing or and I know you mentioned steel but wallboard pricing or ceilings, is it both or one or the other that you're referring to just for clarity? I would say that in terms of the pricing going forward wallboard certainly the increase as I said is in the process of rolling out as we speak. I think in terms of ceilings as we've often said, ceilings generally tends to price up to one to two increases a year, it's a 3% to 5% increase generally speaking on ceilings. Insulation, there still seems to be pressure on pricing as far as that goes. So I would anticipate maybe some inflation there and but steel has definitely settled down a bit and I don't see any near-term price increases there. All right. Well thanks for that. Just hearing that you were expecting more moderate I just was making sure we were fully understanding that comment. Okay, and then secondly, the Canadian market has clearly weakened, was down this most recent quarter for you guys. What are you hearing from your customers there and their outlook for the building season in that market as we're kind of at least starting to come into view with the building season here in Canada? Well, it is the general backdrop clearly just this period of time tends to be a seasonal slowdown for Canada anyway just based on the snow and cold conditions. I would say the outlook right now on the single family side there definitely has been some downward pressure of single family detached. So the standalone homes definitely have seen and a lot of that frankly has to do with the mortgage programs they have in place and the stress test that the Canadian Government essentially has imposed on mortgages, so that's definitely had an impact. But I would say that when you look at the commercial high rise and commercial development as well as the commercial multi-family and this pretty much goes across the board, the market outlook is still very positive. So I would say as far as Canada is concerned it is pretty well not completely isolated but for the most part it's that single family detached business which has had, under pressure right now. But our view is still positive. I mean I think the market overall is sound and the outlook is generally pretty optimistic. Okay. And last one for me is just on with that increases that are out there especially on wallboard, are you guys seeing or are you guys participating in any pre-buy of any size at this point? No, we've had limited pre-buy this season. All right, that's it from me I'll pass it on. Thanks a lot. Thank you. Our next question comes from the line of Keith Hughes with SunTrust Robinson Humphrey. Please proceed with your question. Thank you. The EBITDA margins are up 20 basis points year-over-year excluding the change in leases. I assume were your organic margins down given the tight and usually mixes you up and if it is so kind of how much? Yes, thanks for the question Keith. We don't break it down by those geographies. Okay, let me ask you this way on Titan. You talked about sales being weak. If you kind of combine it you didn't know it last year, but just roughly how did their margins look compared to last year given the weak environment? Yes, Keith. They were lower and their SG&A as a percentage of sales was also impacted by the same weather conditions that we discussed. And one thing, on a constant currency basis, sales were down 2%. The Canadian dollar did decline about 5% and that resulted in about a little bit less than a million dollars of impact on their adjusted EBITDA. And just one small question on, this has come up for the fourth quarter. The interest expense we saw in the third is that roughly in tax rate is that roughly what we'll see in the fourth quarter? Yes, that's a good way to think about the fourth quarter in terms of interest and taxes. Okay great. Thank you. Thank you. Our next question comes from the line of Matt Bouley with Barclays. Please proceed with your question. Hi. Thank you for taking my questions. Mike are you able to kind of quantify the impact of lost shipping days in the quarter and then maybe provide any comments around what you've seen, I guess in February thus far? Thanks. Yes, thanks Matt. Yes it's really tough to quantify. The bulk of the impact in terms of weather tends to gravitate towards single family and if you look at our numbers overall, our mix, you're probably looking 20% to 23% of our business overall is new revenue if you break it down on net basis. So when you think about that, given just the magnitude of the impact that had on the single family piece and it is - we lost numerous shipping days. It's not just the fact that it rains for three or four consecutive days, but it's also that you've got to get the job sites themselves to dry out. So while I can't really quantify that I think anybody that's been looking at the news and seeing from Texas all the way to DC that we've all had to deal with pretty adverse conditions. Now I will say that in November, December we were under a lot of pressure. January, we saw a significant pickup in momentum and activity which carried over into February. So I would say that the momentum of activity in January plus frankly we were delivering on Saturdays trying to catch up, which also leads to some SG&A pressure frankly, in terms of you know overtime and things such as that. So if you pick all that together, so we're trying to catch up as best we can. But fundamentally I think the January and February momentum levels give us cause for optimism going into the fourth quarter. Yes, I would note also that our February per day sales is up versus prior year on an organic basis. Okay, appreciate that detail. And then secondly, just following up on the Titan business in Canada and obviously you called out the challenges on the single family side not the data, it seems to be a bit better on the multi-family side. Could you remind us of Titan's multifamily versus single family exposure? And then just maybe put some finer points around what you're seeing on the multi-family side specifically because I do think the data has been a bit stronger there? Thank you. Yes, 40% commercial construction and then 60% resi. On the resi side about 40% new and then and that's 40% of the total in market and 20% are R&R and we estimate on the commercial side that that's 10 new and 30 are R&R. Okay, I appreciate the detail. Thank you. Thank you. Our next question comes from the line of Mike Dahl with RBC Capital Markets. Please proceed with your question. Good morning. Thanks for taking my questions. Mike, I wanted to follow up on the pricing comments again. Actually two parts of it, but first on the wallboard side, I think Lynn mentioned not really any pre-buy right now and you're talking about seeing how the price increases settle out there early on. But is there anything to interpret in terms of how you're viewing the market and the likelihood for a price in terms of you guys not participating in price pre-buy? Well, first off the circumstances around pre-buy they show differently because the increase itself was pushed out, so routinely this is a January increase and it got pushed out this year. So, and then of course based on some of the conditions relative to deliveries and some of the pressure, the ability to find a place to put the board was limited based on our inventory positions and delivery lag. So the general outlook Mike is that we are going to be nimble as the price increase is introduced into the marketplace, but it's still early on. We don't really know. A lot of it has to do with just demand levels and traction and take away from the plants and that literally has taken place as we speak. Now the manufacturers continue to talk about escalating cost and inflationary pressures and they're reacting to that with their price increases. But the market will dictate just exactly how much of this ultimately is going to be realized and depending on when it settles in first there may be a second phase to the increase as they always leave the door open for that. So I can't really handicap it at this point, where we're going up as we received higher costs from our manufacturers in many cases where we're quoting commercial work, we're quoting escalators based on the projected increase and we have yet to see how it's all going to settle out. Okay. That's helpful. The second part of the pricing was really back related to steel and comments about not expecting any further increases. I guess given the path of steel pricing when you look out over the next few quarters, do you think that we could see price declines actually? That really is hard for me to call based on the current, you know just the current uncertainties around steel in general and tariffs and everything else that is going on. What I will tell you though is that we have our purchasing group here has a daily dialogue almost with the steel producers and we keep very, very close to the ground as to what's going on relative to steel pricing. And so, we can move quickly too, but based on how we turn our inventories. I mean our steel inventories cycle very quickly, so even if there is a near-term price adjustment up or downward we're able to cycle through that pretty quickly based on our, just on how quickly we cycle in the steel inventories. So it's tough to handicap right now. I would say right now we look at is kind of flattish and where it goes from here really remains to be seen based on demand levels and just consumption. Got it. If I could fit one more in, when you made a comment about the fourth quarter gross margin, I just wanted to understand or clarify that a little, were you saying that the 32.4 seen in 3Q was still the reasonable assumption for 4Q or was that comment related to your prior 32.2? Yes, now our guide continues to be the 32.2. Okay great. Thank you. Thank you. Our next question comes from the line of Kevin Hocevar with Northcoast Research. Please proceed with your question. Hey good morning everybody. You mentioned that so 3Q 2018 had favorable gross margins for, that you mentioned incentives ahead of price increases taking effect on the wallboard side and it sounds like you're not really pre-buying much ahead of this increase and gross margin expectations are from 3Q to 4Q relatively similar. So can we infer from that you're not seeing the same level of incentives this year as you saw last year ahead of the price increases? The favorability that we saw in our margin last Q3 due to the incidents was simply, I think timing of the purchases. So in terms of whole dollars or percentage the incentives remain fairly constant. It's not even a little bit more favorable. So no, I wouldn't infer that. Okay. And then, so the largest wallboard manufacturers, is that to be acquired here sometime in early 2019. So curious if you have any thoughts on that in terms of, did you expect that to have any impacts on that industry or do you think it will be pretty much business as usual after that transfer takes place? My view having done business with - significant business with both sides of that equation so to speak, I think it's going to be business as usual. I think it's going to be a very strong and formidable company and they certainly have a very impressive array of products from the insulation side all the way through wallboard and ceiling. So from our vantage point it's going to be business as usual and we're going to continue to do business with them as a combined entity just as we have separately in the past. Got it, okay. Thank you very much. Thank you. Our next question comes from line of Matt McCall with Seaport Global Security. Please proceed with your question. So Mike you made some comments, bullish comments about the mid to long term specifically on the residential market. I was just curious about more the near-term view as you said there may be a pause. I'm just - I'm wondering about the impact of kind of the starts weakness that we saw in the end 2018 and the expected impact on your business to start 2019, calendar 2019? Well, I mean I think it's logical to say that the same thing that we were talking about in terms of weather impacts on our business has impacts on starts too. I mean it's tough to clear land with a bulldozer when it's going to be submerged in six foot of water in a subdivision in Atlanta or Georgia. So I mean, I think the reality is our outlook is that if there is slippage we think it's going to be moderate slippage because there's still a shortage of inventory and in just about every major market we serve. So based on our conversations with the large national homebuilders that we do business with throughout our footprint that our house counts generally speaking are up and I think the general attitude of the homebuilders is optimistic as well as the custom builders. It's just that with the rate increases back at 2018 carried over into the tough winter, I think the data is just kind of noisy right now. So as we get deeper into the spring selling season, I think all of us will have a little bit better clarity on where this market's going to settle out. But a pause I think is the best word because I don't consider it to be any kind of a long term slippage. I think it's just a matter of making it a temporary market adjustment frankly. Okay. Thanks that's helpful. So the detail around the synergies and the cost savings that was also helpful. Can you, it sounds like you're optimistic about mainly achieving those goals, but can you give us an idea where you were as of Q3 for both the synergies and the cost saves and how we should layer those in over the next I guess four or five quarters? Yes. Are you referring to the Titan synergies or SG&A synergy? Both, cost saves and in the synergies as well? Yes, so on the SG&A, so I would expect that for Q4 that our reduction in SG&A as a percentage of sales our SG&A leverage is somewhere between where it was Q2 over Q2, and Q3 over Q3. Okay. And then does that kind of get - I think you talked about the total for - I think you said through 2020 for both synergies and cost saves, so I guess when do we hit the full run rate of each of those both from Titan and the SG&A or the operational synergies? So in terms of the full run rate on the Titan synergies, we just – those will both be 2020. Yes, we have the $10 million, the jump in both full run rate synergies with Titan which we expect to exceed, those would be fully realized in fiscal 20 which is April 20 and the same thing on the cost efficiencies or the cost savings for both 2020. Okay, all right. Thank you. Thank you. Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the floor back to Mr. Callahan for any final comments. Well, thank you everybody for joining us today. We're very excited about where we are today and we look forward to updating you on our progress in the coming quarters. Thanks for your time today. Thank you. This concludes today's teleconference; you may disconnect your lines at this time. Thank you for your participation.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

Bombardier Inc. (OTCQX:BDRBF) Q3 2019 Earnings Conference Call October 31, 2019 8:00 AM ET Good morning, ladies and gentlemen and welcome to the Bombardier's Third Quarter 2019 Conference Call. Please be advised that this call is being recorded. At this time, I would like to turn the discussion over to Mr. Patrick Ghoche, Vice President, Corporate Strategy and Investor Relations for Bombardier. Please go ahead Mr. Ghoche. Good morning, everyone, and welcome to Bombardier's third quarter 2019 earnings call. I wish to remind you that, during the course of this call, we may make projections or other forward-looking statements regarding future events or the financial performance of the corporation. There are risks that actual events or results may differ materially from these statements. For additional information on forward-looking statements and underlying assumptions, please refer to the MD&A. I'm making this cautionary statement on behalf of each speaker on this call. With me today is our President and Chief Executive Officer, Alain Bellemare; and our Chief Financial Officer, John Di Bert, to review the transaction announced today and our financial results for the third quarter ended September 30, 2019. I would now like to turn over the discussion to Alain. Thanks, Patrick. Good morning, everyone and thank you for joining us again today. As you saw in the press release this morning, we continue to drive our transformation plan. In aviation, the certification of our new Global 5500 and 6500, combined with the remarkable performance of our new Global 7500, is strengthening this amazing global franchise. At Transportation, we are turning the corner. We are making steady progress working through our challenging legacy projects and ramping-up deliveries. At the same time, we are growing and improving the quality of our backlog. With the sale of our Belfast and Morocco aerostructure businesses to Spirit we achieved another key strategic milestone towards building a lean, efficient and strong business aircraft franchise. At Bombardier Aviation, David and his team are on plan to deliver our full year guidance of 175 to 180 aircraft, including 15 or more Global 7500. We now have over 20 Global 7500 in our completion center. Our assembly operation in Toronto is also full, with over 20 aircraft at different stages of completion and we are on track to meet our 2020 run rate by year-end. Our Global 7500 flagship is simply the best business aircraft, size, cabin comfort, range and performance. The in-service performance is outstanding and customer feedback is very positive. Earlier in the quarter, we clearly demonstrated our range advantage with a record-setting over 8,200 nautical miles non-stop flight from Sydney, Australia to Detroit, connecting the longest-distanced city pair in business aviation history. We also announced more range 5,900 nautical miles for our newly certified Global 5500. This is not only better than our original commitment, it is 700 nautical miles more than our nearest competitor. Year-to-date book-to-bill remains strong at 1.3 and our backlog of $15.3 billion continues to lead the industry. The growth and expansion of our aftermarket operations remain on track. We just announced new line maintenance station at Van Nuys, California and Teterboro, New Jersey, two important airports for our customers. Earlier this month we launched a new initiative with GE, bringing Big Data to business aviation. Our new SmartLink Plus program will use fleet-wide data to help customers make better operational and maintenance decisions. We will provide real value for our customers, while diversifying and expanding our aftermarket offerings. At Transportation we are focused on completing our transformation and fully unlocking the value of this great business. As you know, in Q3 last year, we experienced a setback driven by our legacy projects. This had a ripple effect on the portfolio, which led to additional investments and more resources to protect the schedule and the backlog. We took the right actions for the business and we are now starting to recover. Software issues are being resolved, in-service reliability is quickly improving and most importantly customers are recognizing our efforts. Specifically, we are making solid progress with our complex legacy projects. MT in new York, all deliveries should be completed before year-end and the in-service reliability is now exceeding requirements. For Crossrail U.K. production will be completed next month, with final deliveries expected before year-end. For a LOTRAIN in the U.K., production should be completed in November, deliveries to customer is being paced by software development, which is now tracking for completion before year-end, a bit longer than expected, which means deliveries will slip into early 2020. For Dosto, Germany, we are tracking to plan. At SBB, Switzerland, from zero less than one year ago, we now have 23 trains in revenue service and reliability has improved by 500%. We are now tracking in line with typical reliability learning curves. And finally, for TTC in Toronto, we will complete this contract by year-end, a strong recovery. Reliability of the fleet continues to improve and is currently above contractual requirements. Overall, very good progress on these contracts and across the portfolio. Of course, there's still a lot of work to do, with some volatility in the timing of train deliveries. As such the recovery will be gradual over the next 12 months. Danny and his team have done a very good job tackling the challenges. They fully understand the situation and are driving detailed action plans to complete the recovery. Moving forward, we expect more consistent results, with margins and free cash flow gradually improving. Stronger performance should also be driven by improvements in our backlog. We ended Q3 with a record backlog of $35 billion. Our year-to-date book-to-bill stands at 1.3. Equally important, the quality of the backlog is improving, driven by a better mix. Year-to-date two-thirds of new orders are coming from signaling, services and options being exercised. This order intake is accretive to margins. In addition, we've continued to drive for a much higher reuse content in rolling stock projects, such as the latest win in Cairo, where we are using an existing designing. All of this gives us confidence in BT's ability to deliver stronger financial performance in the coming years. Let me conclude by saying that we are fully focused on delivering the fourth quarter. As we are executing the Global 7500 ramp-up and the legacy projects at BT, we have decided to provide 2020 guidance in February with our Q4 results. Having said that, directionally for 2020, we will have two strong businesses expected to deliver higher revenues, better margins and positive cash generation. Okay. Let me stop here and turn it over to John to review the third quarter results. Thank you, Alain. Good morning, everyone. The third quarter results reflect our continued production ramp-up, both at BA and BT. Today a dozen Global 7500 aircrafts are in the final stages of completion, while our rail segment is on track to complete and deliver large projects in New York, Toronto and London. As we move forward, executing on our new aviation programs, as well as our large Transportation projects, we are entering the fourth quarter in a position to release working capital and generate above-average free cash flows. And as we continue to drive stronger financial performance, we're also simplifying the business and strengthening our balance sheet as demonstrated by the transaction announced today with Spirit. This is another step towards creating a stronger and more focused aviation franchise. At 10x enterprise value-to-EBITDA this transaction captures the full value of the business. And after deducting transferred liabilities, we will receive $500 million of net cash proceeds. This transaction together with the sale of the CRJ will add more than $1 billion of cash to our already solid liquidity position by mid-2020. Let me now summarize the third quarter numbers. Consolidated revenues totaled $3.7 billion, featuring 8% organic growth year-over-year excluding the effect of divestitures and currency translation. This growth reflects a double-digit increase in aviation revenues and 5% growth at Transportation. So overall, we continue to see full year revenues of approximately $16.5 billion to $17 billion driven mainly by an acceleration of Global 7500 deliveries heading into the fourth quarter. On the earnings front, third quarter profitability was in line with expectations with adjusted EBITDA and EBIT of $255 million and $159 million, respectively. This level of profitability is aligned to full year margin guidance of approximately 7% and 5% respectively at BA and BT. On a consolidated basis, as the segment's quarter-over-quarter adjusted EBIT margins stabilize in the fourth quarter, full year guidance remains unchanged at $700 million to $800 million. Adjusted EBITDA is expected to grow in the fourth quarter, mainly as the Global 7500 deliveries increase at BA reaching full year guidance of $1.2 billion to $1.3 billion. We also reported a $0.04 EPS loss in the third quarter, lower year-over-year as a result of lower operating earnings and previously capitalized interest now being expensed. On free cash flow, usage was $682 million during the quarter higher than the $200 million to $400 million anticipated for the period, mainly resulting from timing of cash flows. The incremental cash usage was driven by lower cash inflows associated with train deliveries and milestone payments that have moved into the fourth quarter. Looking at the full year to reach the approximately $500 million of free cash flow usage guidance, we anticipate to generate approximately $1.6 billion of free cash flow in the upcoming quarter. While this is a significant undertaking for the team, we have a well-defined road map to deliver on this goal. Let me explain. As a baseline, our fourth quarter is generally significantly cash flow positive generating between $900 million and $1 billion in each of the last two years. We expect this trend to continue this year, particularly as capital investments are coming down. In addition as mentioned, we expect to recover some $300 million of cash inflows originally expected in Q3. In fact, we've already secured some of these inflows in October. Then there are two positive free cash flow catalysts that contribute incrementally to our normal seasonal Q4 cash flow generation. First, Global 7500 aircraft deliveries contributed to cash meaningfully for the first time with each delivery carrying an important final payment. Second, we are accelerating train car deliveries. This will receive -- this will release excess finished goods inventory that is held back as we complete software certification and acceptance requirements. This phase has started in the third quarter with more than 15% sequential increase in deliveries and customer acceptances versus Q2. We see continued momentum in Q4 and through 2020 and 2021. Our leadership teams at both BA and BT are focused on meeting customer deliveries and producing the Q4 cash generation to reach our $500 million free cash flow usage target for the year. Let me now turn to each unit's performance and outlook. Our rail business recorded revenues of $2.2 billion in the third quarter. On a constant currency basis, revenues grew by 5% year-over-year mainly from services. This revenue level is stable over the prior two quarters, consistent with the production resynchronization implemented earlier this year as we addressed production and delivery challenges. For the quarter, adjusted EBIT was $110 million representing a 5.1% margin. This margin reflects the current mix of dilutive projects and the cost of investments being made to increase capacity to ramp-up production. We expect the fourth quarter performance to be similar to Q3 with stable revenues and earnings and aligned to full year guidance for BT. As we look forward to 2020 and beyond, we expect revenues to grow on the basis of a strong backlog and the associated production ramp-up. With higher and more stabilized production rates, we would expect margins to improve given better fixed cost absorption. And while we continue to expect to burn down most of the larger dilutive projects by the end of 2020, we do see a drag on profitability through the end of next year. Overall, we believe we have seen the low point on BT margins in 2019. Finally, we expect BT free cash flow conversion to gradually return to more normal levels and benefit from net working capital tailwind in 2020 and 2021 as we reduce our abnormally high finished goods inventory levels. Although the last four quarters at BT have presented challenges and resulted in some volatility, we are confident we are making the right -- we are taking the right actions to recover and improve performance and put the business back on a path to profitable growth. We believe that our strong product portfolio and our commitment to customers is a solid foundation to continue winning in the market. At aviation, we've made good progress on our growth programs. Total deliveries reached 37 aircraft, including 31 business aircraft and six CRJs. These deliveries included two more Global 7500 and the entry into service of the first Global 6500. With an acceleration of deliveries in the fourth quarter driven by the Global 7500, BA is on plan to deliver 175 to 180 aircraft this year. Revenues for aviation which includes for the first time the amalgamation of business aircrafts, commercial aircraft and Aerostructures totaled $1.6 billion in the quarter. This represents growth of more than 10% when adjusting for the divestitures of commercial aircraft programs and the training business over the past year. This increase in revenues came from more global deliveries, higher external Aerostructure revenues mainly in support of the 8 to 20 ramp-up and was further fueled by the expansion of business aircraft aftermarket activities. With year-to-date revenues of $5.1 billion, we continue to expect full year revenues at approximately $8 billion with the growth mainly coming from our backlog. Looking at this segment's operating performance during the quarter, adjusted EBIT was $93 million or 6% reflecting as expected some dilution coming from early global production units and the CRJ program. With year-to-date adjusted EBIT margin at 7.6% and Q4 margins expected in line with the third quarter, we are reiterating our guidance of approximately 7% for the year. Let me now wrap-up. BA is making meaningful progress ramping up the Global 7500 and introducing the 5500 and 6500 on time, while executing on the learning curve. At BT while 2019 has proven to be more challenging, we have taken actions to exit the year stronger. We are working closely with our customers, we have strengthened the leadership team and we are investing to build more capacity and we are building a stronger backlog. Transportations business fundamentals are intact. Moving beyond the short-term challenges will put us on a growth trajectory in aviation and on a path to earnings and cash flow recovery at Transportation. To conclude with $3 billion of cash on hand expected at the end of this year combined with over $1 billion of upcoming M&A proceeds and with positive free cash flow expected in 2020, we expect to be in an even stronger liquidity position as we complete the last year of our turnaround plan. With that operator, we're ready for our first question. Thank you [Operator Instructions] Our first question is from Myles Walton from UBS Securities. Please go ahead. Thanks. Good morning. Alain I think the question I have and I think I'm getting a lot of is why do you have more confidence now? Obviously, the cash flow has been a pretty big moving target for you and last quarter $1.3 billion was -- you kind of gave us a road map of why that was the Q4 implied and that was reasonable. And now John you walked through why $1.6 billion is reasonable for the fourth quarter. And here's the question I'm getting is, do you guys have confidence in that? Or is it that you don't want to bring down the number again? And I guess on a related note, maybe you can talk about why the $300 million slips from 3Q to 4Q? Yes. Sure. I'll take that one Myles. So we did have some milestone payments in the third quarter as well as some deliveries, particularly in the U.K. that were targeted for late Q3. They did slip into the fourth quarter. That has a lot to do with the certification on the software and the early deliveries of trains in a couple of U.K. projects on Aventra, so some of the places where we've been working to catchup. The good news on the Q3 slip is that we see most of that coming through here in the fourth quarter and some of that has come through in October already. So from that point of view, I think we did express the fact that there's some volatility and that there is some chunky payments that do move around. That being said, I'd say that we also do expect that we have usage here in Q3 as we load up for both aviation and BT big deliveries in Q4. So that is the -- that does set up for a big fourth quarter. So the $1.3 billion to the $1.6 billion is really the movement from Q3 into Q4 largely that's what the increment is there. And as I said in my comments and not to be repetitive but we -- the teams do have a well-defined road map both at BA and BT what gets -- what needs to get done. It's in line with what we're doing in terms of also achieving our customer commitments both on aerospace and on the Transportation side. We did build a plan this year that was going to have a pretty big load in the fourth quarter on 7500. This is not new, that the aircraft really represents the first time that you have a Q4 with 7500 in any magnitude. So this is all the incremental cash flow, so we typically do in the fourth quarter and it's -- the last couple of years we've shown about $900 million of Q4 seasonal cash. So with the 7500 you're talking here probably a dozen or more aircrafts coming through. And that means that there's going to be a lot of the final payments. So that gives us pretty good confidence. The team knows what has to be done. Lots of aircraft in the completion center. So right now about 20 aircraft in completion. We also have a full operating line in Toronto where we complete the green, so already well stocked for next year. So on that front progressing well. Of course lots of work to be done but we know exactly what has to be done. And we actually feel pretty good about how the rapt has been going so far. So we feel pretty good about 7500. At BT some recovery from Q3 as I explained into Q4. And then from that point on it's really -- it's a series of a lot of finished goods inventory that starts to move both in Germany, Switzerland and also the U.K. as we mentioned. We do have a lot of finished goods. The good news here is that there's catalyst events that we're tracking very closely, we know how to achieve. And that gives us confidence that that inventory starts to deplete in the fourth quarter. Being very transparent, we've said it in the past and I'll say it again today is that, there is and there has been some volatility in how those payments come through and how we hit those dates. We've never had more clarity than we do today on the progress and our ability to hit milestones. That being said, these things do have a tend to move around a little bit. We've got eight weeks to the end of the year here, we're fully focused. I think that the road map is clear. We know what we have to do. If it slips around a little bit, it's going to be a slip into Q1 but it's not this is something that right now we believe cash will generate strongly from here on in frankly from deleveraging the inventory at BT. So we'll keep an eye on it and we go from here. But the good news I think is that we're seeing the other side of a lot of this working capital build. Okay. Alain you mentioned one program was slipping I guess the LOTRAIN. But I guess what you're saying is that the way the advances are coming in doesn't disturb the full year free cash flow at the same time. And if you got to the end of the year into December or January – February, I guess when you present your outlook for next year and you didn't make the number, is it more likely to be advances from one of these train contracts? Or is it more likely to be you couldn't get the 7500s out the door? Well I think that's -- I mean, it's still trying to handicap into -- I mean we're pretty clear about what has to get in on both sides. I would say that the reality is at this point in time we have a pretty good line of sight to all the milestones and what has to get done. And then it's a matter of moving trains into service right? And so from that point of view we work with our customers and you can't enter infinite amounts of trains into service. So there's a coordination and a timing of all that. So I would say that we know what we have to do from a milestone and certification point of view. Moving trains into service becomes its own kind of work stream. We feel pretty good about how we're taking care of that. And on the 7500 obviously every one of those aircraft is sold, it's a matter of completing them. Like I said, we have 20 in the completion center. So I'm not going to handicap one or the other and we have a clear road map of what has to get done. And at this point in time we're just focused on doing it. Okay. I'll leave there. Thanks. Thank you. The following question is from Seth Seifman from JP Morgan. Please go ahead. Good morning. This is Mike Rednor on for Seth. With the medium jet category running about 10 deliveries lower year-to-date versus last year, can you talk through some of the market challenges you're seeing there and kind of what you're seeing on the demand side? Good morning. It's Alain. Can you just repeat the last piece of your -- last part of your question? Sure. Kind of what are you seeing on the demand side for the medium jet category? Okay. So overall it's pretty stable year-over-year. We're in the same ballpark. We're seeing the demand being stable to good in the U.S. it's really driven by North America, rest of the world is relatively flattish. And things have not changed much. I think that what is driving growth in our case are the new platforms, especially the Global 7500. And as we introduce the Global 5500 and 6500, I mean, this gives us confidence in our ability to keep winning in the marketplace in business aircraft. The midsized -- super midsize, the Challenger 350 is best-in-class product still doing extremely well. And there's like maybe some slight variation here and there but by and large I would say relatively stable. Thank you. Our following question is from Walter Spracklin from Royal Bank Canada. Please go ahead. Thanks very much. Good morning, everyone. So just focusing on the 7500 here. I know that there's a little bit of aberration here with the very first bunch coming out. They're all coming in all at once in the fourth quarter. My question is does that signal what you can do on a kind of quarterly run rate? What would a normalized cadence for your deliveries be as we look into 2020 and beyond compared to what it seemed now that it's all jammed into obviously in the fourth quarter here? How would we look at the cadence? And is your ability to deliver kind of in that 10 to 15 this quarter suggestive of a run rate that you can do a larger number than what you've previously guided to in the full year going forward? Thanks for the question Walter. I'd say let's call it the way it is. This year we knew we were going to be building towards a big Q4 delivery. So there's lots of aircraft that are moving towards their first deliveries in Q4. So I do think that our ability here with about 40-odd aircraft in the total production line between green aircraft and completion aircraft sets us up well for our stated objective of being at 35 to 40 next year. And I would say that's really what our expectations remain at this point in time. In terms of having smooth production, I think you got to give us probably more than just one or two quarters a year of normal rate, it will take through next year before you kind of have that smoothed out. It doesn't mean that you'll have the same profile. I think that that will start to improve of course; and the quarter-over-quarter, you'll see good compares through all of next year. But I wouldn't suggest that you're going to go linear eight to 10 a quarter just yet. Good news here is that everything has gone fairly nicely all year. Teams work very hard and to be in a position where we have 40 aircraft or 35 to 40 next year at this point in time gives us good confidence in our ability to continue to pace the program. Okay. That's great color. You had kind of put out an 8% to 10% in 2020. Some time ago you were telling us you kind of hold off. Is that now -- should we just -- obviously we got to put something in our models here. Is that directionally something we should consider? Are there aspects to that original guidance that you would say okay, not really applicable anymore because of -- and perhaps what those factors would be? Or is it kind of directionally if that's what we had in our model that's what we'd have in our model and stay tuned until February? Yeah. I think it's -- we're still very bullish on our aviation franchise and its ability to grow margins. So I would say that by and large we still have very similar expectations for this business. There is a lot of moving parts and another one that today with the divestiture and completing the CRJ transaction as well. So that does move things around a little bit. And I think that we're going through a year where we start to deliver 7500s as the unit cost comes down. So, all of the trends are pointing in the right directions. I'll reserve any commentary on 2020 just until we get into our guidance as Alain said in February of next year. But I would say that by and large we're pointing in the right direction. This is still a great franchise that we expect to grow margins for the longer-term here for sure. Okay. That's great color. Really appreciate it. Our following question is from Benoit Poirier from Desjardins Capital Markets. Please go ahead. Yes. Good morning everyone. My first question is related to your available short-term capital resources of about $5 billion by year-end. So, my question was, whether you are closer or you might be considering to buy back CDPQ's stake at one point? Sure. Good morning, Benoit. It's -- a clear part of our overall turnaround plan is to -- as we get to the end of it is to start to really focus on the deleveraging and the improvement of the capital structure. Everything we've done to-date has been to improve the businesses, improve the operating margins and we're going through some transition here in trains, but the thesis remains the same. The ability to convert that to cash flows. We are going through a little bit of a working capital peak here and that will kind of turn soon, so with the cash on hand, with the simplification of the business with the focus on core operations through strong businesses. As I mentioned in my comments going into 2020, I think this is -- it's clearly to where we're going to turn our attention is to improve our balance sheet and improve the capital structure. So this is all part of our turnaround plan and frankly I think a part of the next chapter, which will start to evolve. But that's something that we can probably pick up into 2020 as -- after we move off of what's really in front of us here over the next few months. Okay. Perfect. And with respect to your stake in the Airbus 220, Airbus is not allowed to buy back the stake before 2026. But if there would be a case where you could make it and sell your stake earlier, is it something that you would consider, John? Good morning, Benoit. So I would say we're looking at all options as John just said to deleverage the balance sheet moving forward. So that is part of our five-year plans where we're defining it as we speak right now. Clearly, this is a great investment. Airbus is doing a great job at building the backlog, reducing cost and strengthening the business. Just -- the work that has been done over like the 12 -- the past 12 months has been creating a lot of value for that business. So we feel good about this. And we will decide what to do with this at the right time. But for the time being, Airbus is a great partner, and we're very, very proud to be part of that journey with them. And at the right time, I mean, if there's ways to look at monetizing this investment and we're deploying somewhere else, we'll look at it. But this is not for today. And this is part of a future road map to deleverage the business. Thank you very much for the time. Thank you. Our following question is from David Strauss from Barclays. Please go ahead. Hi guys. This is Kate Kawczynska [ph] on for David. So guys had pretty strong bookings at BT and you cited a large mix of reused projects and services and call offs. So I was wondering if you could elaborate on when you expect the BT backlog composition to substantially transition kind of from where you are right now with a lot of legacy projects into a more favorable mix of reused contents and call offs? And when we would expect that to be reflected in higher margins and cash flows? Thanks. That's a good question. It's John. So I would say that this has always been part of the plan, and we've been working through a significant amount of backlog that has been dilutive so lots of investments and the development in that backlog and now we're coming to the point here of significant deliveries and that's put some strain. We will work through 2020. And I think that is going to move through a lot of the remaining backlog on these large dilutive projects. And I think as we get gradually through 2020, the margin starts to improve. So, we do have expectations of better margins next year and 2021. So I think as you go over the next 18 months, 24 months we'll be largely transitioned to a good quality balanced backlog. And at production rates that are also going to give us I think operational efficiencies. So business is progressing well, and the work that we've done in the backlog here over the last two years, three years I think will bring benefits in the longer-term. Thank you. Our following question is from Robert Spingarn from Credit Suisse. Please go ahead. Alain, can we probe a little bit deeper into the software versus hardware element of the BT contracts? I'm just -- that was a theme this summer from Danny clearly that the software needs to catch up you took the charge. So how -- could you give us an idea of the progress there? And then separately John for you, progress payments on 7500, could you just refresh us when you deliver all these airplanes in Q4 what percentage of their sale price you actually collect? Yeah. Good morning, Rob. Let me start with the first part of this. As you well know, the software is always the last piece in order to complete larger industrial programs like that. So this is not surprising, but we had a bottleneck last year. We really played a lot of resources. We've moved over 50 aerospace engineers systems -- software engineers to the train business, we recruited top talent. We've moved our Chief Engineer from Bombardier to a -- to full-time -- to be full-time in London to focus on the software side on train control management. We recruited John Saabas former President of Pratt Canada very strong engineering background, a very capable program and project leader. So we've strengthened the team, added resources, and although there's still some work to do, we have much more capacity today to enter all of the projects that have been piling up over the past two to three years, because of delays of these large legacy complex projects. So, the -- as a result of that as we said over the past four quarters on the hardware side, on the rolling stock side, we were ahead. So, we were building inventory. And I think that we're peaking right now and we're starting to see the next phase where we will deplete all that inventory. We have a very significant backlog and that backlog is going to -- on these legacy projects is releasing right now. And that's important what I said. And I was like New York -- we said that New York was going to be completed this year, it will. Crossrail, we said it was going to be completed this year, it will. TWINDEXX SBB last year there was a lot of challenges around that. We now have like 23 trains in service. I went to ride the train myself with the Chairwoman of SBB. And I would tell you I mean it's a spectacular train and the performance is very, very good and improving every day. And no train is a good example of what I just described at first. I mean a software development has been delayed because it's complicated. I mean these trains are complex today. They have to integrate well with the network, with the infrastructure. And as a result of that LOTRAIN train is the one where we got -- we would release the buildup of rolling stock this year. But this one now will slip into early 2020 because of the delays on the software side. So, I think actually we have clear visibility as John said earlier, we understand where are the bottlenecks where are the issues on the development side on the production side. And Danny and the team have a clear understanding a clear action plan and we're just driving this hard. So that's kind of it. Yes. And Rob I'll just quickly comment on your question on 7,500 and the cash and final payment. Obviously we don't provide the details for competitive reasons on how those are structured and they can be tailored on different transactions and so on. So, I would say that when you look at it in kind of just big, big picture here you've got about $900 million that we expect a seasonally strong fourth quarter normal type of cash. And then that leaves $600 million $700 million to get you $1.6 billion that we expect. I'd say that if you kind of cut that in half maybe a little bit more to the train side, but the remainder of that is the upshot of the 7,500 final payments in aggregate. Okay. That helps. Thank you, both. Thank you. Our following question is from Fadi Chamoun from BMO Capital Markets. Please go ahead. Hey thanks. Good morning. John if we look at the BT result this year, can you help us understand what is currently in the BT margin that you don't expect to repeat in 2020? Like what are the elements that are associated maybe with these contract's one-time charges that you incurred in 2019 that you don't expect to reoccur in 2020, so it can help us a little bit -- of the trajectory of the profitability of BT as we go into next year? Yes, I think that the biggest item that will clear its way through is the challenges we've had with absorption and factory overheads and so on as we kind of moved the production schedule around a lot early in the year. We took an adjustment to production which resulted in the revenue adjustment and then we moved the projects around to resynchronize flow and also working with our customers. So, I would say that by and large that's where the normalization will come out. The remainder is mostly associated to -- directly to the projects themselves. So, it kind of when you do a percentage of completion margin, it's the margin across the projects. So, you just basically adjust and then you take it on a go-forward basis. So, for all intents and purposes I think that the real takeaway for us at BT is that we've seen the low points here. And 2019 has been tough because we have made some investments we -- those will flow through the projects. We've had some headwind from the absorption in our factories. We will clear out a lot of the more dilutive backlog, particularly in 2020. So, that's still going to be a bit of a drag year-over-year. That doesn't kind of abate, but it does clear the backlog out. So my view here is that you grow into 2020. I'd say, it's about a 100 basis points of dilution that we would have taken probably this year on the absorption side. So that's kind of just a ballpark number, but still a little bit of drag coming from the tougher contracts until we finish those 2020 early 2021. Okay. And if the dilution impact of these contracts gets bigger in 2020 or smaller than it is in 2019? Yes. At this point, I'd call it kind of -- it's a bit of a push year-over-year. We're going to clear out the big five contracts we talked about here finish up any cost that comes with protecting the entire backlog. So I would say largely a push, the biggest year-over-year improvement I would say is coming from absorption. And then clears the path for even better margins I think, going forward. You know, I would say that a bigger picture we still believe the train business is a solid high single-digit business. And we'll give more color on that as we talk with you guys on kind of the look forward on both franchises next year. Okay. And then just also follow-up -- so if basically there is a dropoff in this dilution effect as we go into 2021 like do you get through most of this by 2020? Or... Yes. The answer to that is yes, we do. Yeah. Okay. And one quick one on the BA aviation margin. On the business aviation margin, which I guess you corrected provided 8% to 10% that you've given us a while back is kind of realistic still. But is the effect of the dilution from -- not the dilution, I guess, the consolidation of Aerostructure back in the aviation business including Red Oak or does this help you or hurt you when you look at that 8% or 10%? Yes. So things move around a little bit. What I'll say is that the operations that at in Belfast for example, you know, that the Aerostructure comes with high single-digit margins. Historically, we were driving something closer to 10%. And -- so that's part of the franchise in Northern Ireland and Morocco and Dallas that produced those kind of margins. So that does create a bit of a headwind. I would say that's probably less than 100 basis points. But nonetheless it's probably in that range of 50 basis points to 100 basis points of I'll call it dilution from the divestiture of some of those Aerostructure components. And that being said we get it upfront with proceed cash and this is also -- and the transaction today is also another great example of how we are taking deleveraging steps along the way here. CRJ was a good example with RBGs. Again, today moving some pension liabilities and other liabilities with the transaction. So I'm very, very pleased with the balance of what we give up and what we get and it strengthens the business. So a little bit of headwind or dilution there. Nonetheless, we're going to work through 2020. It's another year where we're delivering the first real full production rate of 7500. So you can appreciate that that's still a dilutive relative to the overall base margin. But honestly, business is well set up to do exactly what we wanted it to do which is move towards in the longer term those double-digit margins. Thank you. Our following question is from Ronald Epstein from Bank of America Merrill Lynch. Please go ahead. Just a couple of quick ones. On that Global 7500, how is the wind production going right? I mean is that -- can you give us a feel for bringing that back in house? Are you on productivity levels where you thought you would be? Are you doing better than it was when it was outsourced? Or what can you tell us about that? Good morning, Ron. Yes. Absolutely, doing much better. That was a real good move to get control of that wing manufacturing. And the team has been doing a great job and we're tracking on the learning curve we still have some work to do. We're not exactly where we want to be, but we're like so much better than where we were a year ago. And most importantly, we did that to secure the program itself. And that has been very good. So it's a -- was a good move. And the teams, they have a path now to keep on improving the wing manufacturing assembly, supply chain. And it comes down the learning curve. I mean this has put pressure on the business, in 2019. We said that. But again, superior supply and making sure that we protect this great program was our priority number one. And we're glad, we did it. So when you say it's doing better. Can you quantify that, any way? Like, we have no way to tell. We know it was not doing well for Triumph. So, is there any way you'll quantify, how much of the headwind it is? Where you expect to be next year? How to think about it? Yeah. The delivery performance is much better. Their rework level is coming down, out of sequence work is coming down. So, it's becoming a much smaller operation. When we get the wings, in Toronto for final assembly and they are in a much better shape, which in all ease and accelerate the portion, the assembly of the aircraft. So I mean all around things are getting better. It's a smoother flow. And this had a huge impact in 2019, over $200 million. But as we come down the learning curve, meaning, you improve the operation, productivity in Red Oak. You dig -- you bring down the cost of systems and subsystems, attached to the wing. All of this is better. So cost is better, delivery performance is better. The flow is better. As a result of that, the Global 7,500 overall, learning curve is improving. Okay. Great and then, if we could just change gears quickly to Transportation. Kind of as long as I've been following the company there's always been three to five programs in BT that have been problematic. Those three to five get fixed but then three to five more popup. So it's a sort of rolling cycle of problematic programs and has probably been that way for the better part of 15 years. How do we feel good that once the ones that we all know about are call it fixed out of the backlog, however you want to call it. Out of the inventory, how do we feel good that there's not three to five more sitting behind them that are going to rear their ugly faces sometime next year, as an unpleasant surprise? Yeah. It's a very good question, Ron. And I've heard that. And we've looked at this, and I think that, you're right in what you're saying. We've done a lot of deep dive on this. And by enlarge and all this is a challenge that starts with the way you bid on projects. And up to the last milestone in getting through homologation, customer acceptance, and delivery to customers. So, we've put a lot of discipline into the process, starting with the way we bid, on projects. And our focus has been over the past like two years, to bid on projects where we already have existing rolling stock, to minimize project risk. So, as we move forward, the level of risk that we have in the new projects is much lower than it used to be. Second thing is we've increased focus on signaling and on maintenance projects. So, when you look at this, the way you bid is the starting point of that. And then making sure that, when you bid it, you have the right level of resources attached to these projects and that -- we've done a lot of work on that as well. And that's one of the reasons why we invested more in 2019 to increase capacity, across the entire system from engineering to manufacturing and supply chain. We have also strengthened our project management organization in the region closer to customers. So you're in better sync between, customers when it comes to defining requirements to be able to move it from requirements to software, then to the trains getting into service. So it's really making some systemic improvement across the entire system. So, time will prove that, this is -- we're taking the right actions. But we went back, we look at past experience. And we have built on these learning's. And I think that, what we're putting in place is, a much stronger industrial process, to be able to avoid the challenges that you just talked about. And Ron, maybe I'd just -- I'll add something very quickly. Because I think Alain, has covered all of it very well here is that -- and this is a bit anecdotal, but nonetheless, if you look back, 2015 to 2019, right? So just assume those five actual years of performance. You had a booking in 2015 that was a tough margin year. You have a booking in 2019. I get your point about there's a bit of a cycle on this, but if you take the aggregate of those five years. And my numbers aren't perfectly right here just off the cuff but, it's over $35 billion of revenue in five years, and if you did the composite EBIT performance at BT over that period over 7%. So I guess all I'm trying to say is that, a lot of what's been done is actually broad benefits, been a bit lumpy. We're coming into some of the -- a tougher phase here as we get to the end of some of these large projects. But demonstrated over the last five years, $35 billion of sales which would include all of the lumpy backlog and the challenges we've had, 7%-ish or better EBIT margin. So that has already started to pay benefits. And I think, we're just going to get a little bit more stable and a little bit more predictable, as we go through here. And that's what we're trying to work on. And if I may add to John, one last thing, we have worked over the past five years to standardize in all the platforms. And I think this is also a very important achievement that, we don't talk much about. The reason why we can use existing trains on new platforms is because what John just said, we invested massively over the past like four or five years in developing these new platforms, while standardizing them. So, we had over like 50 different platforms and now we're down to less than it a dozen. And we've created also a center of excellence in engineering and in manufacturing to leverage the scale of the business and to put more standard work in place, so that we can be more efficient when it comes to designing and producing and servicing the trains. And I would just say that Cairo is a very good example. Cairo is a showcase of what we can do from an end-to-end offering. And as you know, it was a very significant win over like $2.5 billion. And if you look at this project, it's a reuse of an existing platform the ENOVIA platform which is already on 300 projects. So, it comes with like rolling stock that we know. And it comes also with 50% of signaling and services. So, this is what we've been doing over the past three, four years, focusing on standardizing improving. And hopefully, this will turn into positive contribution moving forward for our BT. Okay. Great. Thank you. Thank you. Our following question is from Noah Poponak from Goldman Sachs. Please go ahead. John, so you started the year in the 2019 free cash outlook with an assumption for $300 million to $400 million of working capital recovery at BT. So, what is that number now going to be or according to your final outlook here what is it? And then, I want to ask you what -- how we should be thinking about that number for 2020? And I can sense the answer to that being, we're not specifying things in 2020, but it's a critically important number obviously and you've got the statement of positive free cash for the year. So, even if a really wide range or some other way to order a magnitude talk about it, what are you assuming for it in the statement of positive total company free cash in 2020? So, let me take the question in a couple of pieces. So, for the working capital of 2018 that would have pushed into '19. And I'm going to try to do this, so I'm as clear as I can be here. Of course, a lot of the cash flow that would have slipped in 2018, we would have recovered in '19. That being said, on a net basis, when you just look at where we end the year 2019, my statement on BT would be no meaningful working capital recovery. I leave it at very much that and that's what we described here, some stuff that has moved through and some that's pushed into next year. Now, what I'd also say is that, you've got the right answer to your second question, but I'm going to give you a little bit of color and just transparently as we kind of work through this. We've got a lot on the plate in the next few months, so we'll focus on that. But by and large, since mid-2017, when we start to really drive this peak delivery and output phase that was targeted over '18, '19, we've now by the end of '19, all things considered and with the delays and so on accumulated in excess of $2 billion of finished goods inventory. Now there are natural financing and advances and so on and so forth that support that build. But I would say that there's several hundred million dollars that that will come through cash flow residual after -- in all the advances and whatever other financing support is in that finished goods build-up that will come out through 2020 and '21. So my expectation here is, that you've got probably the next 18 to 24 months of deleveraging $2 billion of inventory, which will produce $400 million $500 million of total cash flows from excess inventory holding. So, hopefully that gives you some color. You had the last part of your question, which I thought was important. So it was -- remind me. Give a little bit of color onto next year. So, let me just kind of again give you a little bit of a framework and then you'll reserve the right here to go out in February with clarity and detail. But in simple terms, this year minus $500 million free cash flow that's the target. That's what we're driving. That's our expectation. In there, you've $300 million to $400 million that is non-recurring items negative. So, you talked about the wings, a couple of hundred million dollars there. You've got restructuring costs. On a net-net basis, you've got $300 million to $400 million of negative cash flow items in 2019. In 2020, my expectation is, you get more contribution from both the BA and BT on an earning side. So BT, gradual recovery, little bit of topline growth, some margin recovery at BA. You got a 7,500 produces good EBITDA will start to add volume there as well. Generally, the business will continue to progress overall. So, you've got a couple of hundred million dollars after your $500 million if you deduct this $300 million to $400 million, 2019 is $100 million to $200 million negative. You go into 2020. You've got earnings that grow. And then, you'd have some of that working capital as a tailwind through the period. So that's kind of where we are. There's moving parts. We're still working through some of the volatility. But I would say that's the framework. And just as a qualified, the only thing I would say is that, this is kind of net of the CRJ Aerostructures and some of these RBG payments. But nonetheless, that formula aggressively kind of works for how to think about free cash flow generation 2020 and onward. Let's take our last question please. Thank you. Our last question is from Cameron Doerksen from National Bank Financial. Please go ahead. Thanks. I guess, just sort of following up on that on the -- I'm just wondering, if you can talk a bit about the cash flow implications from the Aerostructures sale. Obviously, you've offloaded some liabilities here, government advances and pension. Just wondering what the cash outflows from those two items have been I guess over the last 12 months or so? And was the business that you're selling itself generating positive cash? Yes. So maybe -- I mean, I'm not going to get into a lot of the specifics perhaps. But what I would say is that, you've got something in the neighborhood of about a $1 billion of revenues for that component of the business. About two-thirds of that roughly was external, largely Airbus-related revenues. And then the rest is internal. Like I said before, this was a business that had the typical Aerostructure margins kind of high single digits up to 10% that kind of a number. And that earnings piece goes with the business. So -- but that's fine. And like I said and we think, we made a decision, right? Not to grow into that part of the segment into third-party sales. We really wanted to focus the franchise to support our aviation unit. There is an investment cycle ahead, so there was going to be some CapEx associated with building the ramp, particularly on the Airbus programs. And -- so that kind of is a bit of an offset to the cash that it would generate. So this cash generation, the typical businesses, they tend to be somewhere close to the 70%, 80% cash to earnings, but a little bit of CapEx that would have -- over the next couple of years anyway would have been a bit of a drag. Overall, I'd say that's kind of the big picture on the piece of the business that we've sold here. Okay. But does it reduce your future pension cash pension funding? Yes. But it -- but don't forget, the business unit carries its own cost, right? So on a net-net basis, it does reduce pension cash costs for sure. But it also was contemplated in the cash flows of the business. So, as I said it's cash generating. So on a net-net basis, we're monetizing future cash flows. Those cash flows would have been a lower in 2020 and 2021 and then growing in '22 '23 as the CapEx cycle subsides. We do reduce pension cash outflows. It's very important. At the same time, we do also give up some of the cash from operations. Great. Understood. All right. Thank you, very much. Thank you. This concludes today's conference call. Please disconnect your lines at this time, and we thank you for your participation.

News: Companies News
Site: companies.einnews.com

Good afternoon and welcome to Revolve Group's Third Quarter 2019 Earnings Conference Call. Today's call is being recorded and we have allocated one hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Erik Randerson, Vice President of Investor Relations at Revolve. Thank you. You may begin. Good afternoon, everyone, and thanks for joining us to discuss Revolve's third quarter 2019 results. Before we begin, I would like to mention that we have posted a presentation containing Q3 financial highlights to our Investor Relations website located at investors.revolve.com. I would also like to remind you that this conference call will include forward-looking statements. These statements include our expectations regarding financial results and guidance, market opportunities, our growth and increased efficiencies, our owned brand mix, our inventory position, our dilutive share count, our investments in customer experiences and fulfillment centers, the impact of tariffs and our tariff mitigation efforts, and our lower price point offerings. These statements, which are subject to various risks, uncertainties and assumptions, could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this afternoon's press release, as well as our filings with the SEC, including our registration statement on Form S-1 that was filed with the SEC, our Form 10-Q for the second quarter of 2019 that was filed with the SEC on August 12, 2019 and the Form 10-Q for the third quarter of 2019 that will be filed. All of which could be found on our website at investors.revolve.com. We undertake no obligation to revise or update any forward-looking statements or information except as required by law. During our call today, we will also reference certain non-GAAP financial information, including adjusted EBITDA, free cash flow and adjusted diluted EPS. We use non-GAAP measures in some of our financial discussions, as we believe they more accurately represent the true operational performance and underlying results of our business. The presentation of non-GAAP financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP, and our non-GAAP measures may be different from non-GAAP measures used by other companies. Reconciliations of GAAP to non-GAAP measures, as well as the description, limitations and rationale for using each measure can be found in this afternoon's press release and in our SEC filings. Joining me on the call today are our co-founders and co-CEO's Mike Karanikolas and Michael Mente, as well as Jesse Timmermans, our CFO. Following our prepared remarks, we'll open the call for your questions. With that, I'll turn the call over to Mike. Thanks, Erik. Good afternoon, everyone. Thanks for joining us on our third quarter earnings call. We had another very solid quarter in Q3, delivering growth in net sales, profitability and free cash flow to achieve record results in any third quarter. Net sales increased 22% with the Revolve business continuing to be the primary driver of growth, delivering a year-over-year increase in net sales of 24%. We also made progress in the other areas of our business, and I'm excited to highlight that our international business accelerated to double digit sales growth this quarter, validating our many efforts to further improve the customer value proposition overseas. As a reminder, we localized the customer experience in the U.K. last year by providing all-inclusive pricing, free shipping and free returns. We expanded this localization to Australia earlier this year and we continue to improve the experience around the world. For instance, we now ship to most major international regions within two to three days. We're also encouraged by the progress we continue to make on the FORWARD business, which delivered year-on-year growth of 14% for the second quarter in a row, continued evidence of the success of our discipline to reposition this business. We see several tailwinds in the works at FORWARD that Michael will talk about, including the recent launch of two coveted luxury brands and our first FORWARD owned brand set to launch later this month. Across both segments, we are driving growth through the continued expansion of our customer base, further illustrating that we are in the early stages of penetrating a large global market opportunity. Total active customers for the trailing 12-month period surpassed 1.4 million during Q3, an increase of 33% year-over-year. These customers placed 1.2 million orders in the third quarter, an increase of 26% year-over-year. We delivered gross margin of 53.6% in the quarter, an increase of 90 basis points year-over-year that was driven primarily by a significantly improved gross margin on the FORWARD segment, as well as a change in accounting estimate that Jesse will talk about. Supported by growing penetration of net sales from our Owned Brands, the Revolve segment gross margin remains healthy at 55.4% – yet declined by approximately 50 basis points year-over-year. The decline in Revolve segment gross margin was primarily due to a slightly lower percentage of Revolve net sales at full price, compared to last year, which we view as a function of our inventory position rather than external factors. As we invested in the rapid expansion of the owned brand platform in recent years, our overall inventory position has become higher than we would like. Even so, we still achieved our second highest third quarter full price mix ever, second only to the prior-year comparison in the third quarter of 2018. This quarter, we reached our highest owned brand mix of Revolve segment net sales to date, and increased our portfolio to a total of 24 owned brands, following an exciting influencer collaboration launched earlier this month on superdown. I should mention that the expansion of owned brands as a percentage of Revolve segment net sales has slowed in the past couple of quarters compared to the very fast expansion through the first quarter of 2019. While we expect the moderation in owned brands net sales to continue in the near term, the owned brand platform is a key part of our value proposition, and we remain confident in the long-term opportunity to significantly increase our owned brand penetration over time. As our results illustrate, we continue to operate in a disciplined manner, managing costs while at the same time making significant investments to support future growth and expansion. Most notably, we successfully launched further automation in our new warehouse, which began to drive efficiencies as we exited the quarter. As illustrated by our warehouse automation, Revolve is a company focused on leveraging technology to drive efficiencies and improve the customer experience. We recently launched a powerful set of visual navigation capabilities on our Revolve iPhone app that allows our customers to quickly discover their preferred styles. For example, customizing a search for dresses across various colors, lengths, necklines, sleeve options and more. As you may recall, we had previously launched this same functionality for our mobile website. We also continue to create solutions to drive deep relationships with and an even better experience for our customers. Earlier this week, we launched what we call the Revolve Fitting Room, enabling our core Revolve customers to do home try-ons of an extra size at no additional cost. I'm personally very excited about this initiative as it provides a great experience for customers and since our experience has proven that customers who order more than one size of a style have a materially higher 'Keep Rate' than customers who order just one size of a style. Another important innovation that is ideally suited for our digitally native, mobile first customer base is our progressive web application set for a test launch later in Q4. The progressive web app enables mobile websites to offer a highly engaging, app-like experience, which we expect will drive a higher conversion rate than standard mobile web sites. Now, I'll turn the call over to Jesse to provide additional detail on our third quarter results. Thanks, Mike. As Mike mentioned, we delivered another very good quarter highlighted by growth on all fronts. Net sales, profitability and cash flow. Before I get into the numbers, I want to point out that our Q3 2019 financial results reflect $1.5 million in net sales realized as a result of a change in estimate related to the recognition of store credit breakage. Now, starting with the top line. Total net sales for the third quarter were $154.2 million, an increase of 22.5% year-over-year. The Revolve segment remained the key growth driver, delivering segment net sales of $135.4 million, an increase of 23.7% year-over-year. Turning to FORWARD, we are very pleased that our FORWARD segment delivered another solid quarter of double-digit revenue growth following the inventory reset. FORWARD net sales were $18.8 million, an increase of 14.2% year-over-year. Our top line growth continues to be driven by the combination of new customer additions and continued loyalty from our existing customers. Our active customers during the trailing 12-month period grew to 1,438,000, an increase of 33% year-over-year and total orders placed in the quarter increased 26% year-over-year. Average Order Value, or AOV, was $275 in the third quarter, illustrating the premium nature of our offering. On a comparative basis, AOV was unchanged sequentially from the second quarter, and down 1.8% year-on-year, slightly offsetting the significant increase in orders placed. The decrease in AOV year-over-year is the smallest decline for the past eight quarters, even as we recently launched our lower price point offerings. International net sales for the quarter were $26 million, a year-over-year increase of 14.7%, and a meaningful acceleration from the 4.3% growth in the second quarter. Australia was a key success story in driving the stronger performance internationally, resulting from our efforts to improve service levels, drive faster shipping and provide expanded payment options. We also experienced growth in other regions where we have previously made investments, such as the U.K. and Western Europe. During Q3, we also began to see stabilization in greater China and some moderation in foreign currency headwinds. Finally, this was the first full quarter comping the incremental Goods and Services tax on Australian imports, that was implemented in July of 2018. Moving to gross profit. Consolidated gross margin was 53.6% for the third quarter, an increase of 90 basis points over the prior year. FORWARD segment gross margin was 41%, an increase of 970 basis points year-over-year and our highest ever third quarter gross margin, as a result of the successful repositioning of this business, as well as a favorable comp as a result of discrete items that negatively impacted the prior year. By comparison, the Revolve segment gross margin contracted by about 50 basis points year-over-year, as continued growth in Owned Brand penetration was more than offset by a reduction in the percentage of Revolve segment net sales at full price. We mainly attribute the increased markdowns to our inventory dynamics rather than external factors. As we have invested in the rapid expansion of owned brands and the launch of superdown, our inventory has increased at a greater rate than that of net sales. Looking ahead, we expect the fourth quarter dynamics to be similar to the third quarter with continued strength in FORWARD Segment gross margin offset by a year-over-year decrease in the Revolve segment gross margin, as the expansion of owned brand mix as a percentage of Revolve segment net sales begins to moderate and as we work to more closely align growth in inventory with growth in net sales. Now, we'll move down the P&L and give you some color on the expense line items. Fulfillment, which reflects the costs incurred to staff and operate our distribution centers, totaled $5.1 million. Expressed as a percentage of net sales, fulfillment costs grew to 3.3% from 2.6% a year ago. The 70-basis point increase in fulfillment expense reflects temporary duplicate costs and inefficiencies incurred in implementing our new warehouse automation technology. As with any new warehouse technology system, gearing up for the new process and providing employee training for a new way of doing things, while continuing to meet the fulfillment needs of our customers, required significant overtime and duplicate costs in the early going. We experienced the peak of temporary inefficiencies during the month of July. In August, we began to realize some efficiencies, particularly in the last two weeks of the month. And by the time September rolled around, the process had become much more efficient, exiting the quarter with fulfillment costs as a percentage of net sales a full point lower than where we started in July. The takeaway is that we exited Q3 on a much-improved run rate for fulfillment efficiency. Most important, our new fulfillment center infrastructure provides not only significant growth capacity, but further opportunities for operational efficiencies and enhancements to our customer experience going forward. Selling and distribution costs, which consist primarily of shipping, merchant processing fees and customer service, were $22.6 million, or 14.6% of net sales, an increase of 10 basis points year-over-year. We are very pleased with our ability to manage efficiency on this line item, despite macro cost headwinds and the pressure that has come from an outsized number of orders, units and customer touches in relation to net sales. Marketing costs were $23.1 million and remained at a relatively consistent efficiency level as the prior year at 15% of net sales, a decrease of 10 basis points year-on-year. We increased our brand marketing investment in the quarter, while realizing year-over-year efficiencies in our digital performance marketing efforts. The constant flow of events, social media and influencer-based marketing, combined with more traditional performance marketing enables us to cost effectively acquire and retain customers, build on the Revolve brand and build each of the unique brands within our portfolio of Owned Brands – all with a long-term view towards driving customer lifetime value. General and administrative costs, which primarily consist of salaries and wages, were $19 million. G&A costs as a percentage of net sales improved to 12.3% of net sales in the third quarter from 12.9% of net sales in the prior year. With our platform largely built, we are able to gain efficiencies with scale, while at the same time, making investments in our team and infrastructure to support future growth and to operate as a public company. The combination of top-line line growth and a well-managed cost structure resulted in strong bottom-line results in Q3. Net Income was $9.6 million, an increase of 34% year-over-year, and adjusted EBITDA grew to $14.4 million, an increase of 40%. Adjusted EBITDA margin expanded to 9.4% of net sales, up 120 basis points over the prior year. Diluted earnings per share, or EPS, was $0.13 per share, up from $0.10 in the third quarter of 2018. All of the profitability measures benefitted from the $1.5 million in net sales realized as a result of the change in estimate mentioned earlier. For the quarter, we had 72.7 million diluted shares outstanding, which is a reasonable number to use for modeling earnings per share for the next few quarters as well. I would like to remind everyone that we are reporting our Q3 earnings per share and EPS going forward on a GAAP basis, without adjustment. The only instance where we will report Non-GAAP earnings per share is to adjust for the corporate conversion discussed last quarter that occurred in connection with our initial public offering. Moving to the cash flow statement, we operate a highly capital efficient business that positions us to generate positive free cash flow. In the third quarter, we generated $9.2 million in cash flow from operations and $7.4 million in free cash flow, approximately 4x greater than the prior-year quarter on both measures. The favorable comparisons resulted from an increase in net income and Adjusted EBITDA and also benefitted from the timing of tax payments that I spoke about on last quarter's conference call. For the past few quarters, the build out of our new fulfillment infrastructure has been a headwind to free cash flow. These investments are now largely behind us, so we are well positioned for cash flow generation going forward. This healthy cash flow generation has further strengthened our balance sheet. As of September 30, we had no debt and cash and cash equivalents of $51.1 million, an increase of 14% from June 30 of this year. We ended the September quarter with $103.7 million in inventory, as compared to $89.8 million at the end of the third quarter of 2018. As a reminder, with the adoption of the new revenue recognition standard, we reclassified a portion of our inventory to prepaid and other current assets starting in 2019. The amount of this reclass on the September 30, 2019 inventory balance was $14 million. Before I move to a discussion of the outlook, and since we have received many questions about the impact of tariffs and our China supply chain, I'll provide an update regarding our tariff exposure. The incremental tariffs imposed starting on September 1 did not have a meaningful impact on the quarter, and similarly, we do not expect the tariffs to have a significant impact to the remainder of 2019 given the timing of the tariffs, our inventory position, and our inventory turns. Importantly, we have made significant progress towards our stated tariff mitigation effort of negotiating pricing with our current vendors, and we continue to explore diversification of the supply chain. We have not increased prices to the end consumer in response to the tariff situation, and while this remains a lever we could choose to pull in the future, at this time, we don't anticipate a meaningful change in retail pricing in response. With that, I'll turn to our full year 2019 guidance. And just as a quick reminder about our seasonality. Revolve does not follow a traditional retail seasonal cadence that results in a disproportionate amount of revenue in the holiday quarter. In fact, for the past three years, Q4 has averaged close to 25% of the annual net sales. Given that we are down to just one quarter left in the year, we are narrowing our guidance ranges. We expect net sales to be between $598 million and $606 million, which represents growth over fiscal 2018 of between 20% and 22%. Adjusted EBITDA is expected to be between $51 million and $55 million, which represents growth of 10% to 18% over fiscal 2018. This equates to an adjusted EBITDA margin of 8.5% to 9.1%, as compared to 9.3% in 2018. Now, I'll turn it over to Michael. Thanks, Jesse. Hi everyone. A quarter is such a short period of time, especially when we manage the business with such a long-term view, consistent with how we have managed the business for the last 16 years. Nonetheless, we had another solid quarter on a number of fronts. Starting with marketing, where we had another very active and impactful few months. Along with the efficient performance marketing that comprises most of our spend, Revolve is recognized as a pioneer in building our brand through our disruptive social marketing. Working with influencers since the earliest days has played a critical role in enabling us to develop authentic connections with the next-generation of consumers. The events we host each quarter create the experiences that excite, inspire, and engage our community. We kicked off the third quarter with a RevolveSummer event in Cuixmala, Mexico and August brought us to Revolve around the World in Canada before traveling to fashion shows in New York and Paris in September. Across all of these events in Q3, we dressed hundreds of influencers and generated billons of impressions showcasing our merchandise in a way that resonates with our target customer. These events define our aspirational global lifestyle brand that is Revolve, while the massive social reach continuously drives traffic to our sites in a very cost-effective way. Our strong partnerships with influencers are increasingly extending into the development of new collections leveraging our owned brand platform. Coming on the heels of the successful collaborations with Aimee Song and Camila Coelho in the second quarter, in October we launched an exclusive owned brand collaboration with Draya Michele for superdown. An actress and style icon, Draya is an ideal ambassador of the superdown lifestyle to her 7.6 million Instagram followers. The debut collection will be followed by additional styles over the next several months. Now, I would like shift to an update on superdown more broadly. Earlier this year, we launched superdown as a dedicated new website targeting younger consumers with on trend apparel at lower price points. We are excited to further expand our addressable market to include Gen Z consumers. We see a compelling 'customer lifecycle' opportunity to convert a younger superdown customer of today into a more affluent REVOLVE customer over time. We are encouraged by the early results. Despite making only limited marketing investments to date, we experienced a steady uptick in traffic, engagement, conversion and spend per website session on superdown in the third quarter. For instance, Instagram followers on superdown now exceeds 140,000, about twice as many as we had at this time last quarter. We have a lot more testing, refinement and iteration ahead of us to optimize for this new initiative that remains in the early stages. Nonetheless, we are excited about the long-term opportunity to create an additional growth driver for the company. On the opposite end of the price spectrum, we couldn't be happier with the continuing progress at FORWARD, our website focused on luxury offerings for the more affluent consumers. Aside from the improved top-line growth trajectory and margin strength, we are making great progress in creating an even more coveted selection of iconic luxury brands on FORWARD. In September, we launched a full collection of apparel and handbags from the French luxury brand Balenciaga. Early customer response has been very encouraging. Adding to our merchandise momentum in October, we launched a full collection of handbags, shoes and accessories from Gucci. Also, very exciting is that third-party luxury designers have become more aware of our increased scale, the value of our customer base and the impact of our marketing strategy and, as a result, have partnered with us to develop styles exclusively for the FORWARD customer. In fact, last month we partnered with French luxury house Givenchy to launch a luxury handbag exclusively through FORWARD. We also collaborated with luxury designers during the recent Paris Fashion week when Alexandre Vauthier, David Koma and Peter Dundas each launched exclusive collections for FORWARD customers at premiere Fashion Week events. And last, but not least, we are excited to introduce our first FORWARD owned brand at a launch event next week. The collection will initially feature elegant evening dresses starting at price points of around $900, just in time for the holidays and for our Annual Revolve Awards event next week. As you can see, we continue to be relentless in our goal of being the trusted premium lifestyle brand and go-to source for discovery and inspiration for millennial and Gen Z consumers. We're proud of our continued success and more excited than ever about what's ahead. I want thank our team for all of your valued contributions to our success. Your dedication makes all the difference in maintaining our focus on executing against the opportunities ahead. Now, we'll gladly take your questions. Let's go to Q&A. [Operator Instructions] And our first comes from Oliver Chen with Cowen and Company. Your line is open. Hi. You've been real pioneers at using machine learning to drive the inventory decisions. So, could you brief us on what happened with respect to your inventory levels and how are you feeling now going forward about where you are in the composition and what the prospect is for promotions? Thank you. Yes, definitely. This is Mike Karanikolas here. We've been making investments in inventory in recent periods, particularly on the low price and own brand side. And so the inventory positions and those decisions are kind of more strategic decisions versus algorithmic decisions in terms of the magnitude of the investments and so, our inventory positions is little bit elevated compared to where we'd – I really to be, but at the same time I think it is really important to note, the third price, full price sales figure was actually the second highest for a third quarter ever. So, we do think in general we are repeating better and better what we do. There is going to be some fluctuations quarter-to-quarter in a year, but we feel very good about the trajectory of the business as a whole. And then with regards to the elevated inventory position, in general, it is the sort of thing that we think can take us a few quarters to work our way through, but we feel like our results are still very favorable at this time. Okay. And regarding the modeling, and as we think about customer lifetime value, how should we expect orders per customer to trends? And will the AOV stay in the $275 range? Would love your thoughts about the medium-term modeling around those trends? Yes. Sure, Oliver. This is Jesse. So, I think, consistent with what we've talked about on the previous calls and just to set the stage a little bit, if we recall back to the back-half of 2018, we had significant customer and order growth. So, we're starting to come through that and that's where you see the slightly moderation – slight moderation in the order growth. And then also important to note that the orders is a quarterly metric and then the active customers is a trailing 12-month metric. So, if you look at the trailing 12 months of orders and compare that to the active customers, you'll see a slight uptick over time in the number of orders per customer. So that goes back to the customer lifetime value and that customer ordering, both more frequently and at higher AOVs over time. So, to your question on AOVs, we'd expect some moderation in the coming quarters. There is some seasonality there. You generally see Q2 at a higher AOV than the other quarters, but plus minus with some mix shift with forward in the lower price points, you should see that moderate different from what you've seen in the past few quarters with the decline. Okay, that's now really helpful. And just lastly, I would love your take on the environment that you see out there that department stores have been – having a more challenging time in our view and the calendar is more difficult, and there's different kinds of bankruptcies happening. But how are you feeling about your customer and the environment at large? Thank you. Hi, Oliver, Michael Mente here. Overall, it really depends on what lens you're viewing and where we're looking at, this month it is quarter over the long-term. But we're always looking over the long-term. We feel incredibly great about the way things are going. We've seen a lot of legendary companies, the companies that we've looked up to and the companies that we've learned from when we were founding this business struggle, as they fail to adjust to the changing times of the next-generation of consumer. And I think that everything that's going on really does reflect us doing what we do best, connect with the next-generation of consumers executing well in our challenging time. So, feeling better than ever and maybe we can both get them liquidated in due course with some of these other guys. Thank you very much. Best regards. Your next question comes from Ross Sandler with Barclays. Your line is open. Hi, guys, couple of questions from me. So, you nicely beat your 3Q revenue and EBITDA, but you're taking the high-end of the range down a tad. So, is there anything in 4Q that you want to flag? There has been a lot of questions about the fewer shopping days for e-commerce between Thanksgiving and Christmas this year, is that going to have an impact? And, Mike, you mentioned that PWA is going to launch in 4Q and I think we've talked about higher conversion rates in the past from that. So, is that going to be from material thing, or just something nice to have them? Then I guess, my second question, why don't we go to that now? I'll ask second question later. Sure. Yes, I'll start, this is Jesse, on the guidance front. To your point, the guidance range is the same slightly tightened and tightened at the top-end. And that reflects general trends that we've to date. But as well as to your point, the shortened holiday season and the fewer number of shopping days. Now that said, we're not overly seasonal. As we said in the prepared remarks, Q4 is generally been 25% of the total year mix. That said, it's a little bit uncertain on what it does to just the macro kind of consumer spending habits, given that shorter holiday shopping season. So, we're remaining cautious there. And then maybe I'll pass it over to Mike to talk about the progressive web app. Yes, thanks. Yes, so with regard to the progressive web app, we're certainly hopeful that that will have a positive impact for us. It's something we haven't done yet. We don't for sure know what the impact is going to be. And so, in general, that's not something that we take into account when you're coming up with our forecast. It's also important to note that, while we're getting very close to launching it, there's going to be certain periods of time like Black Friday, Cyber Monday week, where we don't really want to launch something new. And so, the time is going to be a little bit tricky just in terms of how many days of the quarter, where we can have this launch to a segment of our customer base in kind of a beta mode initially. Got it. Okay. And then I guess, the second one is, Jesse, I guess, thanks for the breakout of the segment gross margins. And you guys mentioned that Revolve gross margins down a bit on, I think I heard two factors that own brand mix and the lower full price sell-through. So, which is the bigger contributor. And can – on the ladder, the lower full price sell-through, is that at the lower price points around the superdome launch of core Revolve and any additional color on the work that's happening? Thanks. Yes, sure. So maybe, again, to give some context. The own brand mix expanded again this quarter, and we hit a record high there, as we said in the prepared remarks. And just to kind of frame it up a little bit more, we're at 15% mix in 2016, went up to 30% for full-year of 2018, and then was 36% in Q1 of 2019. So, we've seen some explosive growth there in the mix of own brands on the Revolve segment and still an increase this quarter again. So, if we think about the year-over-year margin impact on Revolve, it was – it wasn't due to that own brand mix, given – even though it did moderate slightly. So, it's largely a function of that full price mix that declined year-on-year. But again, as Mike mentioned, that's coming off of an all-time high. So, still a really strong number that just came off of that, that all-time high. And if we think – if we kind of break that up a little bit more, we won't call out specifics regarding which segments it related to, but it was on Revolve and just a factor of really that slightly elevated inventory position rather than kind of external macro factors. Your next question comes from Bob Drbul with Guggenheim. Your line is open. Hi, guys, good afternoon. I guess, it's – on the expectation for the moderation in the own brands, Jesse, I guess, could you just talk a little bit more around like the testing that you've done? And is pricing a factored in terms of what you're seeing from a slowdown? And then the other piece of it from our standpoint is, can you talk a little bit about different cohorts and some of the new customers versus your older customers and how that the different groups are trending? Thanks. Yes, sure. So, maybe I'll start with a couple of the more tactical items and then pass over to Michael to talk about longer-term own brands. So, to your own brand question and I called up the mix movement over time, and it's really just a factor of that. We've had really explosive growth in that own brand mix over the last couple of years. So, it's at the point where that is still growing this quarter, but it's just moderating somewhat. We should expect to see that for the next few quarters is be kind of moderate that growth and then, sorry, and then on pricing, sorry, your question on pricing, not – nothing significant on pricing related to own brands. And then let me pass over to Michael. Yes, with regards to own brands, as Jesse mentioned, as I'm sure, a lot of you on the call are super familiar, the growth has been really explosive through the past many years. And now in an exciting position of investment, we – the last two, three lines that we've launched, have been incredibly successful, will continue to build from there. And we have a very robust pipeline through 2020 in terms of additional line. So, really in a position of investment to really expand our offering across our entire consumer offerings, so it's a very exciting time for us. Sorry. And then, Bob, I'll jump in again, because I forgot about your last part there on the customers and the economics. We don't disclose on a quarter-to-quarter basis, because it is a longer-term metric. But those that LTV to CAC dynamic has remained relatively consistent, feel good about the – kind of the strength of the customer. And you can see that in, again, if you look at the orders per active customer over time increasing. Got it. And just a couple more quick ones. In terms of superdown, can you talk a little bit about this superdown conversion and are you seeing any cannibalization from the Revolve business in terms of superdown? Thanks. Yes. So, we're seeing healthy increases in a lot of our key metrics on superdown. So, we're encouraged by the trends that we see there. And then from a cannibalization standpoint, we don't think it's cannibalistic of Revolve. There's certainly overlap, particularly given that the superdown kind of clothing line brand itself launched on Revolve initially and was there for several quarters. So that's kind of where it first built its awareness. But we're seeing that overlap decrease with each passing quarter. So that we think over time, the overlap will be fairly minimal. Yes, I think this is something where the cannibalization risk factors, something we're very, very focused on. And I think that, if done well, it's quite the opposite, it ends up being a long-term customer migration platform, where we ensure that the merchandising mix minimally overlaps, but also complements each other. So, we can attract a younger consumer and grow with there for many, many years from when she is college years to when she has the big bucks to spend on forward. Great. Thank you very much. Your next question comes from Kimberly Greenberger with Morgan Stanley. Your line is open. Oh, great. Thank you so much. I just want to make sure that I understand the inventory and gross margin dynamic. I think you indicated that whilst their price selling was down year-over-year. Did you say it was the third – highest third quarter rate of full price selling? I indicated it was the second highest ever, and just to clarify, it's the second highest in the past decade, at least. I have the team hold [indiscernible] at least that far. So, just to clarify, be a second highest within at least the past decade. Okay, great. For the third quarter, right? Yes, yes, for any third quarter, not for pending quarter. Okay. And it looks like with the markdowns in the third quarter, you were able to move through some inventory. If I adjust your inventory to be apples-to-apples with the way it was reported last year, it looks like it was about a 31% growth rate here at the end of Q3 and that's down nicely from the low-40% growth that we saw at the end of Q1 and Q2. So, it looks like some of that inventory was cleared out. I'm wondering – it sounds like what you're saying is, you expect a little bit more of this activity in the fourth quarter. Would you then expect inventory at the end of Q4 to be growing in line with sales? So, is it sort of one more quarter of the inventory clean out, or does this continue into early 2020? Yes. So, I think it's going to take a few quarters, which we'll say more than one. So, yes, we do expect to continue in the 2020. But at the same time, we feel like it's a manageable situation, as you mentioned, the dynamics did close a little bit in the third quarter. So, we feel like it's on the right path. Great. And Mike, where would you like to see your inventory turn? Get to over the next year or so, what are your kind of medium to long-term targets on inventory turnover? Yes. So, I think that the medium-term target is to be a three-year better. That's where we'd like to be. Now, three years kind of on the lower-end of the range of where we'd like to be. But it's within the range, we're more comfortable and we're a bit below that right now. So, that's kind of our near to mid-term goal is to get back to three or better. And then, longer-term, I think, the mid-3s is kind of where we'd like to be. Okay., great. My last question. It looks like international sales accelerated nicely here in the third quarter, if I have it, right, 15% growth versus looks like 4% growth in the second quarter. Was there something that sort of triggered that acceleration? And what – if any view you have for the fourth quarter? Yes, definitely. So, I think the acceleration is a result of the investments we've been making internationally. We were dealing with some very tough headwinds in Q2. I mean, some of those headwinds continue into Q3 and beyond with regards to currencies, but they've moderated a little bit. So, Australia, in particular, was a key success story for us in the third quarter. We've been making investments in the past six months really localizing the experience, improving the service levels, upgrading local payment options, but we're facing a difficult year-over-year comp issue with a 10% tax increase on foreign Internet retailers compared to the prior year. And so that comp issue went away in the third quarter. We also saw in a lot of our longer tail countries; some acceleration is we've invested in increasing the service levels and shipping times in the longer tail countries. So, it's a healthy trend that we'd like to see more of. Your next question comes from Justin Post from Bank of America Merrill Lynch. Your line is open. Hello, this is Joanna Zhao for Justin Post. Thanks for taking my question. So, just to follow-up on the international question, it's a great job for the Q3. And just to think about the trend for 2020 and in terms of the growth and investments in the international markets, anything that you can highlight there? And also, you mentioned that you've launched this free delivery even for international markets. And with a quick turnaround, and how do you foresee that impact margins, especially international segment going forward? Yes. So, I think the majority of our shipping in investments, I don't want to say are complete, right? Because it's an ever-ongoing thing, even in the U.S., right, continue to improve service levels. But I think from a margin standpoint, we've seen fairly minimal impact to margins. We've been able to negotiate some great rates on our shipping contracts. Localized returns is something that affects margins a little bit more, but we think ultimately helps us build huge businesses internationally. In markets, where we've rolled out free localized returns, we're seeing some of our highest customer conversion rates and some of our highest retention rates ever. So, the UK and Australia, in particular, we saw our highest numbers ever in those regions. So, we think the investments make sense and we're excited to continue to pursue upgrades around the world. Okay, great. Thanks. And then my next question is around macro factors that going forward in 2020. And I'm just trying to get a sense on what is your thought on the consumer sensitivity to price increase or decrease? So, if any – if macro factors come in for next year, more so on a recessionary scenario, what are the strategies that you have to place? Do you foresee potentially lower the price on your items? And so, the percentage of full price items will go down in reaction to that? Yes, maybe I'll start with Alan. So, I guess, maybe to start off, we're not guiding to 2020 yet or providing a lot there. And it's really hard to speculate what could happen in 2020 with respect to a recession or anything else. But just to call out a couple of stats that maybe differentiate us, about 70% of our product is either our own brands or you can't find anywhere else or an emerging brand, which is really hard to find. So, maybe some of the pricing dynamics that you would see in other retailers you wouldn't see here. So, I think we're comfortable with where we're at, we feel like we have a great offering to the customer. The – this millennial customer continues to take the purchasing power and things are shifting digital. So, again, we feel like we're well-positioned, but not commenting much more beyond this quarter. Okay, great. And then my last question is on the return rate. So, it seems that you have a nicer return – higher – sorry, higher – lower return rate relative to last quarter. Anything you could highlight that maybe have triggered the decline in the return rate? So, there's a little bit of a seasonality to the return rate from quarter-to-quarter. So, in, as you know, we don't disclose return rates specifically, but whatever number you're backing into probably reflects just some seasonal trends that typically occur from Q2 to Q3. Okay. Thank you. Your next question comes from Michael Binetti with Credit Suisse. Your line is open. Hi, guys, thanks for taking our questions here. Could you, Jesse, could you speak to, let's try and do a little modeling here to what you see in some of the dynamics in the P&L, help us with the modeling for fourth quarter. In particular, I think the guidance you gave embeds scenario at the low-end or EBITDA would actually be negative year-over-year in the fourth quarter, and trying to get my head around what those – what some of the drivers on the P&L would look like in that scenario? Yes, yes, sure. And so, I guess, maybe to start from the top. We are seeing some margin pressure on the Revolve side, which we called out for Q3 and we expect that to continue into Q4. So, that's a part of it and that's coming off some really healthy margins last year. And then if you work down through the P&L, again, we're investing in the fulfillment centers. So, there's some incremental costs there still in Q4 this year versus Q4 last year. Now, let's start to see that dissipate, as we head into 2020 and other investments largely behind us. So, that's probably the other one. Marketing, call it, plus, minus, we're not – we continue to invest there in factoring in any significant efficiencies and G&A is largely a fixed cost and we continue to build on the platform there and gain efficiencies. Okay. And I know that we've gone through inventory quite a bit. I want to ask about the tariff comments. I guess, the read – is the read that the inventory that would be impacted by tariffs is still a very low percent of the mix that's made it to your books now and through year-end, or are there tariff headwinds ahead as you bring in more inventory after the end of the year that could be affected by those tariffs? And then I guess, just backing up a little bit, maybe you could speak a little bit more to why you think the inventory builds? I mean, you're asked, because you're trending well above what we expect on active customers. So, I'm curious what you think the customer is going to the site and seeing is that maybe some of the low productivity skews, any kind of the dynamics that you're seeing there that you think led to the inventory build in the – on the demand side? Thanks. Yes, sure. We'll try to capture all those, but jump in again, if we missed anything. So, starting with tariffs, and this is specific to the tariffs that were put into place on September 1, which, as of this morning, we'll see what happens there. And it sounds like they might be pulled back, which would be great, but not counting on that quite yet. So, the reason you don't see a significant impact this quarter is, one, due to timing. They were just put into place in September 1. And so, there's only a limited amount of receipts that came in with those tariffs applied. And then, second, we've made a really good progress towards our mitigation efforts there, as I mentioned in the prepared remarks, and the number one was negotiating some concessions with our existing suppliers, which we've been really successful with. We haven't gone to the last level we can pull, which is pressing some of that cost increase on to the consumer. So, the minimal impact is largely related to timing and just the timing of inventory receipts. To put it into context a little bit and to kind of a refresher, the area we're focused on with tariffs is that own brand component. So, if you think about, call it, roughly a third of the business is own brands. Of that 75 plus, minus is sourced from China. So, that's the population we're thinking about there. And then on inventory, I think, we covered it for the most part. If you think about the investments that we've made, that's what's really led to the slightly elevated inventory position not being own brands over the last several years, and then maybe lower price points superdown in the back-half of 2018. And if you try to calibrate that with active customers, like you said, active customer growth has been really strong. But again, important to think about that as a trailing 12 months number. So, you're still picking up that really robust customer growth in the back-half of 2018. So, you'll start to see – which you have started to see over the last couple of quarters that active customer growth starts to converge with net sales growth, AOVs is moderating and things kind of balancing out after that growth in customers and orders and the decrease in AOV we saw last year. I guess just to add on that really quickly, have you – with the gross margin pressures you saw on Revolve is the read that, was there a change in the trend line on the conversion metrics quarter-to-quarter that – did that feed into it at all? Yes. I mean, so the third quarter is historically a little bit of a slower turning quarter for us. Then the second quarter – and then also, there's individual dynamics between different kind of segments and the individual products. And so, the markdowns are actually algorithmic driven. And so, to your point, the algorithms are going to react to try to optimize margin. And so, there's a little bit of a shift in dynamics there. But, again, I think it's important to us within the context, but it was still a really healthy quarter historically. It's just compared to a record full price sales number – or record was in the past decade anyway [indiscernible] in the third quarter of last year. Your next question comes from Ralph Schackart with William Blair. Your line is open. Good afternoon. Just first on the call, you talked about some updates the apps just in terms of customization and some more functionality. Just curious for the receptiveness of the customer base, an engagement trends that you saw, and maybe more broadly how you're thinking about mobile on a go-forward basis? And then I have a follow-up. Yes, definitely. We've seen a really great reaction from our customers as we've rolled out new features and in terms of providing a better user experience for them. And that's really, we're focused on creating a better experience for the customers. That's going to keep them happier and have them ordering more. So, we're really happy with the roll outs that we've done there. Progressive web app, as we talked about, we're really excited about. The fitting room that that I mentioned. Right now, that's not on the app and mobile yet, it's just on the desktop. We've already received and it really just launched to about half of our customer base yesterday and we've already received a number of raves from our customers unsolicited coming in with regards to that feature, I just got an e-mail 20 minutes ago about that. So, we're really excited about the message we're making. And to your point on mobile, right, we're in a mobile-first world. And so, mobile's area, we're really going to focus on heavily in the upcoming year. And, again, we think the progressive web app is a really important step for us to capitalize on that opportunity. Great. One more, if I could. Few days ago, the FCC issued some new rules for disclosures, bad for social media influencers. And I know it's a fairly recent. But just curious if you had a chance to sort of digest the news and if there's any potential implications for the business? Ye. So, it's not something that we've fully digested at this point, but certainly, we'll review kind of the latest updates internally. And if we feel like it has any implications on our business is something that we'll chat about. And our final question comes from Aaron Kessler with Raymond James. Your line is open. Great. Thank you, Mike. A couple of questions. I noticed quickly back to their own inventory, was there any specific brands that you would call out, or was the more across the Board? And then just in terms of some of the newer verticals as well besides superdown, maybe if you could any update on Men's beauty traction, as well. Thank you. Yes, nothing specific to call out there on the kind of category or brand level. And to your question on some of the different categories, I guess, the one thing we haven't talked about here in the Q&A is the forward segment, which had a second quarter of really healthy growth those – there. So, we're confident in our research that we conducted last year and how that's paying off, beauty and men's is still there a really small component of business, but still some healthy growth. but nothing more specific to color. Got it. I mean, just on own, is there a good way to think about kind of long-term mix that you guys are thinking of, or I mean, obviously you to maximize that given the higher margins. But is there a good a framework that you're thinking about in terms of what percentage of the business that could be longer-term? Yes, no specific target there. And we've been careful not to put a number on it, because we do optimize for what's right for the customer. That said, we do see meaningful upside there. Over the long-term, it's just –, we're careful not to put a specific number on it. Okay, great. Thank you. And ladies and gentlemen, this does conclude the Q&A period. I'll now turn it back over to management for any closing remarks. Hi, guys, thanks for joining us for our second quarter as a public company, it's been fun and exciting as always. I think for us sitting here, I know we're running the business for many, many years. The consistent profitable growth continues to be a historic theme and we'll continue to be a long-term theme for us. We're excited and appreciate all the time energy you guys have spent with us and we're excited to continue this for many, many years to come. Looking forward to talk in greater detail soon. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect.

News: Transcripts from Seeking Alpha
Site: seekingalpha.com

Please standby. Good day. And welcome to the Palo Alto Networks Fiscal First Quarter 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Mr. David Niederman, Vice President, Investor Relations. Please go ahead, sir. Good afternoon. And thank you for joining us on today's conference call to discuss Palo Alto Networks fiscal first quarter 2020 financial results. This call is being broadcast live over the web and can be accessed on the Investors section of our website at investors.paloaltonetworks.com. With me on today's call are Nikesh Arora, our Chairman and Chief Executive Officer; Kathy Bonanno, our Chief Financial Officer; and Lee Klarich, our Chief Product Officer. This afternoon we issued a press release announcing our results for the fiscal first quarter ended October 31, 2019. If you would like a copy of the release, you can access it online on our website. We would like to remind you that during the course of this conference call, management will make forward-looking statements, including statements regarding our financial guidance and modeling points for the fiscal second quarter, full fiscal year 2020, and our next three years, our competitive position and the demand and marketing opportunity for our products and subscriptions, benefits and timing of new products and subscription offerings, and trends in certain financial results and operating metrics. These forward-looking statements involve a number of risks and uncertainties, some of which are beyond our control, which could cause actual results to differ materially from those anticipated by these statements. These forward-looking statements apply as of today. You should not rely on them as representing our views in the future and we undertake no obligation to update these statements after this call. For more detailed description of factors that could cause actual results to differ, please refer to our Annual Report on Form 10-K filed with the SEC on September 9, 2019, and our earnings release posted a few minutes ago, on our website and filed with the SEC on Form 8-K. Also, please note that certain financial measures we use on this call are expressed on a non-GAAP basis, and have been adjusted to exclude certain charges. For historical periods, we have provided reconciliations of these non-GAAP financial measures to GAAP financial measures in the supplemental financial information that can be found in the Investors section of our website located at investors.paloaltonetworks.com. And finally, once we have completed our formal remarks, we will be posting them to our Investor Relations website under the Quarterly Results section. We would also like to inform you that we will be attending two investor conferences next month, we will participate at the Wells Fargo TMT Summit in Las Vegas on December 3rd and at the Barclays Global Technology Media and Telecommunications Conference on December 11th in San Francisco. And with that, I will turn the call over to Nikesh. Thank you, David. Good afternoon, and thank you everyone for joining our call. As most of you know, with this quarter, I am lapping my first Q1 at Palo Alto Networks. In my very first call, I talked about my observations on the industry and our goals of the company. About a year ago, we were great single product company focusing on integration and automation. We have made some early moves towards the aspirations of the cloud where we are beginning to build products with AI and ML, recognizing the evolving trends in technology. One year later, I couldn't be happier with our achievements. We have made significant progress moving into a leading position in cloud security, making great strides in automation using AI and ML across our product portfolio. Our speedboats are working. We are delivering integration. This is bearing fruit and our customers seeing the benefit and betting more and more on Palo Alto Networks. A few months ago, we set out a three-year plan for the company and shared it with you during our Analyst Day in September. While I intend to share our progress during this quarter, I also want to provide a report card on how I feel we are progressing towards the longer term goals that we have set for ourselves. And perhaps, more importantly, I'd like to share where we are feeling more confident and also where we need more work. This is the first quarter we are marking ourselves against the target that we presented in September. We have published a slide that is available on our Investor Relations website that you can download to follow along with my comments. We will be targeting our progress against this plan. Let's start with our overall billings targets and how they are tracking. We are delighted to have done better than our guidance. As I am learning the rhythm of our -- an enterprise business, I understand that enterprises put a lot of effort in driving good year end and then they have to kick-start new years. I was advised that sometimes there can be challenges sustaining momentum into new fiscal year, but our teams have delivered and we are off to the races. As I spoke with investors after Analyst Day, many asked me, what makes you confident that you can achieve billings of $800 plus million in next-generation security this year? I am delighted to report that after a great Q4, we have maintained the momentum and have been able to better our plans, delivering next-generation security billings of $170 million, which is 217% year-over-year. So sticking with my scorecard, I have more confidence in our ability to continue to deliver here. To show our growing confidence, we are increasing our guidance for next-generation security billings for the full year to $810 million to $820 million. The one area that we did not deliver to our expectation in the quarter is product, which weighed on the growth of the firewall as a platform category and grew only 11% year-over-year, the category firewall as a platform grew only 11% year-over-year. In fiscal 2019, we provided incentives to our teams to build our next-generation security business. By Q4, they showed us they could with very strong results. That momentum carried into the start of fiscal 2020, with strong next-generation security pipeline going into Q1. However, even though we have balanced our sales incentives this year, it looks like it's going to take us a little more for that change to take effect. Despite our performance this quarter, we continue to have confidence in our ability to deliver a 23% CAGR over the next three years in the firewall as a platform category, with contributions from all three form factors hardware, virtual and as a service. To help our efforts in this area, we have established our third speedboat to coincide with our security enterprise pillar. This speedboat will be led by Andy Elder who was recently the Chief Revenue Officer of Riverbed. This gives Amit, our President, three speedboat leaders, along with our regional leaders. With that change, we have chosen not to replace the position of Head of Sales and on a flatter organization, allowing us to continue to be nimble in our transformation to a multi-product company. Back to our scorecard, our revenues remain on target. Now let's travel down to our EPS, margins and cash flow. I did get to read many of the analyst's report on this topic and I want to help you appreciate a point we made at our Analyst Day. This fiscal year is our year of investment in transformation. We are not looking to cut costs, we are looking to invest. However, we are holding our teams to a plan. Our plan asks us to deliver an EPS of $5.00 to $5.10 for this year and we intend to stick to it, without accounting, of course, the proposed acquisition of Aporeto, which I just announced. Our Q1 adjusted free cash flow margin was light compared to our annual target due to the timing of certain cash flows. However, we remain on track with our annual guidance. So with that, let's now dive in the exciting product announcements we debuted at our Ignite Conference in Barcelona earlier this month. Many of our customers are taking integrated bets across our enterprise, cloud and the AI, ML products, while a year ago we were just talking about the ambition today, we see the three platforms emerging in our product strategy. As you know, we have branded our cloud solutions Prisma, and our application framework in AI and ML products Cortex that left our firewall business needing a brand. Today we are announcing Strata, a brand for our firewall and attach subscription. We are pleased with the innovations we are making to secure the enterprise. As some of you might be aware, we announced DLP and SD-WAN for Prisma Access at our Ignite event in Barcelona two weeks ago. We will extend SD-WAN capabilities to our next-generation firewalls with an attach subscription to be available shortly, and then IoT in 2020. In the span of 18 months, we will take our attach subscriptions from four to seven. These new subscriptions will be simultaneously available in a virtual firewall format. As a quick side note, DNS security now boasts over 1,000 customers and is our fastest growing attach subscription having launched just in February of this year. In this category, we continued to garner recognition for our technical leadership and were named as the leader in the Gartner Magic Quadrant for Network Firewalls for the eighth consecutive time. We were also recognized as a leader by Forrester in their recent Zero Trust extended ecosystem platform providers Wave report. We feel good about the overall growth potential of firewall as a platforms and are excited about the ongoing innovation we have planned in this area. Moving to securing the cloud and access to the cloud, let me first talk about Prisma Access. We are very excited about the recent innovations we have announced, including SD-WAN and DLP services, a new cloud-based management UI and new SaaS service level agreement. Prisma Access is now the industry's most comprehensive secure access service edge platform. This gives Prisma Access a potential to be a leader in a new market category defined by Gartner called SASE or secure access service edge. SASE is a convergence of network and cloud security that recognizes the new demands required to secure cloud and mobile work forces, while also delivering on integration and ease of management. Prisma Access is perfectly suited to be leader in this emerging category. We are incredibly excited to bring this announced product to our customers. Moving across to Prisma Cloud, one of the questions I often get asked is, are you deploying the string of pearls strategy? The answer is no. I want to point out, we are doing something different. We are integrating into three platforms. Our goal is to make life easier for our customers through integration. A prime example is Prisma Cloud. As soon as we acquired Redlock, we integrated it into the evident functionality in four months. This past week, we have announced the integration of Redlock, Twistlock and PureSec into one platform, yes, one platform, Prisma Cloud. Now for our SaaS version, you can only buy one product which is the integrated product. I am very proud of our Prisma team who have delivered this effort in a record time of five months since acquisition, and of course, we will continue to work on delivering more cross-product capability over the next year. Prisma Cloud allows organizations to obtain a full and unified view of their cloud security and compliance posture across any type of cloud workload, including containers, serverless and host environments under a single pane of glass. Prisma Cloud also integrates security in the software development workloads, allowing developers the ability to see vulnerability status every time they run a build without having to run a separate tool. I personally believe Prisma Cloud is fast becoming the essential multi-cloud, multi-technology platform, now with over 1,000 customers. Keeping to a theme of providing more capability, today we announced our intent to acquire Aporeto. After an extensive market scan and thinking through how we believe micro-segmentation can fundamentally be reinvented. We decided to accelerate our efforts to the proposed acquisition of Aporeto. Aporeto has unique machine identity based micro-segmentation capabilities that complement the existing cloud native security platform capabilities delivered by Prisma Cloud. We are incredibly excited to welcome the team to Palo Alto Networks. In addition to the Aporeto acquisition, our team continues to drive hard innovation on the Prisma Cloud platform. Now let's turn to Cortex. I am also proud of this team. This team has outperformed their billings forecast for the first quarter by almost 20%. We introduced Cortex XDR 2.0 at Ignite. This is an integrated version with both endpoint protection and XDR capabilities. When we launched Cortex 1.0 about six months ago, we are the only vendor to take EDR and reinvented with network data to deliver XDR. It's been gratifying to see several other vendors follow suit and offer their own XDR term products. We continue to stay on the bleeding edge in this category. We are extending Cortex XDR's behavioral analytical capabilities to include data and logs collected from third-party firewalls, enabling detection across multi-vendor environments. We announced the inclusion of Check Point Firewall Data at Ignite. We also hope to be able to accept data from Fortinet and Cisco before the year is over. This is probably the only time you will hear me talk about our competitors in a neutral way. In the first nine months of Cortex XDR, we have enabled organizations to reduce alert volumes by up to 50x and speed investigation time by about 8x, filtering out the noise and allowing analysts to focus on those critical threats. Turning to Demisto, which is part of our Cortex brand, a couple of months ago, we enhanced our comprehensive security orchestration automation response platform, Demisto by adding a number of new capabilities. Demisto 5.0 redefines the limits of sore customizability, enabling users to visualize incident and indicator flows in a completely tailored manner, improving the clarity and speed of security operations. What's even more exciting is what Lee talked about at our ignite event, our ability to collect telemetry data on how Demisto is being used. We are starting to get this data on customers. We will start to see the benefits, where we can give them more insights on how to get the most of this platform, including which playbooks are the most valuable and which integrations work the best. Finally, we are very pleased to announce a new high-end support offering called platinum support for our physical and virtual firewalls and our Panorama management system. This is a continuation of our goal to provide the highest level of service to our customers. Platinum supported the NaaS version of our premium support offering and will feature dedicated teams and best-in-class response times, and also several other new features designed to ensure our customers peace of mind knowing that Palo Alto Networks deep expertise in their quarter, whenever they need it. This is just an overview of all that we have introduced at Ignite and I encourage you to review the archive presentation from that event. As a continued measure of that confidence during the quarter, we repurchased nearly $200 million worth of our shares. To conclude, we had a great first quarter. I feel more confident in our ability to deliver the plan we set out for this year. Our product teams have rolled out exciting innovations and have us on the leading edge in multiple categories from firewalls to XDR to SOAR to SASE and cloud security. As I contemplate our road map for the next 12 months, I become even more excited to see the security category strengthening, knowing that our products will continue to mature and be deployed by our customers around the world. With that, I will turn the call over to Kathy. Thank you, Nikesh. Before I start, I'd like to note that except for revenue and billings figures, all financial figures are non-GAAP and growth rates are compared to the prior year periods, unless stated otherwise. As Nikesh indicated, we had a good start to our fiscal year and are tracking well against the targets we had outlined during our Analyst Day in September. In the first quarter, we continued to add new customers at a healthy clip and sustained momentum in our next-gen security products. Let's look at some key customer wins. We signed an eight-figure deal with a leading casino company, spanning each of our three pillars. This engagement was positioned with their entire IT leadership team from the director level, all the way to the CIO as a comprehensive outcome-based security transformation project. The large retail customer we highlighted last quarter expanded their Palo Alto Networks footprint this quarter with a seven-figure Cortex deal. This customer purchased Cortex XDR and Data Lake setting them up for comprehensive data analysis going forward. We beat Check Point and replaced Cisco to win a substantial deal with a major European toy manufacturer, who purchased next-gen firewalls Prisma Access and Traps. This customer has selected Palo Alto Networks as their strategic security partner and in the coming years, we expect them to replace their current firewall with next-generation firewall from Palo Alto Networks, their current VPN solution will be replaced by Prisma Access and endpoint protection will be covered by Traps. These wins are excellent examples of our success in articulating our vision of security and being able to demonstrate our value proposition to customers, and I am pleased to report that wins such as these help us deliver another strong quarter financially. In Q1, total revenue grew 18% to $771.9 million. Looking at growth by geography, the Americas grew 18%, EMEA grew 16%, and APAC grew 21%. Q1 product revenue of $231.2 million declined 4% compared to the prior year. Q1 SaaS-based subscription revenue of $318.6 million increased 38%. Support revenue of $222.1 million increased 21%. In total, subscription and support revenue of $540.7 million increased 30% and accounted for a 70% share of total revenue. Turning to billings, Q1 total billings of $897.4 million, net of acquired deferred revenue, increased 18%. The dollar-weighted contract duration for new subscription and support billings in the quarter remained at approximately three years, but declined by approximately three months year-over-year. Total deferred revenue at the end of Q1 was $3 billion, an increase of 26%. In addition to new customer acquisition, we continued to increase our wallet share with existing customers. Our top 25 customers, all of which made a purchase this quarter spend a minimum of $41.7 million in lifetime value through the end of fiscal Q1 2020, a 24% increase over the $33.6 million in the comparable prior year period. Q1 gross margin was 76.6%, which was down 10 basis points compared to last year. Q1 operating margin was 15.8%, a decline of 500 basis points year-over-year and includes a headwind of approximately $7 million of net expense associated with our recent acquisition. We ended the first quarter with 7,382 employees. On a GAAP basis for the first quarter, net loss increased by 56% to $59.6 million or $0.62 per basic and diluted share. Non-GAAP net income for the first quarter declined 9% to $104.8 million or $1.05 per diluted share. Our non-GAAP effective tax rate for Q1 was 22%. Turning to cash flow and balance sheet items, we finished October with cash, cash equivalents and investments of $3.3 billion. During the first quarter, we repurchased over 947,000 shares of common stock at an average price of approximately $209 per share, leaving a remaining repurchase authorization of approximately $800 million. Q1 cash flow from operations of $225.2 million, decreased by 11% year-over-year. Free cash flow was $178 million, down 18% at a margin of 23.1%. Adjusting for cash charges associated with our headquarters in Santa Clara, free cash flow in the quarter was $202.7 million, representing a margin of 26.3%. Capital expenditures in the quarter were $47.2 million, of which $22.7 million was associated with our headquarters in Santa Clara. DSO was 63 days, an increase of five days from the prior year period. Turning now to guidance and modeling points. For fiscal Q2 '20, we expect revenue to be in the range of $838 million to $848 million, an increase of 18% to 19% year-over-year. We expect billings to be in the range of $985 million to $1 billion, an increase of 16% to 17% year-over-year. We expect Q2 '20 non-GAAP EPS to be in the range of $1.11 to $1.13, which incorporates approximately $3 million of net expense or $0.02 per share related to the proposed acquisition of Aporeto using approximately 100 million shares to 102 million shares. For the full year fiscal 2020, we expect revenue to be in the range of $3.44 billion to $3.48 billion, representing year-over-year growth of 19% to 20%. We are increasing our prior billings guidance by $10 million to $4.105 billion to $4.165 billion, representing growth of 18% to 19% year-over-year. As Nikesh said earlier, we are also increasing prior guidance for next-gen security billings by $10 million to be in the range of $810 million to $820 million, representing year-over-year growth of 79% to 82%. We expect fiscal '20 non-GAAP EPS to be in the range of $4.90 to $5.00, which incorporates approximately $13 million of net expenses or $0.10 per share related to the proposed acquisition of Aporeto, using approximately 102 million shares to 104 million shares. Finally, turning to free cash flow, for the full year, we continue to expect an adjusted free cash flow margin of approximately 30%. This excludes approximately $20 million in net expenses and acquisition transaction costs attributable to the proposed acquisition of Aporeto. Including these net expenses, we would expect adjusted free cash flow margin of approximately 29%. As a reminder, the adjustments to free cash flow include CapEx associated with the completion of our headquarters in Santa Clara. You can review these adjustments to free cash flow in our supplemental financial information document, which is posted on our Investor Relations website. Before I conclude, I'd like to provide some additional modeling points. We expect our Q2 and fiscal '20 non-GAAP effective tax rate to remain at 22%. CapEx in Q2 will be approximately $50 million, with approximately $25 million related to our headquarters in Santa Clara. For the full year, we continue to expect CapEx to be approximately $170 million to $180 million, with approximately $50 million related to our headquarters. With that, I'd like to open the call for questions. Operator, please poll for questions. Thank you. [Operator Instructions] We will take our first question today from Keith Weiss with Morgan Stanley. Excellent. Thank you guys for taking the question. Nikesh, I was hoping to drill down a little bit more into the firewall as a platform side of the equation, where it seems you guys are a little bit disappointed. It sounds like the incentives that you guys had in place last year, just sort of push more of like the new business activity or more of the pipeline building on to the next-gen cloud stuff and let you guys a little bit short on pipeline heading into the FY '20. One, am I thinking about that correctly in terms of kind of where you guys came up a little bit short? And two, how do you guys think when you are looking at sort of assessing the problem, how do you vet out what comes from sort of that kind of execution issue versus what might be more of a macro or competitive issue? Thanks, Keith, for your questions. You are thinking about it right. As you know, many of our next-generation security products are very early in their life cycle. So, literally, there's stuff like Twistlock we acquired in July, there's stuff like Demisto, all these things haven't even lapped one year. So we put a lot of effort towards getting our core team to both, learn, understand, build pipeline and sell and in that process we set up some good incentives for them to focus on next-generation security, because pretty much the entire conversation for my first year here was, they love the fact that you are a great firewall company, how are you guys are going to keep transforming as the firewall market transitions. And we set out, our team and me, we set out to prove to ourselves that not only can we build the products in addition to firewall, but we can make this a multi-product company. So part of that is Lee's team did a great job in getting the products in place and thinks on the integration work I talked about. The go-to-market team is starting to make sure they can prove -- that they can sell this stuff. And we are very excited that approximately 40% of our core salespeople sold Cortex this past quarter, approximately 25% of them sold Prisma. So we are tracking to the targets we set ourselves in terms of getting our core engaged. But because of the incentives, people made their decisions that they can make more money selling Cortex and Prisma in Q4 than selling firewalls. As a consequence, we saw a huge pipeline build and a lot of deals done in Q4, the momentum carried to Q1. We recognized this coming into the year. We have right-sized these incentives, but it takes a little bit longer for the pipeline till we get back into place. I don't think there's a systemic issue. I don't think it's a market share issue. I just think it's taking the eye off the ball and we have already put stuff into place and we wouldn't be saying we feel confident of delivering 23% long-term, if we didn't believe that we could actually get the team to balance their focus both on Cortex, Prisma, as well as the firewall. Next we will hear from Sterling Auty with JP Morgan. Yeah. Thanks. Hi. Maybe just following on that last question, can you help us understand that, I think, the EPS guidance for the year includes the acquisition. The revenue guidance is unchanged. So just so we get a sense of what looks like lowering the organic revenue for the year. How -- maybe the order of magnitude, how much acquisition revenue are you kind of baking into the reiterated full year revenue number? Yeah. Look, we acquired this company called Aporeto. We are in the process of acquiring it. This is slightly earlier in the technology lifecycle of cloud security. This is a bet we are making in terms of how micro segmentation will need to be done in the future and with that bet, it's going to take us a while to integrate this into our Prisma Cloud offering. So we are not anticipating much revenue uplift this year. So we are holding revenue flat from -- as a flat in line with guidance, without expecting any revenue impact this fiscal year from Aporeto. But we -- obviously we have to pay the cost for the company. Okay. And then one follow-up on Prisma specifically, you talked on the other side, I think, at length through the prepared remarks. I think last quarter you talked about maybe some early Prisma wins. Can you give us just maybe a little bit more color on the traction that you saw in the quarter especially on the competitive dynamics with Prisma? Well, look, both on Prisma Cloud and Prisma Access and I am sure you all remember Nir's emotional explanation on Analyst Day around Prisma Access, which is the product that competes in the secure access space. We are very excited. We are seeing -- we continue to see traction. We continue to see large seven-figure deals in that space. It's a space where we are seeing the market is going. There is a cloud transformation happening. As you start transforming your applications to the cloud, you start thinking about how to transform your network and start creating more high bandwidth secure access to all of your users and your branches. So we see the market moving there. We see our product getting stronger and more mature. As we said, we announced the availability of SD-WAN and DLP in the product, where -- which makes it a comprehensive solution in the market. So we are seeing the traction. Those deals take the same time as firewall deals take to close because customers have to go through a strategic transformation of the network. So they are not as quick as Prisma Cloud deals. On the other side, as I said, we have, I think, in record time, gone past 1,000 pure cloud security customers across Redlock, Evident, Twistlock, PureSec, which, in our mind, is one of the fastest ramps in terms of our ability to get 1,000 customers to deploy our cloud security product. And this is when we were selling them individually and we just last week integrated all of them into one SKU. So we believe that gives us more traction. So we are very excited about the traction we are seeing in the Prisma product. Got it. Thank you. Next we will hear from Fatima Boolani with UBS. Good afternoon. Thank you for taking the questions. I had one for Nikesh and one for Kathy. Nikesh for you just harkening back to the Analyst Day, we did talk about contract structuring as a mechanism to allow you to introduce new functionality into the installed base. So I am wondering with regard to the expansion in the unattached portfolio and even the attached portfolio of subscriptions, I was wondering if you could share some of the details of what has changed or what is different as you start this new fiscal year around some of the newer expanded capabilities in Prisma Cloud. And certainly, this new acquisition, as well as on the DNS and SD-WAN attached side and then I will have a follow-up for Kathy, please. Okay. Great. Thank you for the question, Fatima. I think as we discussed at the Analyst Day, we had said that we don't want to have to sell every module of Prisma Cloud to our customers individually and we want to create a structure where they can actually buy once and use our products on a consumption basis. And effectively, this integrated platform we have rolled -- started rolling out last week, Prisma Cloud, where you have one SKU where all Redlock, Twistlock, PureSec functionalities available. If you bought Redlock SaaS version, you will be able to use container security without coming and signing a new deal. You will just use up some of your credits that you bought. If you bought Twistlock functionality, you would be able to do the same thing with Redlock or PureSec. So we have simplified our contracts and our ability to consume in this release of our product last week. We are in the process of rolling it out to all of our Prisma, sorry, all of our Twistlock and Redlock customers, which should be accomplished in the next few weeks, I hope. And those customers then will have the ability to consume the product without actually having to come and buy those individual products from us, which is -- takes away a lot of friction in the process. In terms of SD-WAN and DLP, they will be available integrated and part of Prisma Access, so you will not have to go buy different products and integrate them. This will come integrated out of the software box, if there's some such thing, and you will be able to use it with a single cloud pane. Fair enough. That makes a ton of sense. Kathy, for you, I was wondering if you could give us an update on just some of the tariff escalation that's happening and that's -- sort of how that's impacting or financially impacting your supply chain and how we should think about those costs rolling through the model. I know, historically, you quantified some of the negative financial impact on EPS. I am wondering if there is any sort of update there, given some of the whipsawing on the trade war and tariff-related escalations we have seen? Thanks a lot. Sure. Thanks for the question. We do manufacture our products in the U.S. However, there are certain components that we -- as we have talked about in the past, that we source from China. That's the only place where we are able to purchase these components. And we have seen that list of products expand as the tariff situation has expanded in the U.S., as it relates to China products. So, we have felt the impact of that and we have been talking for a while about the impact to EPS. However, just at the start of this new fiscal quarter -- fiscal Q2, we did increase pricing on our firewalls and that increase in pricing is intended to offset the tariff impact. So that's why you don't see us outlining a specific financial impact this quarter. That's super clear. Thank you so much, Kathy. We will now hear from Phil Winslow with Wells Fargo. Hi. Thanks guys for taking my question. I just wanted to focus in on the next-gen firewall platform space. Kathy and Nikesh, you both have talked about the opportunity just to refresh the older models that you all sold in the past. I am wondering if you could provide us an update on -- sort of what you are seeing right now and thinking for this year relative to past years in terms of the contribution from just refresh of your base and then just one quick follow-up to that. Yeah. Sure. We have been talking about refresh activity in a couple of different ways. One, in terms of what we see with our customers' refreshing competitive boxes, and of course, that's been a motion that we have been competitively trying to address since the start of the company. And as you know, there is rarely a company that we go into that doesn't already have firewalls and so it's always been a competitive displacement go-to-market approach for us. When we talk about our own internal refresh cycle, we continue to see our customers refreshing. However, in terms of driver of growth, we pointed out that in terms of just pure magnitude of customers, our new customer acquisition, as well as our customer expansion opportunity is a much bigger driver of our overall growth and less -- much less so refresh of our own boxes that we have sold to customers previously. Got it. Great. And then, just a follow-up for Nikesh on the platform side of your Cortex obviously, you talked about the AI-based continuous operations platform, I think, is what you called it at the Analyst Day. What's the feedback been from customers in terms of developing their own apps, their own functionality on top of this, as well as third parties, any sort of update there would be great. Yeah. As I mentioned in my prepared remarks, this team outperformed the numbers by approximately 20%. So there we are seeing tremendous amount of tractions, both -- traction both on the XDR side and the Demisto side, Demisto is performing way ahead of our acquisition plan. We haven't opened up the capability for customers to write their own applications on our platform just yet. We have some apps in the old version of the application framework. But right now we focus more on providing integration out of the box with third-party vendors, so customers don't have to try and take that and normalize the data, which has been a bit of a shift in our strategy, but we are seeing huge traction. I think it's fair to say that one of the times when Lee announced the ingestion of checkpoint firewall data into our product was when he got a standing ovation. It's hard to get a standing ovation from a bunch of engineers at a conference. So they must have liked that and we are going to do the same thing with Cisco and Fortinet firewall data. So that way when a customer is trying to look at alerts across firewall and endpoint data, we can ingest any firewall data, as well as match it up with our endpoints. So we are seeing traction in Cortex across both product categories, but we have not opened up the ability for people to write their own apps just yet. All right. Thanks guys. Next we will hear from Karl Keirstead with Deutsche Bank. Thank you. Maybe I will direct both to Nikesh. So Nikesh, the product revenue disappointment is coming relatively soon after a series of sales leadership changes at Palo Alto over the last six, nine months. I am just wondering if you believe that those changes might have contributed to the product performance, and in that spirit, do you mind just repeating your rationale for not replacing the Head of Sales. So first part of the question is on the sales leadership, and then I will ask my second. Thank you. Sure. I think we are taking two random points, and try and draw a straight line. I personally don't think there's any correlation between the changes and our challenge on the product this quarter. If there was a challenge we would have [inaudible] across the Board, across every category, not just our firewalls. So, the fact that our teams have gone out and that's the billings targets for Q4 and Q1, and we have had a mix shift in terms of what we have been able to sell, validate at least the period we are putting our or for the facts we are putting out around the fact the incentives contributed to it as opposed to our leadership changes. On the leadership change front, we have very strong leaders in our regions. We promoted Rick Congdon, who has been around for many years at Palo Alto Networks. He is doing a phenomenal job in Q4 to run our Americas business. We have Christian Hansen in Europe we have talked about in past earnings calls, as well as we have promoted Simon Green to one of JPAC business to manage the Pacific for us. So between those three, we feel we have strong leadership in the regions. And both our Prisma and Cortex leaders are doing really well, given the performance we have seen NGS. And we felt that we were not -- we don't have a laser-focused leader on the firewall as a platform category. So we were able to hire Andy Elder, who is an amazing sales leader from Riverbed, who is going to run that part of our business in terms of focusing and making sure that as we deploy new products like Prisma Access or virtual firewalls, or going from four to seven subscriptions that there is a same go-to-market focus that we have had on Prisma and Cortex. And with that, sort of 3x3 matrix, we feel, I might need to say engaged in that transformation with these teams and putting another layer between him and these six people would be detrimental to our ability to go and execute. So we have decided not to replace the Head of Sales position. Got it. Okay. That's helpful. And then, again in the spirit of just trying to unpack what might be going on. This too might be drawing an incorrect conclusion. But is it possible Nikesh that you guys saw an accelerated hardware to software form factor shift that might have cut you a little bit by surprise and contributed to that product number, but it would obviously show up in super strong VM series billings numbers? I wish that was the case that we have been caught unaware. So I really like to be surprised by phenomenal growth in any product category. Unfortunately, it's just the fact that our teams had only so many dollars they could sell in Q4 and they sold a lot of them. But they sold them in the category, which was going to make them a lot of money, which is a good thing. You want your sales teams be motivated by the incentives -- realizing incentives are not working. But we have fixed the focus to make sure they have focused on both categories. So we think it's nothing systemic. We think it happened in this quarter. And to be honest, if you look at the numbers, another $20 million of deals would have gotten us to a number, which would have made all of you happy and made us happy. But we -- that's kind of the quantum of the change on an $897 million worth of billings. So $20 million showed up in more next-generation securities then showed up in product, which is why we are all getting unhappy about this. But hopefully, we can fix that in upcoming quarters and we can deliver to the long-term guidance of 25% CAGR. Got it. I am sure you will. Thank you very much, Nikesh. Jonathan Ho with William Blair has our next question. Hi. Good afternoon. I just wanted to start out with maybe the Aporeto acquisition and could you maybe give us a little bit of a sense of what this adds to your overall solution set, as well as the role that micro segmentation plays in the cloud? Sure. Look, as we said in the past is that there are tons and tons of people selling the transition to the public cloud across the various large cloud providers around the world, whether it's Alibaba cloud sales or Oracle, Amazon or GCP or Azure, they are all trying to convince us to move to cloud. We personally have thought to having moved to the cloud for that reason, because we think that's the right outcome of the long-term. But we don't believe that a lot of the cloud security products exists to be able to deliver the amount and quality and capability of cyber security that exist in today's enterprise world. And as you make that transition, as we start putting more and more mission-critical applications onto the cloud, it is going to be important to reinvent the way cyber security is delivered, made for the cloud, by the cloud, what's the third part of that? Never mind. [Inaudible] is weaker than it should be. But anyway, so as we go down that path, we believe only 50% of the cloud security products have been invented so far. And instead of sit down and try and build them all ourselves, we have acquired Redlock and Evident, in the first instance, secure workloads, the market moved swiftly to containers. We acquired Twistlock, the market was heading to serverless. We acquired PureSec. We are also in the process of building our own modules in addition to those, which we will, obviously, as part of our product road map. And we look to the world of micro segmentation and said, micro segmentation is deployed today and the data center is not the way it needs to be deployed in the cloud because micro segmentation relies on IP addressing in the data center, which is very good for the enterprise but not really how the cloud operates. And Aporeto has a really good way. They have been working at it for the last two and a half years, three years, perfecting an approach which they have deployed in two or three very large customers at scale. We looked at it and said, look, this would be a phenomenal set of capabilities to have in our cloud security platform. We talked to the company. We liked them. We looked to the whole market, and said, this is the way we want to do this in the future. As a consequence, we acquired them and this will become part of our Prisma Cloud platform. So we don't intend this to be a separate SKU, we expect it to be part of integrated capability as part of our Prisma Cloud platform and we hope the underlying capability they bring will allow us to create more features in the future using their backlog. Thank you. And then just as a follow up, can you talk a little bit about maybe what you are seeing in terms of your customers from a budgeting activity standpoint for 2020 specific to Prisma Cloud and what types of trends are you seeing around that? Thank you. Look, I haven't been in this industry very long. But I am told by my colleagues and the way we watch this, it's very rare to start a cybersecurity company or a product and start closing seven-figure deals in short order, and it's fair to say, we are seeing a healthy amount of seven-figure deals in Prisma Cloud, which tells us that there is a need out there for this product, as a product market fit. And it kind of makes sense if you think about average customers are spending tens of millions of dollars in their cloud transition moving to the public cloud providers, and I have said, this in the past, if we can get 2% to 5% of that spend for cloud security, we will be in a good place. And I think we are tracking to that as we go to customers and we see them, they are spending $30 million, $50 million a year in the public cloud. We are tracking to the 2% to 5% number for those customers. And there's a possibility that, that goes up a little bit, because there's a whole bunch of capabilities that doesn't exist yet. But we have not run into budget constraints in our customers, who are moving to the cloud, and saying, well, I am moving to cloud, but I don't have the money to do cloud security. Thank you. We will now hear from Saket Kalia with Barclays. Hey, guys. Thanks for taking the questions here. First, maybe for you, Nikesh, just to go back to an earlier question on SD-WAN, I think, we understand the integration of that into Prisma Access. But can you just talk about your thoughts on SD-WAN as part of the firewall appliance and whether that's something you feel is driving some customer purchase decisions right now? It seems to have become a consideration in the purchase decision. But let's remember there's over 40 SD-WAN providers out there in the world and customers also choose whether they want a separate SD-WAN with more capability or an integrated SD-WAN in the firewall. But given that has become a consideration, we have launched or announced SD-WAN as part of Prisma Access and you can logically expect us to be able to deliver that across every form factor in the near future. That's where you were going, Saket. Yeah. Absolutely. That was where I was going. But maybe for -- maybe for you, Kathy, just as a quick follow-up. Can you just talk about the gross margins on the recurring revenue part of the business. So much of that is that nice higher margin attached subscription and maintenance, but of course there is a nice growing piece from next-gen as well. As the latter grows, can you just talk about how that affects the gross margin profile, if at all? Yeah. Sure. The gross margin range that we have provided in the past that we expect to operate within is 75% to 78% gross margins and we have continue to operate within that range for many, many quarters now. The services margin in particular, which we -- which you will see in our financials has been at the higher end of that range as you rightly point out. And it's in fact actually come down a little bit over the last couple of years and that's as a result of us building out the next-gen security products. Many of them which have hosting and data management costs and those costs are higher than the typical software type margins that you have seen on our attach subscriptions in the past. So, slightly different profile, but still operating overall service margins at the high end of that range. Got it. Thank you. Walter Pritchard with Citi has our next question. Hi. A question for Nikesh and then one for Kathy, so on Prisma Cloud, you talked about integrating those products probably faster than most were expecting. I am wondering how you are thinking about integrating the backend management of the Prisma Cloud products, as well as other products into Panorama? What the time line looks for that and are there some customers that are waiting for that unified management to make bigger commitments to those products? Walter, what we have noticed is that people want integration of the SD-WAN capability or DLP capability into the Prisma Access pane. So it can be integrated solution as they go deploy this in their branches and as they deploy for remote users. We are not seeing a lot of -- we don't believe that's the right thing to merge our cloud security pane into our firewall pane. Our cloud security pane is self-standing independent pane, which you believe is more relevant to DevSecOps than the CIO teams, then it is to the network security team. So, which is what we said we just announced the integrated -- sort of deploying the integrated platform across RedLock, Twistlock, PureSec, Evident last week and we believe that's going to become the mainstay of the cloud security front-end. And Lee, do you want to add something? Yeah. So just maybe continuing where Nikesh left off. So for Prisma Cloud, we do have a single unified UI for all different Prisma Cloud offerings. So for customers that are securing their applications in the cloud, they would go to one UI for that. Within Prisma Access, as we deliver additional integrated services, we have an ability to do that within Panorama to be able to, we call, plug-ins that can expand Panorama to include the additional capabilities as they come out. So, again, customer can go to one unified UI to see all those different pieces in one place. Great. Thanks, Lee. And then, Kathy, on the acquisition, I guess, just looking up on LinkedIn, looks like the company, Aporeto, had about 65 employees. I guess, as we think about smaller kind of tuck-in M&A like this, I guess, maybe some of us would have expected, given you had a couple of hundred employees kind of organically every quarter you could kind of do this under your organic hiring plans. How should we think about that going into the future? Do we need to worry about kind of margins coming down with tuck-ins? Well, we have talked about the impact, which is pretty modest impact $0.02 on the earnings per share for the quarter and we are investing in order to ensure that we can integrate these products and make sure that we are successful in our go-to-market efforts and so there is real expense associated with those. So the framework that we have given you is an organic framework and when we do M&A we will point out any incremental financial impact to that. Okay. Thank you. Our next question will come from Gur Talpaz with Stifel. Hi, guys. This is actually Chris Speros on for Gur. For Nikesh, you noted earlier that Demisto was performing ahead of plan. Can you talk about the dynamics behind what's driving this outperformance? Yeah. Look, I think, the whole automation use case is resonating with our customers, where they are building Data Lakes, they are looking at their SIMs, but they are realizing they are getting a huge barrage of alerts as they deploy more and more cybersecurity solutions into either the enterprise and the cloud. And Demisto is turning out to be the versatile automation tool with the number of indications it has of all security vendors out there. So we are seeing traction. Our core team is able to explain it, sell it across the Board. As I mentioned, that approximately 30-plus percent of our core sales team is selling Cortex, which includes Demisto. So it's really the expanded go-to-market, the expanded capabilities that the new Demisto product has. It's really driving that, and of course, the good product market fit out there. Great. That's awesome and one for, Kathy, if I may. With more large Prisma deal starting to close, can you walk us through the relative economics of a Prisma deal versus a traditional appliance deal? Yeah. Prisma Access and the functionality that it provides is typically slightly higher -- somewhat higher price than a typical firewall sales that we would see. Of course, depending upon the firewall and the number of attach subscriptions over time over a five-year period, which is the typical life cycle of a firewall, we would expect to see more revenue from the Prisma Access deal. Our next question will come from Patrick Colville with Arete Research. Thank you for taking my question. Kathy, you mentioned earlier on the call that DSOs had risen five days year-on-year. I mean is the product issue anything related to the change in DSOs. I mean are those things correlated or they separate? No. There's really no correlation there. Okay. Understood. And then, can I just switch over to SD-WAN, because that's an area that we are getting a lot of incoming on both from investors and CISOs. So you have mentioned that Palo is going to release appliances with SD-WAN functionality built in. So If I understand correctly, right now the devices don't have SD-WAN, but that's in the roadmap, is that correct? And I mean, can you give us a rough timeline for that or at this early stage? Yeah. So a couple of weeks ago at our EMEA Ignite Conference, we announced SD-WAN and we plan to deliver SD-WAN across all three form factors, so hardware, virtual and Prisma Access around the mid-December time frame, so next month. Good. Thank you for answering the questions. Our next question will come from Brian Essex with Goldman Sachs. Great. Good afternoon. Thank you for taking the question. Maybe a couple for Nikesh, I guess, one would be, as you target products for the developer environment. To what extent are your customers already integrated development with security and is that an evolution that still has to come? I am going to let Lee answer that question since he's been sitting here with not a whole lot to, he is doing the stuff. Can you repeat the question? Oh! You were listening. How many of the customers have integrated security into DevOps? Oh! Look, in the cloud, there's a whole movement towards call shift left, which is really focused on integrating the security process and functionality and posture as close to the point of development as possible. So that by the time an application is running in production in the cloud, all of the security is already there and was developed as part of the application. This was something that Twistlock and container security was very focused on. It's a very common practice within container development to have the shift left mentality and as we look to this going forward, we see it becoming a bigger part of cloud security practice. Got it. That's helpful. And maybe just a follow-up -- jump on this one who whoever wants to kind of grab it, but you have done quite a bit of M&A over the past couple of years, what percentage of your sales force would you say is fully ramped on selling the entire suite or is there still some progress that needs to happen there in terms of getting everyone kind of up to speed and fully productive? Yeah. And as I mentioned earlier, approximately 39% of our core sales team is selling Cortex, our Cortex suite of product and approximately 25% is selling our Prisma suite of products. Of course, there is a lot of room for us to go from 40% to more and more of our sales team being able to sell these products. But having said that, many of these products have been in play only for about six months, so we have -- -- a few thousand people out there in the field and it takes a while to get them all comfortable, up to speed, being able to sell it. Not only that, we have lots of partners out there, and part of our efforts are not just to motivate and create our team, but also to make sure our partners fully understand our capabilities and are able to sell. So, yes, we can make more progress, but, again, very excited about the progress we have made so far with the new product categories. Got it. Very helpful. Thank you very much. Our final question will come from Michael Turits with Raymond James. Hey, guys. Thanks. I will squeeze two in quickly. One, Nikesh, in Prisma Access, are you seeing primarily Zscaler or is it a wider field, including people like maybe Fortinet with carriers, Netskope, iboss, et cetera? And then, Kathy, how fast do you expect that you can get the product growth back to the kind of levels that we are expecting it to trend at? So in terms of your first part of the question, Prisma Access we will be seeing out there. Prisma Access is part of a network transformation decision that the customer makes and depending on how their current network operates and what they want to make it look like going into the cloud, there can be hardware-based solutions or software based solutions. And depending on whether it's a smaller footprint of larger data centers versus a larger footprint of smaller branches or remote users, the architectures can vary. So you can solve this problem with different architects and different products. But we -- from our stand, I can tell you that, our software-based solution, our software-based approach and our security-first approach is resonating with them because as it goes to cloud, the security is getting distributed and they want to make sure that as they start accessing mission-critical applications straight into the cloud or back to the data centers, that security is a priority. So we are seeing traction in that space. I am sure there are many other vendors out there who have different solutions, which are adapted to their product portfolio. And in terms of product growth, we don't guide product specifically, but you can tell from the guidance that we have given both for Q2 and for the full year looking at typical trends that we have seen in the past in terms of product as a percent of the total. You can -- I am sure back into what we are expecting for product are pretty closely. Yeah. So before I close, I want to thank everybody again for joining us today, and I wish you and your families a very safe and Happy Thanksgiving. And we look forward to seeing many of you in the upcoming weeks at some of our investor conferences. I also want to thank our customers, our partners and employees around the world. Have a wonderful evening. That will conclude today's conference call. Thank you for your participation. You may now disconnect.

News: Companies News
Site: companies.einnews.com

News: Entrepreneur, Latest Articles
Site: www.entrepreneur.com

June 29, 2021 8 min read This story originally appeared on StockNews As the economy ramps up in its fast-paced recovery, we think cyclical stocks The Gap (GPS), Danaos (DAC), and CONSOL Energy (CEIX) are well-positioned to thrive. Given the economic tailwinds and strong fundamentals, our proprietary POWR Ratings system has recently upgraded these three stocks to 'Buy.' Read on for some details as to why. Cyclical stocks are making waves, driven by the fast-paced economic recovery. Robust consumer spending and job growth have been driving cyclical industries, such as retail and transportation, which have been seeing solid demand lately. And as the economy continues to recover, we think companies operating in cyclical industries should witness further growth. The AtlantaFed expects real U.S. GDP growth to range from 8.3% to 13.7% in the second quarter, which should bode well for cyclical industries. Given this backdrop, we think fundamentally sound cyclical names The Gap, Inc. (GPS), Danaos Corporation (DAC), and CONSOL Energy Inc. (CEIX) could deliver solid returns in the coming months. Also, these stocks have been recently upgraded to Buy in our proprietary POWR Ratings system. The Gap, Inc. (GPS) GPS is a San Francisco-based international apparel retail company that offers casual apparel, accessories, and personal care products for men, women, and children under the Gap, Banana Republic, Old Navy, Athleta, and Intermix brands. The company offers its products through company-operated stores, franchise stores, websites, third-party arrangements, and catalogs. As of March 04, 2021, the company had 3,100 company-operated stores and 615 franchise stores. On May 26, GPS and Walmart Inc. (WMT) announced a strategic partnership to introduce Gap Home, a new brand of home essentials available exclusively at WMT. WMT's scale and GPS' brand heritage, brought together through this launch, should encourage customers to shop for quality designs and timeless home essentials for their everyday lives. The partnership is expected to generate good sales in the near-term because it allows GPS to introduce this new home brand category in a smart, scalable way. GPS entered a new, long-term credit card program agreements with Barclays and Mastercard on April 13. Barclays will become the exclusive issuer of GPS' co-branded and private label credit card program in the U.S. beginning in May 2022, and Mastercard will be the exclusive payment network across GPS' brands. Through these partnerships, GPS' iconic brands will continue to offer a suite of industry-leading credit card products, anchored in a digital and physical shopping experience, as part of a reimagined rewards program. During its fiscal first quarter, ended May 1, 2021, GPS' net sales increased 89.4% year-over-year to $3.99 billion. The company's gross profit came in at $1.63 billion, up 508.2% from the prior-year period. Its operating income is reported at $240 million, compared to a $1.24 billion loss in the prior-year period. GPS' net income came in at $166 million for the quarter, compared to a $932 million loss in the year-ago period. Its EPS is reported at $0.43, compared to a $2.51 loss per share in the prior-year period. The company had cash, cash equivalents and restricted cash of $2.10 billion as of May 31, 2021. A $0.43 consensus EPS estimate for the next quarter, ending October 31, 2021, represents a 72.2% improvement from the prior-year period. GPS surpassed the Street's EPS estimates in three of the trailing four quarters. The $4.19 billion consensus revenue estimate for the next quarter represents a 4.9% rise from the prior-year period. The stock's EPS is expected to grow at a 4.9% rate over the next five years. GPS has climbed 234.6% over the past year and 108.7% over the past nine months. It closed yesterday's trading session at $32.66. GPS' strong fundamentals are reflected in its POWR Ratings. The POWR Ratings are calculated by considering 118 different factors, with the weighting of each optimized to improve overall performance. The stock has an overall A rating, which translates to Strong Buy in our proprietary ratings system. The stock was upgraded from Buy to Strong Buy on June 25, 2021. The stock has an A grade for Momentum, and a B grade for Growth, Value, Sentiment, and Quality. To see more of GPS' component grades, click here. GPS is ranked #11 of 65 stocks in the A-rated Fashion & Luxury industry. Click here to checkout our Retail Industry Report for 2021 Danaos Corporation (DAC) Headquartered in Greece, DAC provides marine and seaborne transportation services internationally. The company owns and operates containerships and charters its vessels to liner companies. As of February 28, 2021, it had a fleet of 65 containerships aggregating 403,793 twenty-foot equivalent units in capacity. On May 11, 2021, DAC announced the implementation of a dividend reinvestment plan that offers its stockholders the opportunity to purchase additional shares by having their cash dividends automatically reinvested in DAC common stock. Initiating a regular quarterly payment of $0.50 per share for its fiscal first quarter, this dividend reinvestment plan is likely to create more capital for the company to use. DAC's operating revenues came in at $132.12 million for its fiscal first quarter, ended March 31, 2021, which represents a 24.4% year-over-year rise. The company's income from operations is reported at $57.61 million, up 32.7% from the prior-year period. While its adjusted net income increased 74.3% year-over-year to $58.01 million, its adjusted EPS increased 111.2% year-over-year to $2.83. As of March 31, 2021, the company had $362.51 million in cash, cash equivalents and restricted cash. Analysts expect DAC's EPS to improve 78.4% year-over-year to $3.05 for the current quarter, ending June 30, 2021. The stock surpassed consensus EPS estimates in three of the trailing four quarters. Its revenue is expected to improve 21.8% year-over-year for the current quarter to $142.30 million. Analysts expect the stock's EPS to grow at 3% per annum over the next five years. DAC has gained 1956.1% over the past year and 1184.7% over the past nine months. It closed yesterday's trading session at $76.65. It's no surprise that DAC has an overall B rating, which translates to Buy in our POWR Ratings system. It was upgraded from Neutral to Buy on June 25, 2021. The stock has a B grade for Quality and Momentum. In addition to the POWR Ratings grades we've just highlighted, we also provide Growth, Value, Stability, and Sentiment grades for DAC, which you can find here. DAC is ranked #8 of 48 stocks in the Shipping industry. CONSOL Energy Inc. (CEIX) CEIX produces and exports bituminous coal. It operates through the Pennsylvania Mining Complex segment, which consists of the mining, preparation, and marketing of thermal coal, sold primarily to power generators. It focuses on the extraction and preparation of coal in the Appalachian basin. As of December 31, 2020, the company had 657.90 million tons of proven and probable coal reserves at PAMC. On March 31, 2021, CEIX priced $75 million of tax-exempt solid waste disposal revenue bonds to be issued through the Pennsylvania Economic Development Financing Authority (PEDFA). The bond proceeds will be used to finance the expansion of the coal refuse disposal areas at the company's Bailey Preparation Plant in Pennsylvania, which will support current and future mining at the Pennsylvania Mining Complex. The project also highlights its continued environmental commitments. For its fiscal quarter, ended March 31, 2021, CEIX's revenues were $342.15 million, which represents a 17.5% improvement year-over-year. The company's pre-tax earnings have been reported at $31.59 million, up 620.7% from the prior-year period. Its comprehensive income increased 807.3% year-over-year to $30.18 million. Its EPS increased 733.3% year-over-year to $0.75. The company had cash, cash equivalents and restricted cash of $91.48 million, as of March 31, 2021. Analysts expect CEIX's EPS to improve 143.5% year-over-year for the current quarter, ending June 30, 2021, to $0.30. It surpassed the Street's EPS estimates in three of the trailing four quarters. The $290.15 million consensus revenue estimate for the current quarter represents a 92.5% rise from the prior-year period. CEIX has gained 238% over the past year and 269% over the past nine months. It closed yesterday's trading session at $17.27. CEIX's POWR Ratings reflect this promising outlook. The stock has an overall A rating, which translates to Strong Buy in our proprietary ratings system. The stock was upgraded from Buy to Strong Buy on June 25, 2021. The stock has an A grade for Momentum, and a B grade for Growth, Value, Sentiment, and Quality. We have also graded CEIX for Stability. Click here to access all CEIX's ratings. CEIX is ranked #3 of 94 stocks in the Energy - Oil & Gas industry. Note that CEIX is one of the few stocks handpicked by our Chief Growth Strategist, Jaimini Desai, currently in the POWR Growth portfolio. Learn more here. GPS shares were trading at $32.77 per share on Tuesday afternoon, up $0.11 (+0.34%). Year-to-date, GPS has gained 63.62%, versus a 15.22% rise in the benchmark S&P 500 index during the same period. About the Author: Sweta Vijayan Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She's passionate about educating investors, so that they may find success in the stock market. More... The postappeared first on

News: Companies News
Site: companies.einnews.com

Ladies and gentlemen, thank you for standing by and welcome to Tencent 2019 Fourth Quarter and Annual Results Announcement Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker host today, Ms. Jane Yip. Thank you. Please go ahead ma'am. Thank you. Good evening. Welcome to our 2019 fourth quarter and annual results conference call. I'm Jane Yip from the IR team of Tencent. Before we start the presentation, we would like to remind you that it includes forward-looking statements, which are underlined by a number of risks and uncertainties, and may not be realized in the future for various reasons. Information about general market conditions is coming from a variety of sources outside of Tencent. This presentation also contains some unaudited non-IFRS financial measures that should be considered in addition to, but not as a substitute for, measures of the company's financial performance prepared in accordance with IFRS. Non-IFRS measures formerly referred as non-GAAP measures are intended to reflect our core earnings by excluding certain one-time or non-cash items. For a detailed discussion of risk factors and non-IFRS measures, please refer to our disclosure documents on the IR section of our website. Let me introduce the management team on the call tonight. Our Chairman and CEO, Pony Ma, will kick-off with a short overview. President, Martin Lau, will discuss the strategic review. Chief Strategy Officer, James Mitchell, will speak to the business review; and Chief Financial Officer, John Lo, will conclude with financial review, before we open the floor for questions. I'll now turn the call over to Pony. Thank you, Jane. Good evening, everyone. Thank you for joining us. During 2019, we reinforced our leadership in Consumer Internet and extended our presence in Industrial Internet, while sustaining healthy operating and financial metrics. Let me update you on our key achievements in our four strategic areas. In social, Weixin ecosystem became increasingly vibrant and better connected users with services; annual transaction volume via Mini Programs crossed RMB800 billion. As it's related to QQ, we branded the product with enhanced chat features and friend recommendation, as well as expanded entertainment use cases via Mini Programs, increasing QQ's popularity among young generation. In online games, we extended our China leadership, while expanding internationally via popular games, including PUBG Mobile, Brawl Stars and Call of Duty Mobile. Our international revenue rose to 23% of online game revenue in the fourth quarter of 2019. In content and advertising, video subscriptions exceeded 100 million milestone in the year. We innovated our business model and increased operating efficiency of our long-term video business, significantly reducing its 2019 operating loss to below RMB3 billion, much lower than industry peers. Despite macro headwinds, we achieved robust advertising revenue growth, progressively realizing the long-term potential in Moments and expanding our mobile ad network. In FinTech and business services, average daily commercial payments transactions exceeded 1 billion in the fourth quarter as we deepened penetration among offline merchants. We consistently expanded our market share in cloud with revenue crossing RMB17 billion in 2019; numbers of paying customers surpassed 1 million. Now, let me go through the headline financial numbers, and John will provide more detailed discussion in the financial section. Total revenue was RMB160 billion, up 25% year-on-year and 9% quarter-on-quarter. Quarterly revenue for the first time exceeded RMB100 billion, both including and excluding Supercell contribution. Gross profit was RMB46 billion, up 31% year-on-year and 9% quarter-on-quarter. Our non-IFRS operating profit was RMB30 billion, up 35% year-on-year and 6% quarter-on-quarter. Non-IFRS net profit attributable to equity holders was RMB25.5 billion, up 29% year-on-year and 4% quarter-on-quarter. Moving to platform update, in social, combined MAU of Weixin and WeChat increased 6% year-on-year to 1.165 billion. Smart devices MAU of QQ declined 7.5% year-on-year to 647 million as we proactively cleaned up spamming and bot accounts. In games, we solidified our number one position in China with Peacekeeper Elite's popularity and extended our international success with the launch of Call of Duty Mobile and Teamfight Tactics during the year. In media, music subscription growth accelerated, benefiting from the pay-for-streaming model. In FinTech, we operate the largest mobile payment platform in China by DAU and transaction volumes. In cloud, we continue to outgrow peers with increasing scale and higher operating efficiency. In utilities, we maintained our industry leadership in mobile security, mobile browser and Android app store in China. I will invite Martin to discuss strategy review. Thank you, Pony. And good evening and good morning, everybody. As we headed into the year of 2020, I believe all of us are facing the massive challenges of the coronavirus pandemic, which is profoundly impacting China as well as globally. I'd like to say our hearts go out to the people, the families that are affected, and we hope their conditions will improve and their difficulties will go away soon. Now at Tencent, we rose up to the challenge, and we tried to provide relief and help to people in need in a number of different ways. We established an emergency fund of RMB1.5 billion to prepare and donate medical supplies and equipment, to offer relief, support and sponsor pandemic related programs' development, as well as to sponsor medical research to try to solve this problem. At individual level, our employees volunteer to help deliver donated resources on the ground to the troubled area of Hubei. Thousands of our employees also worked around the clock to develop a number of pandemic related online products to serve over 1 billion users in China. To help efficiently combat the outbreak, our technologies and smart solutions play a crucial role to digitalize public services rapidly, generating over 1,000 related Mini Programs in municipal services, healthcare and education. Leveraging our high DAU platforms, authorities can deliver pandemic related news and timely information, promoting public awareness and educating preventive measures. A reliable and smooth live broadcast system enabled schools to move courses online and helped students to resume their studies. For enterprises, we upgraded our remote working and collaboration solutions to help mitigate interruptions to their business. We also helped retailers to leverage Mini Programs to move online in order to recover sales. Successful retailers have seen their sales through Mini Programs increasing by tenfold, and some even more. For Internet users, our free online courses and rich digital content enriched their leisure time at home. Our communication and social platforms connect users with their friends and family including when they are under quarantine. We believe these efforts fully embody our mission, which is "Value for Users, Tech for Good." Now, the outbreak also presented short-term impacts to some of our businesses, which I would like to summarize for all of you. For mobile payment, offline commercial transactions and revenue declined significantly as many restaurants and stores did not open up the Chinese New Year but volume rebounded quickly after work resumes. During this time, we reduced marketing expenses, and therefore, net-net, we expect limited negative impact of mobile payments on our profitability. For online advertising, despite some advertisers reduced spending during this period, our performance based advertising is sustaining robust year-on-year growth rates, driven by our high ROI, as well as a healthy and diversified advertising mix. For cloud services, there's a short-term negative impact on revenue due to delayed implementation of projects. However, we believe the coronavirus outbreak capitalize to the expansion in industry demand and addressable market for long-term as enterprises embrace digital upgrades. For smart industries, increased adoption by consumers and enterprises led to growth in users and traffic to our WeChat Work, Tencent Meeting, Tencent Health and Tencent Education services. For Mini Programs, as an easy to deploy digitization tool, it is used by many merchants and institutions to move their services online rapidly. Therefore, DAU, daily visits and number of Mini Programs surged, especially in fresh food and grocery delivery services, municipal services, remote working, online healthcare services and online education. For digital entertainment, it is not only an alternative to out-of-home activities, but also help to reduce people's anxiety during such a difficult time. Users are increasing their time spent on a whole range of digital content services, including our online games, video and reading services. We believe challenges are transitory, but user behavior and enterprise mindset change are structural. We are well positioned to accelerate the digitization of industries for the future. So that concludes the discussion focused on the COVID outbreak. Now let's move on to some strategic areas that we are pioneering the industry evolution and also facilitating the digital upgrades. In the area of smart healthcare, leveraging our AI and cloud technologies, we're committed to bringing convenient and professional healthcare services to users and institutions. During the outbreak, our Tencent Health, Tencent Medipedia and Health Code services helped prevent the spread of coronavirus and also acquired a large number of users. First on Tencent Health, it is our all-in-one entry point for online medical services. Over 300 million Weixin users used it as an important access to real time data and information, as well as conduct online consultation. During the outbreak, we launched AI-powered tools to enable users to self diagnose via chatbot. These services and tools were also built into our smart solution, facilitating 40 medical institutions to deliver prompt and timely services to help contain the spread of coronavirus. Second, Tencent Medipedia provides reliable and professional medical information resource covering knowledge graph of over 10,000 diseases. We developed pandemic-related content and distributed via our multiple high traffic platforms such as Weixin and Tencent News, attracting over 600 million page views. We also launched free online consultation to enable access to over 10,000 doctors from our ecosystem partners such as WeDoctor and Doctorwork. Third, Health Code becomes the most used ePass for verifying health and travel history during the outbreak. Leveraging our extensive reach of Weixin and easy-to-use Mini Programs, Health Code rapidly covered 900 million users across more than 300 cities and counties with 8 billion total visits since early February. Now moving on to remote working, which has gained a strong momentum recently as more users and organizations are using remote working as their main type of working. Tencent Meeting which is our dedicated business video conference app has reported over 10 million DAU within two months since launch in last December, and has become the largest standalone app for cloud conferencing in China. In particular, we saw strong demands from business, government and educational sectors, and helped employees work from home and student resume their studies. Our product delivers secure, stable and high definition video experience, leveraging our advanced security, cloud and AI technologies. Users can join meeting via multiple channels across platforms and devices, such as mobile app, Weixin, Mini Programs, PC and phone calls. Our team responded swiftly to customer feedback and upgraded the product frequently releasing 14 versions in the recent 40 days. With infrastructure and sales team support from Tencent Cloud, we're able to enhance Tencent Meeting's performance and efficiency. For WeChat Work, it has become a leading hub for teamwork in China, with millions of enterprises adopting it to resume work and usage surged tenfold recently. Our unique proposition lies in integration with Weixin, which facilitates business, customers' management and sales conversion via Weixin Moments, Mini Programs and Weixin Pay, in addition to providing a collaboration tool for the employees internally. This helped us attract clients and increased engagement. Meanwhile, as we expanded our client base, we encountered differentiated needs from some industries. For example, government and financial institutions prefer private cloud deployment because of the security. Therefore, WeChat Work now can be deployed flexibly on both public and private cloud to cater to different customer needs. Our customers can also select and configure specialized solutions among our rich office tool offerings provided by over 20,000 SaaS providers, allowing tailor made system to better serve business operations. Now moving to Consumer Internet, our mini video app Weishi achieved rapid growth and presented strong momentum, leveraging our social platforms. Using Weishi, users can create and share 30 second videos to Weixin Moments. They can also use Weixin and QQ plug-ins to discover talk-of-the-town videos in a timely basis. These initiatives contributed to the quarter-on-quarter growth of more than 80% in daily active users, and over 70% in daily uploads for the fourth quarter for Weishi. To engage users, we made Weishi attractive and fun by introducing certain innovative and interactive features. For instance, we launched Weishi Challenge, a 30 second challenge for interesting act led by celebrities and imitated then by users. Tens of millions of users participated and upload video to compete with both KOLs and friends during the past half year. We also creatively added red envelope feature in Weishi which can be shared to Weixin and QQ. During the spring festival of 2020, users exchanged 1.6 billion Weishi video red envelopes. We also constantly enhance technologies for content creation, curation and recommendation. We provide AI-powered cameras for Weishi users to lower difficulties in creating content. Our advanced video recognition system accurately tags and classifies the content to be ready for recommendation to users. And by deep learning users' interest graph, the smart recommendation engine is able to facilitate content discovery for them. In terms of content, we leverage our rich in-house IPs to expedite unique content creation by KOLs and MCNs. For example, we allow KOLs and MCNs to repurpose our high quality content from Tencent Video and Tencent Sports to produce clips and highlights for mini video. We encourage star players of Honour of Kings and other Tencent games to share their weekly moments on Weishi. In addition, Weishi and Tencent Animation & Comics also produced popular mini drama series TongLingFei, which was converted into unique mini videos for Weishi by MCNs and KOLs and has attractive large number of video views. Moving on to our online games business, especially on online mobile games. We have made significant breakthroughs in self-developed games for international markets. For example, PUBG Mobile has become the most popular international mobile game in terms of DAU and MAU. Call of Duty Mobile was the largest new launch by downloads and was crowned as the Best Mobile Game of the Year in 2019 by TGA, The Game Awards. Moreover, Supercell's Brawl Stars was one of the best performing original IP mobile titles in 2019. If you look at the global chart we developed 5 of the top 10 most popular international mobile games. The proven success globally demonstrate our accumulated capabilities built up over many years. First, our knowhow in mobile game development. Our in-house studio group Timi and Lightspeed & Quantum representing the highest level of mobile game development capability have delivered authentic PC and console game quality on mobile. Second, advanced technological knowhow. Leveraging our strategic partnership with Epic Games, we have deep technical experience in the industry leading game engine. And our heavy investment in AI and cloud technology over the years ensure a good in-game experience as well as reliable and high speed access to our games. Thirdly, our long-term business cooperation with partners over the years has paved the way for a smooth and in-depth communication, along the topics of IP development, game play design, international user insights, global publishing, as well as operational experiences exchange. Last but not least, expertise in operating large-scale social networks and games. We're experiencing curating social experiences for players to promote their enjoyment and engagement. We also organize top global eSports tournaments to further popularize our games. Going forward, we'll strengthen our technology, service and platform to position ourselves to capture the opportunities from an expanding addressable game market, and long-term digital upgrades in various industries. So with that, I'll pass to James to talk about our business review. Thank you, Martin. Good evening or good morning, everyone. For the fourth quarter of 2019, our total revenue grew 25% year-on-year. VAS represents 50% of our revenue, within which online games 29% and social network is 21%. FinTech and business services represented 28% of total revenue, and online advertising 19%. The Value Added Services segment revenue was RMB52.3 billion in the quarter up 20% year-on-year and up 3% quarter-on-quarter. In social networks, our total VAS subscriptions were 180 million at the end of 2019, up 12% year-on-year. Growth in video and music subscriptions was driven by self-commissioned Chinese animated series, our paid music content library, and bundled subscription offerings. Total video subscriptions were 106 million up 19% year-on-year. Our social network revenue increased 13% year-on-year to RMB22 billion, among which live broadcast services and music subscriptions revenue grew strongly year-on-year. Social network revenue was flat quarter-on-quarter as the seasonal decline in game item sales offset digital content revenue growth. Turning to online games, revenue grew 25% year-on-year, increased 6% quarter-on-quarter to RMB30.3 billion. Non-China markets contributed 23% of our game revenue, benefiting from key titles such as PUBG Mobile and Call of Duty Mobile as well as the consolidation of Supercell. The smartphone games total revenue rose 37% year-on-year to RMB26 billion driven by titles such as Honour of Kings and Peacekeeper Elite, as well as rapid growth in international markets. Sequentially, smartphone games revenue increased 7% as consolidation of Supercell offset soft seasonality in China. The PC client games revenue decreased 7% year-on-year and fell 10% quarter-on-quarter to RMB10.4 billion and users in DnF declined while global revenue from League of Legends increased. Diving into social networks, within our Weixin ecosystem we focused on facilitating service and commerce connections. After the outbreak of COVID-19 we added a dedicated healthcare section within Weixin Pay's Public Service entry point, which is being used by more than 300 million people. We are beta testing live broadcasting Mini Programs and launch tools which enable merchants to increase sales conversion and encourage social sharing of their shows in Mini Programs. For QQ, we enabled AI-based recommendation for stickers and elevated the entertainment experience within QQ Mini Programs. As a result, QQ user engagement increased and daily messages sent per QQ user grew at a mid teens percentage year-on-year and the quarter. We optimized features for QQ school-plus-home groups, which have served over 120 million users since the COVID-19 outbreak began. Schools can attend or students can attend live broadcast curriculum courses and online tutoring programs with leading educational content providers. We offer online classroom management tools for teachers to handle school routines, such as homework assignment. For online games, in China, we enhanced the vitality of our key smartphone game franchises with high quality content updates, such as the inclusion of Auto Chess mode in Honour of Kings, and new gameplay systems for Peacekeeper Elite. For PC client games, a record number of viewers watched League of Legends World Championship in Paris. High end marketing activities and items sales increased League of Legends paying users and revenue quarter-over-quarter. However, Dungeon & Fighter paying users decreased in the fourth quarter due to content challenges. And Martin has already quote out some highlights of our international game business. Moving to online advertising, our total advertising revenue was RMB20.3 billion in the quarter, up 19% year-on-year and up 10% quarter-on-quarter. Our social and others advertising revenue was RMB16.3 billion, up 37% year-on-year and up 11% quarter-on-quarter underpinned by healthy demand from verticals including e-commerce, education and games. We believe our Weixin Moments advertising provides highly attractive ROIs. And we added a 4th ad unit per user day in Weixin Moments during the e-commerce promotional periods in the fourth quarter, which generated positive advertising sell-through and consumer engagement. We permanently implemented the 4th ad load from mid-February. For our mobile ad network, we signed up high traffic media partners such as entertainment and social media services, and added more rewarded video ad inventories. Our mobile ad network revenue more than doubled year-on-year in the quarter, and was the largest contributor to our sequential advertising revenue growth, which we believe testifies to our increasing ad tech capabilities even on non-Tencent sites. Our media advertising revenue for the fourth quarter was RMB4 billion, down 24% year-on-year and up 8% quarter-on-quarter. While we generated less video advertising revenue around NBA basketball games in the fourth quarter, our video and news advertising revenue each increased quarter-on-quarter. Looking at FinTech and business services, revenue was RMB29.9 billion in the fourth quarter, up 39% year-on-year and up 12% quarter-on-quarter. FinTech services revenue grew robust year-on-year and quarter-on-quarter as our platforms and services are increasingly adopted by consumers, merchants and wealth management partners. As Pony mentioned, commercial payments actually recorded a new high with over 1 billion average commercial transactions per day, exceeding the major global card networks and average value per transaction also increased. The wealth management customer base more than doubled year-on-year as we expanded into the mass market and our aggregated customer assets increased over 50% year-on-year. And for lending, WeiLiDai originated loan balances increased. Within business services, our cloud services revenue sustained rapid growth, driven by increased volumes of key contracts and clients. Gross margins improved as we continue to optimize supply chains and expand our business scale. We exceeded 1 million paying cloud customers as we expanded sales teams for different regions and industries and deepened our partnerships with systems integrators. And we enhanced our enterprise software-as-a-service offerings via our first-party products, notably Tencent Meeting and WeChat Work, as well as partnerships with third-party software providers. And I'll now pass to John to discuss the financial metrics. Thank you, James. Hello, everyone. For the fourth quarter of 2019, total revenue was RMB105.8 billion, up 25% year-on-year or 9% quarter-on-quarter. Excluding the impact from consolidating the Supercell consortium group, I'll refer it as Supercell afterwards for simplicity, total revenue would have been 21% year-on-year or 6% quarter-on-quarter. Gross profit was RMB46.1 billion up 31% year-on-year or 9% quarter-on-quarter. Net other gains was RMB3.6 billion compared to a net loss -- other losses of RMB2.1 billion in the fourth quarter of 2018 and up 289% quarter-on-quarter. The year-on-year change was mainly due to non-IFRS items, including one-off expenses relating to share issuance to TME strategic partner in quarter four last year and net fair value gain from certain investee companies. Sequentially, the increase was mainly due to the increase in fair value gains of certain investees which were also non-IFRS adjustments. Operating profit was RMB28.6 billion up 65% year-on-year or 11% quarter-on-quarter. Net finance costs were RMB2.8 billion up 102% year-on-year or 58% quarter-on-quarter. The year-on-year increase was mainly due to greater interest expense resulted from higher amount of indebtedness. Share of losses of associates and joint ventures for the fourth quarter 2019 was RMB1.3 billion compared to share of profits in the fourth quarter of 2018 and the third quarter on a non-IFRS basis. Share of profit decreased from RMB1.9 billion a year ago and RMB2.1 billion a quarter ago to RMB1.3 billion this quarter, partly due to consolidation of Supercell, which was done in associates. Ladies and gentlemen, your speaker is currently experiencing some technical difficulties with the line. Please stand by while we address the situation. Your lines will be placed on musical until the conference resumes. Ladies and gentlemen, thank you all for staying on the line. We will now resume the call. Hi. Let me walk you through non-IFRS financial numbers. For the fourth quarter, operating profit was RMB30.3 billion, up 35% year-on-year or 6% quarter-on-quarter. Net profit after NCI was RMB25.5 billion, up 29% year-on-year or 4% quarter-on-quarter. For the full year of 2019, operating profit was RMB114.6 billion, up 24%. Operating margin was 30.4%, up 0.8 percentage point. Net profit after NCI was RMB94.4 billion, up 22%. Turning to segment gross margin. Gross margin for VAS was 50.1%, down 3.3 percentage points year-on-year or 1.7 percentage quarter-on-quarter. The year-on-year decrease was primarily impacted by continuous revenue mix shift from high margin PC client games to lower margin platform games. The Q-on-Q decrease was mainly due to increased costs from major eSports tournament in the quarter. Gross margin for online advertising was 54.3% up 17.7 percentage points year-on-year or 5 percentage points quarter-on-quarter -- 5.5 percentage points for the quarter. Fourth quarter year-on-year and quarter-on-quarter increases primarily reflected lower content costs for video advertising, as well as revenue mix shift on media advertising to higher margin social and other advertising. Gross margin for FinTech and business services was 28.1% up 3.6 percentage points year-on-year or 0.4 percentage points quarter-on-quarter. The year-on-year increase was mainly driven by revenue mix shift on social payments to higher margin commercial payments. Benefiting from increased loyalty, users were more willing to retain funds in our ecosystems and increasingly utilizing more FinTech services, such as wealth management and micro loan services on our platform. This led to improved margin year-on-year. On operating expenses, selling and marketing expenses were at RMB6.7 billion, up 17% both year-on-year and quarter-on-quarter. The year-on-year increase mainly reflected greater marketing spending on FinTech and cloud services, smartphone games and digital content services. As a percentage of revenues, selling and marketing expense decreased from 6.7% in the fourth quarter of 2018 to 6.3% in the quarter mainly due to the reduction of advertising and promotional expenses as a result of internal initiatives to reduce less effective marketing campaigns. Sequentially, increase in selling and marketing expenses mainly reflect a seasonally higher marketing spending on smartphone games and digital content services, as well as expenses attributable to Supercell commencing this quarter. G&A expense were RMB16 billion up 41% year-on-year or 18% quarter-on-quarter, mainly due to increases in R&D expenses, staff costs as well as expenses attributable to Supercell commencing this quarter. Within G&A, R&D expenses were RMB8.9 billion up 49% year-on-year or 12% quarter-on-quarter. G&A and R&D represented 15.1% and 8.4% of revenues respectively. As at quarter end, we had approximately 53,000 employees up 16% year-on-year or 3% quarter-on-quarter. For the whole year 2019, selling and marketing expenses were RMB21.4 billion down 12% and represented 5.7% of revenues. R&D expenses were at RMB30.4 billion up 32% and represented 8.1% of revenue. Total G&A expenses excluding R&D expenses was RMB23 billion up 24% and represents 6.1% of revenue. Let's take a look at the margin ratios. For the fourth quarter 2019 gross margin was 43.6% up 2.2 percentage point year-on-year or broadly stable quarter-on-quarter. Non-IFRS operating margin was 28.7% up 2.3 percentage points year-on-year or down 0.7 percentage points quarter-on-quarter. Non-IFRS net margin was 25.2% up 1.4 percentage point year-on-year or down 0.6 percentage point quarter-on-quarter. For the full year 2019, gross margin was 44.4%, down 1.1 percentage point. Non-IFRS operating margin was 30.4%, up 0.8 percentage point. Non-IFRS net margin was 25.9% up 0.2 percentage point. For 2019, on IFRS basis, basic EPS was RMB9.856 and diluted EPS was RMB9.643. Non-IFRS basic EPS was RMB9.966 and diluted EPS was RMB9.729. Subject to the approval of shareholders at the Annual General Meeting should be held on 13th of May 2020, we are proposing an annual dividend of HKD1.2 Hong Kong per share payable to shareholders on 29th of May 2020. This represents an increase of [20%] from last year. Finally, I'll now share with you several key financial metrics for the quarter. Total CapEx was RMB16.9 billion an increase of 270% year-on-year and 154% quarter-on-quarter. Within which, operating CapEx almost doubled to RMB7.1 billion mainly due to advanced procurement on servers for business growth in 2020. Non-operating CapEx increased significantly to RMB9.8 billion mainly reflected the land use rights acquired for new project. For 2019, total CapEx was RMB32.4 billion, up 35%. Within which operating CapEx was up 6% year-on-year. As at quarter end, free cash flow was RMB37.9 billion up 27% year-on-year or stable quarter-on-quarter. For 2019 free cash flow was RMB120.3 billion up 37%. Net debt position was RMB15.6 billion. The sequential increase primary reflected payments for M&A initiatives and media and content and consolidation of Supercell's indebtedness, partly offset by strong free cash flow generation. The fair value of shareholdings in listed investee companies excluding subsidiaries was approximately US$60.2 billion at year-end compared to roughly US$50 billion last quarter and roughly US$34.7 billion last year. Thank you. We shall now open the floor for questions. Thank you. And we're sorry for the technical -- the system technical problem that we just encountered. We shall now open the floor for questions. Operator, we will take one main question and one follow-up question each time. Please invite the first question. Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Binnie Wong from HSBC. Please go ahead. My question is on the advertising. We see the revenue from social network actually further reaccelerate to 37% since 2Q. With this reacceleration and also considering the competition, do you see that -- what is the competitive edges in Tencent's ad network versus peers and what are the drivers to propel us into 2020? And then with that, can I also ask a question about the short form video? Given that -- I think in the press release you mentioned that we are in the early stage of a multiyear investment. And you said that experience from overcoming a later start of a long form video give you the confidence. What are the applicable experience you learn and the challenges you see? Thank you. Binnie, thank you for the question. So I think your first question was around social advertising revenue growth and what do we see as competitive advantages. People looking at Tencent from the outside are often at the view that our key competitive advantages -- we have a large amount of traffic for our applications. And that's certainly true. But if you look at the biggest contributors to the quarter-on-quarter revenue growth, it was actually our ad network business which is ads on other people's applications. So I think that speaks to the fact that we're increasingly competitive from a technology perspective because of the investment we've made across the platform. We're obviously very competitive from a targeting perspective, because of the data we aggregate on users. We're also competitive in terms of conversion, specifically conversion from the impression to the transaction. I think that there's many different services in China that can convert traffic impression into a click or even an app download. But because we integrate the advertising platform and the payment platform together, we're actually quite capable of converting the impression into a transaction. And so that's why if you look at the advertiser categories that are doing particularly well for us, it includes businesses like -- activities like e-commerce, education and games. And all of which really -- when they're buying ads they're less focused on the impression or even on the app, and still -- they're most focused on the actual and revenue generation. And we think that over the long-term, more and more advertisers will feel the same way. And that will pay more and more to our benefit. So anyway, that's some of the reasons why our ad network business is doing particularly well. More broadly, our social advertising business benefits from all of the factors above, plus the fact that we have roughly 1 billion daily active users across our properties, which is uniquely broad in China, plus the fact that we have content information on our users because we serve them in video, music, newsfeed, literature and so forth, better games, as well as serving them for communication, social and commerce. So, all-in-all, we think that our social ad -- social and other advertising is a very strong portfolio of properties, a very strong technology platform. We've seen particularly good growth, and continuing to see very good growth from segments such as e-commerce, games and education and we believe that we will strongly outperform the market. In terms of Weishi and short video, I would say, if you look at Tencent's history, right, there have been a few products that we came from behind and then we actually became the absolute industry leader. And I would say games is such a category and our news and our payments platform, and most recently, the long form video. And I think in each one of these instances, we have -- first of all, have to build up the capability that's specific to that product vertical. And after that, we can actually start leveraging our unique Tencent resources and capabilities. So in this short video, right, what are our unique Tencent advantages? And I would say -- in the prepared remarks, we have pointed to some of them, including our product innovation, on the product side, integration with our social network that can bring traffic as well as sharing experiences for our users, as well as our longstanding investment in various kinds of content, be it games and long video, and literature or the IP-related content. I think these are all important Tencent advantages that we can bring to bear in the future. And well so far we have been doing that but then in the future we can actually do it even more. But what are the key important vertical expertise that we need to build? I would say, it's mainly the recommending engine for -- the recommendation engine for these kind of short and mini videos, as well as a system that would actually bring in a very large number of content providers, which is somewhat different from the long form video, right, in which you have a small number of very professional providers of content. Now, I think this is something that we have to build over time. I think we have achieved some success. And at the same time, if you look at the recent success of what James talked about, which is our ad tech, right, and that is actually a tech which is very similar to the recommendation engine of mini videos. And if you look at the large number of content providers that we need to manage, so that's actually somewhat similar to the official accounts, as well as Mini Programs that we're curating. So I think we have pockets of expertise in each one of these areas. It's just an important time for us to bring it into the Weishi product and integrate it in such a way that we can actually build up the vertical expertise within that product. And at the same time, start leveraging our unique resources in a more prominent way. So that's why we believe this is a battle that we would definitely continue to play in and we're actually quite confident that over time we'll make a significant headway into that industry. Thank you. Next question please. Your next question comes from the line of Eddie Leung from Bank of America. Please go ahead. Yes. Thank you for taking my question. I wish everyone well. I have a question on your Consumer Internet strategy. So Tencent is developing more use cases about services, so that's pretty obvious, not just about entertainment. So obviously that's a competitive advantage. But on the other hand, it seems like some leading video traffic platforms are entering more and more digital entertainment services. We have seen news about games, literature, music, live broadcast et cetera. So just wonder how would that offset your strategy and perhaps that industry's our cost structure in running digital entertainment? Thanks. Yes, I will take that question. And I think every now and then you would see this kind of news, right. And if you track the evolution of the China in the Internet industry history, this is something that repeats every few years, right? And in each one of the sector that you talk about, there have been many, many players in market, take an example of games, for example, right, where there have been many different players and it's far from being a winners take all market. And so I think it's actually completely fine for different players to want to go into these different verticals. But I think the important thing is actually, what do we do, right? I think what we try to do is actually to be the best-in-class player in each one of these verticals. So, I would take games as an example, right? So games, it has always been a market with many, many different players and Tencent actually came from the very behind and step-by-step now became the leader in the market in China and now expanding our presence all around the world. And I would say, there are a number of things that we have to do right. We have done right in the past and we will continue to do and invest in those areas in the future. And then this includes one, I would say just we have a very strong franchise over some of the most important genres. If you look at mobile as an example, if you look at tactical tournament as an example, these are game genres in which we have an absolute leadership position in and they have essentially become both genre-defining as well as smart social networks for such type of gamers, right? So I think that has a very strong franchise and we will continue to be the innovator in those genres. Secondly, I would say in the game industry, it's about development capability. And development capability rests both within creativity as well as technical knowhow. And I think we have gone pretty deep into describing what are the technical knowhows that we have. And over the years by being successful in different genres, I think we have demonstrated our creativity and I think those are the things that we have to continue to do well and do better on. And thirdly I would say is the relationship that we have with game, IP and game companies around the world. And a lot of the leading game companies are our partners or our investee companies. And these are built over a very, very long-term. And as a result, we can actually work with the other game companies and bring exciting new games in different formats to the market. And I would say we also have a very strong presence in social network and that has a strong synergy with our game business because games by nature -- especially online games, and mobile online games by nature are social networks. So you want to play with your friends or you want to play with your game mate, right? So by having a social network that actually can connect with all your friends as well as new friends from the games, it actually give us a very specific advantage. And I would say finally, we actually have a very strong ancillary ecosystem around games. If you look at eSports, if you look at streaming platforms, all these are places where people discover games and engage with KOLs on games, as well as with their friends. So I would say these are all the advantages that we have and we have invested for a long time in this vertical to be the leader and we'll continue to do better. If we have new comers into the market, it will actually incentivize us to do even better. Our next question comes from the line of John Choi from Daiwa. Please go ahead. My first question is actually on your recent remote working initiative. It seems like we're seeing very strong momentum as you mentioned. How does the management see the long-term [momentum] of revenue? And what current receptiveness from the users when it comes to subscription or billing? And a follow up on the online video content costs for 2020, how does the management view it and how will this impact the profitability? Thank you. What was the product you're referring to when you say it's doing well. The remote working products like Tencent Meeting and WeChat Work. Okay, well. I'll take that question. So, I think we have actually talked quite a bit about this category of products. And I would say, one, the fact that we have actually invested in this category is that, we feel that there is a trend for increasing digitization of various businesses and institutions. This is definitely the future trend. But I think because of the coronavirus pandemic, it actually expedited -- that necessitates that conversion, right? So during the time when nobody goes to work on location, as well as schools are not open, then clearly there's only online solutions that is available for people. I think when the market actually reopens, then a lot of the use cases will shift back to offline but then I think this consumer habit education have already taken place and people would shift a part or retain a part of their usage habit online. So -- and they also discover the efficiency, right? If you don't have to travel two hours to attend one hour of class meeting, maybe that's a better and more efficient way of doing. So, I think this does capitalize our longstanding vision on the trend within a short period of time. Now, with respect to the products that we talked about, right, so we have been building WeChat Work for a while. And I would say WeChat Work is a product which works with established organizations. So if you have a company or you have an organization, if it's a school, then you can adopt that solution and then it can actually help you to do internal collaboration, and you can actually start stacking in other kinds of [star] solutions on to and help that organization to be more online. Now, what we discover as an additional, important and pretty unique feature of our WeChat Work, in addition to just being an internal collaboration tool is that with integration to Weixin, right, it actually allows a lot of the companies not only to engage in internal communication, but also it can become a good CRM tool for them to engage with their consumers over WeChat. So I think that is an additional advantage of WeChat Work. Now, with respect to Tencent Meeting, right, it's a completely different proposition. It's actually very easy to use application, then anybody can form a group and start video conferencing. So, it actually covers use cases in which it -- like people within different organizations can actually convene a meeting very conveniently. So, as a result you can see during the coronavirus, that adoption of Tencent Meeting is actually very high, especially in terms of signup new users. I think for a product like WeChat Work and also a product like Ding Ding, right, you can cater to the internal needs of enterprises and for the enterprises you have already signed up, you actually suddenly can have more activity within those signup accounts. But then for Tencent Meeting, it actually allows people to download the app and immediately be able to connect it to each other. So they cover different use cases, and the both of them are going to be our flagships for enterprise collaboration development for the future. At this point in time, I think we're very focused on market coverage and we're not worried about monetization yet. We felt that it gets a lot of users in the same line of logic that we have been using as Tencent, right, in many, many of our products that we invest initially to get to users, and eventually the monetization would come. On the Tencent Video content cost question, so 2019 was obviously a challenging year for all long form video services, including our own. But we actually feel that we've made substantial efficiency gains. If you look at the full year results out of all of the long form video platforms, we're the leader by revenue. We also lost far less than our peers. Our full year operating loss was under RMB3 billion and that speaks partly to the fact that we have been quite disciplined about content spending. Now, looking forward, we think it remains a growth market. Therefore, we'll continue to invest aggressively and invest more each year in long form video content. One of the reasons we're comfortable doing that is that we're uniquely vertically integrated. A substantial chunk, not only our own drama series but also of our competitors' drama series derives from other companies within the Tencent Group. And it could be intellectual properties based on novels from China literature, it could be drama series that are produced by new classic media. In the fourth quarter of 2019, I think the most popular drama series both on our own platform and on our competing platform was actually both. It was China literature, IP and a new classic media, [T-drama] series. So in a given we are currently the most efficient in the industry, and given we're the most vertically integrated and given we think that the value of content will appreciate over time, we'll continue to invest hopefully intelligently in growing our long form video content portfolio. Perhaps we can take the next question. Our next question comes from the line of Alicia Yap from Citigroup. Please go ahead. A couple of questions. Number one is on the FinTech business, you mentioned it will be negatively impacted by the outbreak. While we believe there are offline transaction is impacted but we also see the increasing online transaction like the smart retail and also the online grocery purchase. That should help to offset the decline in the offline transactions. So I think directionally how serious is the sequential decline of the FinTech transaction. If you could help us frame the magnitude of the impact in the first quarter that will be helpful? And the second question is related to the strong demand on Tencent Meeting and also the WeChat Work. I understand it's a limited opportunity short-term in terms of monetization, but then any big picture outlook that you could help us to think about in terms of the future opportunity, how that would translate our enterprises think about the IP demand, IP operate, and how that will help your cloud and business services growth opportunity in the future years to come. And just quickly on cost component, any spike of these bandwidth we that will be concerned about? Alicia, we will cap it at two questions. So why don't I answer the first question on the FinTech impact? So I think is the heart of your question was, there's a substantial chunk of payment transactions online and therefore that should mitigate the negative impacts from lower offline transactions. So I want to be clear about this. We generate over 1 billion payment transactions per day. That's a gigantic number. It's more than Visa and MasterCard put together. Within that 1 billion plus, there is a number of online transactions, e-commerce transactions, movie ticketing transactions, travel transactions, and so forth. But it's far from a majority. When you're handling 1 billion transactions a day, almost by definition the majority are offline transactions. And so what we saw in February and the early part of March is that there was a very substantial negative impact on offline transactions, both from a supply perspective, meaning that the merchants, particularly the smaller merchants who accept QR code payment were not actually at work and therefore not accepting payment. And then in addition, from the demand side consumers are generally staying at home and so not out and about making payments. As we moved into March, we've seen that festival -- the POS merchants recovered relatively quickly as consumers began to work and began to go out and about again. And then more recently, we've seen the QR code transaction volume also picking up as the small and medium sized merchants returned to work. So we are seeing a recovery. But I want to emphasize that the negative impact in the period after Chinese New Year was quite substantial. Now, when I talk about the negative impact, I'm really talking about the negative impact on revenue. From a profit perspective, A, as Martin mentioned, we optimize marketing and other expenses during the downtime. So the lost revenue was not necessarily flowing through into lost profits. And then B, within our FinTech portfolio, one chunk of the profits flows from the payment business, but another chunk flows from the asset management and lending businesses. And the asset management business, in particular the wealth management has continued to grow at quite a healthy pace. And that's naturally a relatively profit generating business, so more of an impact on revenue than on profits. So on the business solutions, I will answer the three questions. One is, in terms of monetization, there's actually very little monetization at that time with Tencent Meeting and WeChat work. Now, in terms of the future, I think I should dedicate the whole page as well as I talked pretty much at length on what we feel holds in the future, right. We felt basically Tencent Meeting as a great way for people to have across organization business type of video collaboration and video conference versus WeChat for work, host a future for helping internal collaboration for enterprises as well as for consumer facing enterprises to do CRM. So there's actually a very bright future for both applications. And I think we're just at the beginning of this big wave of digital transformation for enterprises and institutions. And finally, because there's no revenue at this point in time, we do carry costs in terms of human capital investment, as well as the bandwidth and especially the bandwidth for Tencent Meeting actually quite a bit because the usage traffic is actually quite a lot. But on the other hand, right, we do have a very strong CDN capability built over the years to optimize the cost associated with this kind of traffic. And to some extent relative to what we spend on content, this is a small amount of money on a relative basis. So that's why we'll take it, and I think it's worthy investment for the future. Next question comes from the line of Thomas Chong from Jefferies. Please go ahead. Thanks management for taking my questions and congratulation on a solid set of results. My question is about the FinTech business, given the coronavirus, can management comment about our strategy in terms of the take rate improvement? Would we actually slow down the take rate improvement to help the merchants to passing through this challenging period? And also on the wealth management side, James just mentioned that it's going healthily. Can we understand about the different wealth management products like insurance, micro lending, money products, how we should think about the product innovations for this year? And a very quick follow-up is on the overseas gaming strategy, given the fact that we have over 20% of the gaming revenue from overseas, what's the long-term goal that we are looking into and our strategies in ramping up the overseas contribution, would be great? Thank you. So in terms of the FinTech business, I think during the coronavirus, we see a lot of the offline businesses that we serve, have seen their business basically shuttered due to the lockdown. So I think what we are trying to do our best at is actually to help alleviate their difficulties. And some of it is basically helping them to try to get some businesses online, right. I think in some cases, some merchants have been able to leverage Mini Programs, as well as other means or even forming a group for example to sell their products online and some of them actually achieved quite encouraging results. And at the same time, I think over time, we'll try to build tools so that merchants can actually manage their operations more efficiently and at the same time try to get more users to do online and offline transactions. So those are going to be the focus for us. We never wanted to run our FinTech payment business based on heavy monetization model, and has never been our vision, right? And what we want to do is actually make it convenient. And at the same time, we try to be able to add value to the people, the merchants we serve. And over time, we're able to get some monetization out of the additional values that we provide. So that's our strategy. Now in terms of wealth management, as you talk about, well, in terms of our FinTech solutions, there's wealth management, there is our loan and consumer loan, micro-loan business. And then over time, we are going to build some more presence in insurance. I think in each one of these services, right, we have always tried to bring some innovations, as well as additional value proposition for our users. I think a big part of it is centered around just reducing the entire customer acquisition cost and engagement cost in the industry. And along the way, right, pass some of the savings back to the consumers. Another broad stroke strategy is in terms of leveraging technologies and our data analytics to get better in terms of risk management, right? So when the risk is actually reduced, again, there's some savings that we can actually create. And that can be shared with the users, as well as with our partners. So I think a lot of the innovations will be around these principles and we actually find a lot of opportunities to have innovation, we can't go through one-by-one. But I think in broad strokes, these are the areas that we find we can add most value on. For our international game strategy, I think Martin spoke about that in some detail in six slides. I'd refer you back to that slide. But I just want to emphasize that ultimately it is kind of product driven business and the best product comes from the best studios. And we believe within the Tencent family now there's a number of really extremely successful studios. Just to pick one at random, if you look at Riot Games, that pipeline, including games like Valorant, including games like Runeterra, including games like Wild Rush, it's been one of the best pipelines of any game studio in the world, and their existing product League of Legends is the biggest and best PC game in the world. But it's not just Riot, it's Timi which has global success with Call of Duty Mobile. It's Quantum that has global success with PUBG Mobile, it's Supercell that has had the recent success with Brawl Stars and other products coming out this year. So, there's a number of elements to the strategy that people sometimes forget the importance we place on the core studio expertise. And the four studios I just mentioned are best-in-class studios globally. So due to the time constraint we have the last question please. Thank you. Last question comes from the line of Gregory Zhao from Barclays. Please go ahead. Hi, good evening management, thanks for taking my question. So just a quick follow-up on the COVID-19. So we think some of your investment companies also see some impacts during the epidemic situation. So just want to understand what kind of support you can provide to these companies. For example, traffic or technology support? Understand the dynamics of entertainment related services such as live streaming, music, literature and long or short video services, and how shall we think about COVID-19's impact and how would that reshape users' long-term behavior? Thank you. So the second question on the long-term impact of -- potential long-term impact of COVID-19 on the digital entertainment industry, clearly people who are under quarantine situation or people who can't go to school or work are spending more time at home and that's unfortunate, but it's unnecessary reality. And when they're at home, there's a number of activities they can partake -- in a limited number of activities they can partake in. And some of those you mentioned, including music, watching films, watching short video content, playing games. Therefore, see increased usage. Now as and when the COVID-19 situation normalizes, then one would expect people to venture out-of-home and participate more in out-of-home activities once again. But I think that said even with the SARS crisis, which was on a much lesser scale, there was clearly a structural change in consumer behavior where pre-SARS compared to post-SARS people spent more time on digital entertainment. And that may again be the case here. But I want to emphasize that from our perspective that's probably the lesser structural change. The greatest structural change will be enterprises recognizing the importance of remote working and recognize the importance of being able to stay in contact with their consumers, even if their storefronts offline or closed. And that's why it's so important for us that we invest the money and invest time in really making enterprise facing apps, be all that they can be and we gave the example of the Tencent Meeting, video conference service that's enjoyed spectacular growth. And that's partly because it's in the right place at the right time and serving a real need. But that's also partly because I think we rushed out 14 updates in 40 days, which is incredibly fast in update pace for any app and difficult to get through the app stores actually. So anyway, we think that there will be some temporary changes in consumer behavior, revert to normal relatively quickly, but there will also be some structural changes to consumer and especially enterprise behavior that will be longer lasting. On your first question, it took me a little bit to think about it. Because certainly, I have to say, we actually work with our investee companies and providing the support throughout their lifecycle. And there are all kinds of different technologies and management expertise, as well as traffic and product cooperations that we actually do with them during normal times. So our support for them has always been sort of ongoing. But in relation to the pandemic right now, I actually felt we have not provided any specific support to our investee companies. And the reason I think about it is basically I think all of our investee companies are actually best-in-class companies in their own right. And instead of asking for help, I think they're offering help. So all of us during this difficult time actually not think about what incrementally we can do better for ourselves, but more thinking about how we can do to help the general society. So I have to say, I can think about our investee companies basically spending their effort in trying in their own industries provide support to their business partners or their users or government entities that need help. In a way the people who need help are not our investee companies, it's actually the general public. And I think I'm proud to say a lot of our investee companies have rise to that challenge and dedicate their resources to help them and play an important role in fighting against the coronavirus. Thank you and we are closing the call now. If you wish to check out our press release and other financial information, please visit the IR section of our company website at www.tencent.com. A replay of this webcast will also be available. Once again, we apologize for the disruption caused by the system technical problems for tonight. And we hope everybody stay healthy. Look forward to connecting with you again next quarter. Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

ICON Public Limited Company (NASDAQ:ICLR) Q1 2019 Earnings Conference Call May 2, 2019 10:00 AM ET Ladies and gentlemen, thank you for standing by, and welcome to ICON plc Q1 results 2019. [Operator Instructions] I must also advice you the call is being recorded today Thursday, the 2nd of May, 2019. I would now like to turn the conference over to your first speaker today, Jonathan Curtain. Please go ahead. Thanks, Steve. Good day, ladies and gentlemen. Thank you for joining us on this call covering the quarter ended March 31, 2019. Also on the call today, we have our CEO, Dr. Steve Cutler; and our CFO, Mr. Brendan Brennan. I would like to note that this call is webcast and there are slides available to download on our website to accompany today's call. Certain statements in today's call will be forward-looking statements. Actual results may differ materially from those stated or implied by forward-looking statements due to risks and uncertainties associated with the company's business, and listeners are cautioned that forward-looking statements are not guarantees of future performance. The company's filings with the Securities and Exchange Commission discuss the risks and uncertainties associated with the company's business. The presentation includes selected non-GAAP financial measures. While non-GAAP financial measures are superior to or a substitute for the comparable GAAP measures, we believe certain non-GAAP information is more useful to investors for historical comparison purposes. [Operator Instructions] I would now like to hand over the call to our CFO, Mr. Brendan Brennan. Thank you, Jonathan. From January 1, 2018, the revenue recognition standard, ASC 606 became effective for ICON. Consequently, current and prior year period comments made by both Steve and I incorporate the impact of this revenue standard. From this quarter going forward, all business win and backlog-related financial measures will comprise of both direct fee and pass-through components. Quarter 1, we achieved gross business wins of $1.04 billion and recorded $156 million worth of cancellations. Consequently, the net awards in the quarter were $885 million resulting in a strong net book-to-bill of 1.31. With the addition of these new awards, our backlog grew to $7.9 billion. This represents a year-on-year increase of 10.5%. Our top customer represents 9.1% of this backlog, down from 12.2% up to March 31, 2018. Revenue in quarter 1 was $674.9 million. This represents year-on-year growth of 8.8% or 11.1% on a constant currency basis. On a constant dollar organic basis, year-on-year revenue growth was 10.6%. For the quarter, our top customer represented 14.8% of revenue compared to 10.6% in the prior year. We expect revenue concentration from our top customer to remain in line with our previously stated guidance of 11% to 13% of revenue for the full year. Rolled outside, our top customer on a trailing 12-month basis remained robust. Our top five customers represented 39.9% compared to 37.1% last year. Our top 10 represented 53.1% compared to 53% last year, while our top 25 customers represented 71.6% compared to 71.9% last year. Gross margin for the quarter was 29.5% compared to 29.4% in quarter 4 and 30.6% in the comparable quarter last year. We continue to leverage our goal of business support model. And as a result, SG&A was 12.1% of revenue in the quarter. This compared to 12.2% last quarter and 13% in the comparable period last year. Operating income for the quarter was $101.9 million, a margin of 15.1%. This compared to 15% last quarter and 14.8% in the comparable quarter last year. The net interest expense for the quarter was $1.6 million, and the effective tax rate was 12%. Net income for the quarter was $88.3 million, a margin of 13.1%, equating to diluted earnings per share of $1.63. This compares to earnings per share of $1.62 in quarter 4 and at $1.42 in the comparable quarter last year, an increase of 14.8%. On a comparative non-GAAP basis, day sales outstanding were 59 days at March 31, 2019, with 57 days at the end of December 2018. Cash generated from operating activities for the quarter was $94.6 million. During the quarter, the group completed the purchase of MolecularMD for $42.3 million with capital expenditure of $7 million and $25 million worth of stock was repurchased at an average price of $124.84. At March 31, 2019 the company had net cash of $128.6 million compared to net cash of $106.5 million at December 31, 2018, and net cash of $4.6 million at March 31, 2018. With all that said, I'd now like to hand over call to Steve. Thank you, Brendan, and good day, to everyone. Quarter 1 was another positive quarter for ICON and an encouraging start to 2019. The strong market demand for CRO services seen in 2018 has continued this year and driven by our differentiated patient site and data strategy, operational quality and strong therapeutic capabilities, we continue to see an increased rate of opportunities over the last 12 months, resulting in robust business wins across all customer segments this quarter. In quarter 1, we booked strong levels of gross and net awards of $1.04 billion and $885 million representing book-to-bills of 1.54 and 1.31, respectively. Consequently, we grew our backlog year-over-year by 11% to nearly $8 billion, with revenues expanding to $675 million on an 11% constant currency basis. In addition to this growth, by continuing to focus on margin efficiencies and SG&A leverage, we increased our earnings per share by 15% from $1.42 last year to $1.63. Both new and existing customers are seeking to benefit from ICON's patient site and data solutions. This strategy increases the predictability and speed of enrollment while enhancing patient retention and improving data quality. We continue to develop the potential of PMG and our health care alliances, and during the quarter, we successfully randomized 28% of ICON's U.S. patients through these networks, up from 25% in 2018. Furthermore, we see evidence that our PMG network and health care alliance sites provide an average recruitment benefit of 150% that of independent sites in the same trial. Recent data analysis of our trials has also shown that the use of our FIRECREST portal also improves patient screening and enrollment rates as well as reducing data queries. Metrics like this provide us with confidence, and there are significant long-term benefits to the strategy and we believe that further improvements in performance are likely. Moving forward, the expansion at our site network in North America and especially in Europe will be a key area of focus for us from an M&A perspective. In unison, the combination of ICON's data analytics expertise and access to research-grade patient data are helping us address complex clinical development challenges in the planning and implementation stages of trials. We continue to see the benefits of our innovative partnerships with TriNetX, Transmit and Practice Fusion. Our access to patient recruits through Transmit continues to improve. The consortium now covers over 2.2 million lives across all disease areas, although oncology is a specific area of focus, with access to over 750,000 oncology patients, up from 500,000 last quarter. And they're heading to 1 million patients with 390 oncologists in over 200 health care locations, which include community practices, hospitals and academic medical centers. In addition, in early April, we saw the acquisition of EHR4CR by TriNetX, thus creating the world's largest clinical research network with more than 330 million patients. In the same way the ICON was one of the adopters of TriNetX, we have also been involved in the creation and use of EHR4CR. And we are excited about the opportunities that leverage this combined platform going forward. These data sources used alongside our OneSearch data platform and in conjunction with our site network creates specific intangible benefits by helping to enhance engagement with sites, patients and health care providers, enrolling trials faster, reducing the number of non-performing sites, improving data quality and increasing the predictability of success. All of this helps to take significant time and cost out of our customers' development programs. Our cash flow and balance sheet remained strong and ready to be deployed as the right opportunities present. We remain focused on our string of pearls acquisition strategy, and in conjunction, we'll continue to look to repurchase stock opportunistically over the remainder of the year. During our quarter, we repurchased $25 million worth of shares at an average price of $124.84. And in quarter 2 to date, we have repurchased a further $7.6 million worth of shares at an average price of $129.91. As we look forward with optimism, I want to take this opportunity to update our full year guidance. We expect 2019 revenue to increase to a range of $2.76 billion to $2.84 billion, an increase of 6.3% to 9.4%; and earnings to increase to a range of $6.75 to $6.95, an increase of 10.8% to 14.1%. Before moving to Q&A, I'd like to thank the entire ICON team for all their hard work and commitment during the quarter. It was very pleasing to see that for the third consecutive year, ICON has been named as the top ranked CRO in Forbes Magazine's America's Best Employers list for 2019. I would also like to take this opportunity to mention all those who contributed towards ICON's success at the recent CRO Leadership Awards. Congratulations to all the recipient teams involved. Thank you, everyone, and we're now ready for questions. [Operator Instructions] The first question we have today comes from Juan Avendano from Bank of America. Please go ahead. Congratulations on the quarter and on the almost 11% organic revenue growth. I believe over the last three quarters that ICON has been actually the only large public clinical CRO to consistently deliver at least high single-digit organic growth. I think there is always a lot of focus and market share speculations on the net book-to-bills. But I think that in organic revenue growth, that's where the rubber actually meets the road. So on this point, Steve, can you give us your thoughts on the net book-to-bill metrics now that you have also migrated towards, including pass-throughs? How subjective is net book-to-bill reporting? And what can we take from it reliably going forward? Okay. Thanks, Juan, for the question. I think as we've been fairly vocal over, well, a number of years now around the inherent unreliability of the book-to-bill metrics and I could probably talk for days about that, I think including pass-through cost now probably makes that even worse, so makes it even more unreliable. So it's not a great metric, but it is a metric, of course, that the industry accepts and the industry uses. We've reported ours at 1.31. We take a fairly conservative view on the book-to-bill metric. But we're also pleased with the way – with what that's indicating in terms of the amount of work we've been able to win it on a direct fee net business win basis, we were up in sort of vicinity of sort of high single digits on a year-on-year basis. So we saw a nice increase in our direct fee basis. So it's sort of taking out the pass-throughs. Now we're typically not reporting that or not going through that because we're asked now to report on a 606 basis, and that's what we tend to do. But our overall, I think, business development performance was very positive. We're very pleased with it. We reported the 1.31. And although as I – I think I've indicated that, that is a metric that, I think, we can all poke some holes in it as we wish. Got it. And a quick follow-up on that. I mean based on our channel checks, several of the larger CROs are gaining share, but this is primarily happening at the expense of the smaller private CROs. I think some people have the notion that a CRO share dynamics is essentially a zero-sum game, only among the top public 4, 5 CROs. So on this point, can you tell us explicitly whether ICON is at least maintaining or gaining share? I think without doubt, we're gaining share. I don't think there's any doubt in my mind that having posted solid book-to-bills now for the last 6 or 8 quarters, we're well in advance of 1.25 and then 1.3. I think we're gaining share, and our revenue is starting to grow nicely. I think that's probably throughout the larger CROs, where probably we're gaining share mainly from the mid-tier and smaller ones. I think some of the partnership opportunities, if you look some of the more recent research, I think, we see the larger pharmas and the partnership opportunities really more – almost always heading towards the larger CROs. And on that basis alone, I think we're gaining share. But I'm very confident that ICON is doing well in the market, particularly against the more midsize and smaller players. Thank you for the clarification. The next question today comes from the line of Robert Jones from Goldman Sachs. I guess just on the revenue mix in the quarter, you guys highlighted clearly a bigger portion of growth, bigger portion of overall revenue from your largest client and what you guys had been trending at and probably what we were expecting. So just curious if you could talk about what drove that shift in the quarter? And I guess related to that, anything on the non-top client performance, obviously, conversely a little bit probably softer than what we were looking for. And then as it relates to that mix just anything related to bookings if you saw a similar trend in bookings in the quarter, it'd be really helpful. Thanks. Sure. Well, I think as you know, Robert, we certainly saw our top customer contribute very significantly to our quarterly growth. And that was really due to a number of programs, fast-learn programs that are ramping and applying very well at the moment. That's what's really driven that. In terms of the revenue growth outside of our top customer, we tend to look back on a more 12-month basis. And if you look – do that on a trailing 12-month basis, the revenue growth is still in the high single digits at around about 9%. So we still see it moving nicely forward. I think you can get – don't want get too carried away with quarterly trends. There can be fairly significant fluctuations within quarters when large programs move forward while other programs complete and finish. So really, I think it's looking at the longer trend, the trailing 12-month trend and avoiding the quarterly fluctuations that gives you a better picture. And we're very confident that the revenue outside of our top customer can continue to grow at the sort of trailing 12-month number that I quoted there. In terms of bookings, the bookings – as – well, let me just tell you. As Brendan said in his comments, in terms of the backlog concentration, 9% for our top customer. We still see revenue staying within 11% to 13% for the ESO. I think what you'll see is it was a fairly – it was a quarter where we had some couple of large programs really move forward fairly fast and that's what contributed to that. Bookings wise, probably a little bit more like return normal service. We got – we had a reasonable level of bookings from our top customer, but it was more in line with the long-term concentration being at around 9% to 10% of our backlog. That's what we would – that's how we would characterize it. So the revenue acceleration or revenue contribution was somewhat unusual in that. It was very much based on some large programs. And we expect the programs and the customer growth outside of that top customer to continue and to accelerate going forward. The next question today comes from the line of Ross Muken from Evercore. So I guess maybe just on the cash flow generation and sort of maybe M&A pipeline front, you guys are now in a notable net cash position. I don't think your desire is to ultimately become a Irish bank. And so I know you've bought some stock, but M&A has, obviously, been relatively muted. I guess what are you seeing in that environment? You, obviously, did a recent small transaction. Is there much consolidation happening? Are you seeing some interest maybe in that on the site side. Just give us a flavor for maybe after what's been a somewhat quite period even for you, can we see maybe a little bit of uptick in activity? Sure, Ross. As you correctly noted, we did close MolecularMD during the quarter. So that was a positive force. And we certainly see some more opportunities along those lines this year and in the reasonably near future. And I certainly guys I alluded to in my comments to be around. Outside network, we're seeing some new good traction with that strategy, and we're anxious and hopeful to make some moves in that space within the next – certainly within the next 12 months. But hopefully, a lot earlier than that. And then, as I said, from a string of pearls point of view, there are some other opportunities. I think, it's the market in terms of M&A has opened up somewhat for the last sort of six months and we have a number of opportunities that are in discussion. They're in the pipeline so to speak, not ready, of course, to announce anything just yet. But we see certainly some – a number of opportunities that fit nicely with our strategy of moving ourselves into the one or two position within the market segment as soon as we can and use the M&A to do that. And those opportunities are certainly out there. So we expect to have some news in that area certainly over the next few months. And then quickly, just maybe on the revenue cadence, I don't think you broke out yet sort of the reimbursable versus the traditional business. I guess anything to be mindful of relative to how some of the pass-throughs, the cadence will work through the year? We've seen a number of players this quarter in the space kind of have mixed results, top line wise, depending on sort of how pass-through timing comes out. Anything to be mindful of? Or do you think it will be a relatively straightforward year? Hi, Ross. So it's Brendan here. I suppose – well, the first thing I'd say is that you're looking at this is all around percentage completion now. All of these projects you need to look at how your total amount of hours in your projects. So I think folks can get a bit overfocused on the investigator fee element of these projects. So you're looking at your total hours completed versus the total value of your project. So that's what – that's how the math works. That's how the revenue recognition works. And with that in mind, it should be around the normal activity on your project. If you could move that forward, you're going to have better percentage completion on that project and you're going to be able to recognize the revenues. So from my perspective, I think we have a couple of a little bit of getting used to this revenue standard. But the cadence should be more even possibly than we've seen in previous years given that we've moved away from that purely invoiced pass-through calls, more towards that total percentage completion on the contract. So I would say that it should become more regularized and less seasonal as we continue on during the course of the year. The next questioner today comes from the line of Stephen Baxter from Wolfe Research. Kind of a nuance one on the growth expanding on Robert's question a little bit. So if I took your top customer out of the top 25, the rest of the top 25 seems relatively flat year-over-year. And then it was really good growth coming from customers outside of the top 25. So I know you don't want to get carried away with one quarter, but I was hoping if you could provide some insight into those trends and whether you might expect to see better growth in the rest of the top 25 throughout the balance of the year. Thanks. I think on a trailing 12-month basis, yes, the growth was slightly different. But I think it's still a pretty good number. On a trailing 12-month basis but not so much quarter-to-quarter. We see plenty of – we won a lot of work from mid – well, as I said, what customers for large pharma, midsized and the biotech. And what we found is, certainly in the biotech segment some of those projects can start and can burn a bit faster. So to the extent that we've been able to be successful in that area, that will help out our growth outside of our top customer. And that's certainly I believe going to be the case as we go forward. So we feel optimistic and very positive about the growth given the revenue, given the backlog mix we have across large pharma, mid and biotechs. And our ability to get those projects up and moving statement. It's a good environment. We feel very positive about it, very constructive about it. We have a number of initiatives. Our patient site data strategy is really gaining some traction. So we believe we're in a good position to better prosecute those projects very well and get that revenue moving. Okay. And as a quick follow-up, cancellations were a bit higher on a dollars basis during the quarter. Is that having to do with the incremental pass-through fees been associated with cancellations? Or were they up on sort of the core basis and if they were, I guess, how we live thinking about reflecting that in your guidance for the balance of the year? You just answered your own question. It's the first part of your answer, Steven. The past-through component of cancellations was what was really driving that dollar value on a dollar basis, without underlying increase in cancellation. The next question today comes from the line of Jack Meehan from Barclays. Please go ahead. Hi. It's Jack. Can you hear me? Yes, we can hear you. We're glad you can. We we're worried… Something overseas with the connection. As a first question, Brendan, I was hoping you just give us a little color on gross margin progression we should be looking for in 2019. And we've seen it come down throughout 2018. Do you think we can – there's a pass-through getting back to closer to 30% or what are some of the investments that you're making on the hiring front? Sure. Yes. We've been active at the hiring front, obviously, in anticipation of the revenue growth that we've guided during the course of this call for the first quarter certainly. That has as you can see as well, sequentially we are up a little bit from Q4 into Q1. So we've managed to balance that hiring with the effective utilization of the organization to manage that. I think that, Jack, we're going to be in a similar ballpark is how I describe the margin profile. In my tip up a little bit or down a little bit from where we are, but I do see any meaningful movements in percentage terms as we go through the course of this year. This is a growth year for us. You've seen, I think, quite impressive revenue growth numbers. And so we're focused on really delivering that revenue growth. And making sure that we have the investment in the organization and the headcount to be able to deliver that growth as we go through the remainder of the year. So I think the margin profile, the gross margin profile, certainly we're happy with in Q1, bit of an uptick from Q4 and similar ballpark as we go through the course of the year. Great. And then, Steve, you talked a little bit in the opening comments that the expansion of the site network and leveraging that. Is there any additional color you can provide around where organically you might be putting some CapEx versus what some targets are that you might be looking for there? I think at this stage, Jack, we're focusing on really leveraging the pace network that came into the PMG's setup last year. And making sure that we can access their capabilities, their capabilities. They are a significant network that give us oncology capabilities. And so we really want to make sure that we are investing. And that it's not much capital investment is more allocating and hiring people to be at those sites to make sure we're accessing the sites and not investigating and making easy as possible. For them to part of our natural to contribute our clinical trial. And that's the main focus. As I mentioned, on the M&A front, we're very focused in that area, and we're expecting and hoping to move forward on – into some opportunities there in the foreseeable future, but that'll be the subject of our future discussions. The next question today comes from the line of Erin Wright from Crédit Suisse. Please go ahead. A couple of follow-ups to that. On the site network relationships, is this really emerging as a true kind of differentiator for you and driving kind of win rate? Is there any sort of metrics you could give us on that front? And you mentioned the investment kind of in that area. Is this all through kind of acquisitions? Is there a small or large acquisitions? I understand I get a sense of sort of size and magnitude of what you're even contemplating here? Thanks. Sure, Erin. Let me take the first one. In terms of terms of differentiator. I believe is it a differentiator, there are – thing this is a multifactorial think. We talk about patient sites and data. There's no one thing that we're doing that's a total differentiator, it's the combination of things. And I think I've said that number of times on this call. Is how we integrate the approach to sites, the patients and, of course, to the data that applies to both of those groups and how we do that, the algorithms we use, the data sources we use, how effective we are at executing on those and starting, that's the sort of the secret sauce. There's no one individual component there. And so we want to expand our site network. We want to be able to have more sites that we have people in that we can get absolute commitment from and get that additional, as I said, as I spoke about that better performance from. But that's just one component of it. So the differentiation as l said comes from integration and the execution, the strong personal execution across those three components. In terms of investment, you know yourself that there are not large transformational opportunities in the M&A field in this area. They tend to be smaller ones, and so we inevitably as we move forward, we tend to be looking at smaller sites, I mean smaller site networks and being able to bring those in and integrate them. DuPage is a good example. Anything else we do will also be relatively small and will be integrated within our PMG network. So that's the sort of focus we're placing on it from a investment point of view. Obviously, geographically, it's probably the main difference. There we'd like to build a global network or certainly a network in North America and Europe. That would be our focus and use anything we found in Europe is a beachhead to build-out further opportunities and possibly acquire further networks. What sort of deal spend in dollars would you consider relatively small? Curious. I'll let Brendan have a go at that one. In terms of – sorry, is your question in terms of the revenue contribution or the compensation that we are... Like deal spend, just in terms of the incremental investor capital associated with acquisitions? Incremental investor capital associated with acquisitions. So – yes, okay, I would say anything under $50 million of a consideration, I'll consider small from that perspective. If you're asking about what the additional capital consideration is post acquisition, we tend to spend a couple of million dollars usually on IT infrastructures to improve some of our acquisitions. I think that's what maybe you're getting at. The next question today comes from the line of Dan Leonard from Deutsche Bank. Please go ahead. One of your competitors this morning flagged increased cost consciousness at large pharma due to discussions in the media around Medicare for all drug pricing discussions, those types of things. Can you comment on what you're seeing – are you seeing the headlines influence your large pharma customer base to any meaningful degree? Dan, I can't say that come up specifically. We will found out large pharma and there are small pharma customer's pretty cost-conscious quite frankly, no particularly news there. There've been under some pressure and I guess, potential pressure from a pricing point of view to some years now. So I can say it's a new. But I don't think I would certainly wouldn't flag at. It's something because an additional consideration or something that's impacted on our pricing approaches or margins at this point. Okay. And just a quick follow-up, is it – maybe I missed this earlier, but did you quantify the benefit from MolecularMD revenue, the contribution in the quarter? Or is it possible you could do that? Well, I did call out, Dan, the organic and non-organic numbers in terms of constant currency. So what we said was our absolute revenue growth year-over-year is 8.8%, constant currency, so including MMD with 11.1%. But excluding MMD on a similar or constant currency basis, it was 10.6%. So in usual form, I'll let you guys do the hard work in coming up with the math. The next question today comes from the line of John Kreger from William Blair. Please go ahead. Steve, how is your DOCS staffing business going? Are you seeing that grow more or less than the consolidated numbers that you've given us today? John, I'd say on a trailing 12-month basis, that's – certainly, the business is strong. Full – fastest would be our two, three full service business and our lab business, I would say. They – those performed very well. The DOCS business made a very solid contribution to our overall business, but I would say the growth of it would be perhaps slightly below our two, three full service business. Great. Great. And then you've talked about the site management business a lot. Can you just sort of maybe clarify a bit more how that drives the traditional core CRO business? Is this access to patients? Is it access to data? Maybe it's all of the above. And when you affiliate with a site, do you continue to kind of offer them up to clients for projects where ICON isn't involved? Sure. So the site management business is really – we really focus that around obviously our two, three business. To some extent, they're at early phase, but really, it's around two, three. It contributed in a number of ways. One is in terms of starting upsides, the ability to – we have MSAs. We have contracts with the sites. The ability to get the sites up and running is significantly faster. So we get more recruitment time at these sites. They're also – they also have their own staff so every patient who walks in the door is a candidate for a clinical trial and they disproportionately go into our trial. So as I said, we talk about our average, about 150%. So about a factor of 1.5 against the independent sites on the same trial. So they enroll faster. They screen faster. We found evidence – we were still collecting data, of course, but we found evidence that the quality, the number of queries that we have to answer is lower. And so the quality of the data is better. That also goes along with our FIRECREST portal as well. It contributes there. So the site network, it's pretty simple, John. It comes up. They get up and running faster and they recruit faster. And the quality of the data is generally better, in other words have less activity, less work required to clean the database. The PMG sites are available to other, particularly, pharma customers. That's the way it tends to work. But increasingly, we are taking the majority of their capacity. I would say – put it that way because we are preferentially placing trials there and getting that benefit. So while we don't say it's not – you're not available to others, we do particularly focus, as I say, on our own trials and make sure we maximize the benefit for our two, three business. Very helpful. And Brendan, a question on your cost structure side. What are you seeing currently in terms of staff turnover? And are you seeing any pickup in wage inflation as you try to manage that? Thanks, John. We are seeing, I suppose – we really are very good as an organization at staff retention. It's been pretty good consistent over the years. So I think we do a decent job there. So we certainly haven't seen any out of the norm elevation in turnover, but there are always pockets of different staff elements where you need – there's always a crunch in terms of – in certain geographies. You'll always get in certain different roles. You'll always get an element of salary inflation. We manage it broadly as an organization. We are 14,000 people across the world. So when you do see pockets of it, it is there just to add pockets and we still manage to manage our overall cost base. And we target somewhere to be in the region of 3% inflation on a salary basis on an annual basis. And that's what we managed to and have managed to manage to and continue to do that over the course of 2019. The next question today comes from the line of David Windley from Jefferies. Please go ahead. In the last – I guess in the few months – maybe think about year-to-date, your comment about demand trends particularly among smaller biotechs have, I think, fluctuated around maybe some modest slowing or softening, flattening but still a fairly robust environment. And Steve, I think your comments today sound fairly positive. Should I interpret that as a continuation of a strong environment and, maybe overly interpreting the prior comments, still negative? Or has it, in fact, improved in recent weeks or months? Probably neither, Dave. I think we were – we came out and we were – basically, what we said was we didn't think the extraordinary funding environment was going to continue forever. That's what we said. And I don't – I still think that's not – that, that will be the case. Having said that, the environment continues to be strong. We've certainly felt it continuing to be strong and we benefited from that. And we still see very strong – we see RFP values up in the biotech space certainly in the high single – mid- to high single digits. So that would indicate to us it's strong. But I think increasingly, we should be a little careful about worrying about funding itself although, of course, that's important. But the fact is that there are a number of smaller and emerging biotech companies, yes, that – who are very well funded now, who have a lot of cash on their balance sheets and are ready to deploy that really over the next few years. And so I think overall, the environment for us as providers to those companies is a very solid one. The – and importantly and I think it isn't something of a change in the clinical development landscape, we're seeing those companies want to take their products and their drugs right through to registration. I think I saw something the other day about 2/3 of patents are filed by emerging biotech but they're now actually filing about half of those drugs. So we can all look back five, 10 years and say they'd go to proof-of-concept and then they'd sort of partner up or outsource or get out of it. These days, we see these companies with much greater ambition than that and wanting to take their compounds through. And as I said, their projects, we tend to have more ability to get involved with. Our people enjoy working on those projects because they have more input in them, and they also tend to burn a bit faster as well because they award them, I suppose, later on when they're certain of funding and certain of the protocols. So I think the development landscape is changing with the biotech. As I said, a number of companies out there with a lot of money to spend, the funding environment is still positive. Now whether it's going to continue to raise money at the levels they've been raising over the last three, four, five years, I don't know. But really, I'm not sure that, that matters. It continues to be strong and they've got a lot of money to spend. So I think we're in for – I think that way is going to continue for some time and we're certainly benefiting from that. Appreciate that. A lot of perspective there. I want to pivot a little bit to some help on mix. I guess first of all, kind of on accounting, I think maybe midyear, earlier last year, we were getting used to 606, there was still an expectation that 2019 would see some provision of, like, the reimbursed costs in the P&L separate from service fee, direct cost. And I'm not seeing that. So wondering if that's something that your auditors have told you not to do. And then kind of related that, how should we think about the mix of pass-through cost in bookings versus in revenue and how that's going to influence margin? Most of what I hear you say today is very smooth, like these metrics must not be changing very much, but it seems like they certainly have the potential to. So if you could help there, I'd appreciate it. Yes. I'll give it a crack, Dave, at those particular prayer points. I mean first off, when we think about revenue, the law of the land is 606, god knows. We didn't particularly want to go down this road, but that's the revenue number we have. Splitting out pass-through cost was something we've discussed an awful lot in the organization. And we did feel that we needed to rip the bandage off and move to 606 revenue. And that's what we've done in terms of our book to backlog and booking as we go through the course of the year to stop the temptation of trying to fall back to the old revenue numbers. We decided that, that was the correct force of action, and we did that as an organization. So I wouldn't just put that down to the auditors. In terms of the mix of bookings, yes, that's – it's a solid question. We're very happy this quarter in terms of our mix, in terms of our pass-through and our direct fee elements that it can support the revenue forecast and indeed the revenue guidance that we put out today. So that's – and it will be – like any business wins, it will be not smooth. It will be lumpy, but over the – I suppose over a trailing 12-month period, some of that lumpiness should smooth out. So I imagine that as we see it and as we look at the past year, those lumps they might see from a quarter-to-quarter basis will probably smooth out in terms of the pass-through elements as we go through the year. Steve, do you want to add to that? I don't have anything else for that. I'm not surprise Steve wants to stay away from 606. Thank you. I mean at the end of the day, Dave, we're complying with what the accounting standards are and we have to do that from an SEC point of view. So it is what it is. I'm sorry. We can – we're as frustrated, we think, as you are sometimes, but that's the way it has to be. The next question today comes from the line of Tycho Peterson from JPMorgan. Please go ahead. This is Tejas on for Tycho. Just to – I'm sorry about this, but just to continue on that pass-through point, one of your peers this week called out a headwind in pass-throughs, which led to some sort of top line headwind, but they actually pointed that as being a positive because it means there's more projects than the start-up phase. So on that point, I just wanted to get a sense, if you're willing to provide it, just directionally, how are reimbursable expenses as a percent of total revenues trending for you over the last three to four quarters? Are they going up? Or are they going down? And is there anything meaningful to discern from that trend? I don't think – I mean coming right to the point, the proportions of our revenue, then you've seen it in the past that our pass-through represents – have been fairly consistent. That's fairly consistent as an industry over time. So nothing has magically changed as we've moved into this. So those proportionalities have – they really depend on the study and the number of investigator appointments that are during the course of the study. So it's much more of a therapeutic mix. But as I say, if we – if you assume consistent therapeutic mix, the percentage that we've seen as an industry are not dissimilar if you go back a couple of years and you compare different CROs. So again, there's nothing that – you might see little movements from quarter to quarter, but over the longer term, I think this again smooths out of it. I think the other thing I'd add is while you have a greater preponderance of FSP work within a company, you're likely to have a lower proportion of pass-through cost but that – and you know the company. You have large proportions of FSP work. You can work out what that could be. And as that flows through and as that – I mean from a company-to-company basis, that would be different. But really, it doesn't change too much, I think, if you – on the – in the fullness of time. Got it. And then one quick follow-up for you Brendan. DSO ticks up once again even versus the elevated levels last quarter. And I know you talked about sort of elongated cash collection and extended credit forms and so on. Do you have any sort of perspective to share on how that metric will trend over the remainder of this year? My CEO is telling me to say down. I – we're certainly going to be working on decreasing that DSO as we go through the course of the year. We have a number of action items with certain of our customers. We have seen, as time has gone by, contractual terms elongating and also billing milestones being further apart as part of our contractual negotiations as well, both of which has – have a negative impact on DSO. But I think we're – we did say that it may extend quite a lot last quarter. It didn't extend too much from where we were this quarter, two days obviously to the negative, but certainly, the focus is on moving that down during the course of 2019. And I think we were very pleased with the cash collection that happened during the quarter as well to offset that. So we do expect and we do – we are planning and we do have a number of initiatives in place to move that DSO number down. Challenging, of course, that is, given the elongation of the projects that we have. The next question today comes from Eric Coldwell from Baird. Please go ahead. Thank you. Nice job this quarter. I think you've been grilled sufficiently and I will cede the floor to someone. [Operator Instructions] The next question comes from the line of Sandy Draper from SunTrust. I'm not going to be quite as nice as Eric. I'm not going to grill you, but Steve, maybe – look, a lot of focus on sort of near-term stuff. Maybe pull out your crystal ball. There's been a lot of talk – or I've been hearing a lot of talk around AI, big data, et cetera primarily from the technology vendors. I'm just trying to get a sense from you. You guys have invested a lot of technology. You've got technology partners. When you think about the opportunity for AI and data, I mean to me, it seems like it's three to five, maybe five to 10 years out over that time period. It's not going to happen in 2019 and 2020. But I'm just – when you have conversations with your customers, are they sort of – did they ever bring it up in sales? Did they talk about it and say, "Yes, we're going to do it in several years?" Or did something like that had to come from you guys? I'm just trying to think about how all of this is going to start to flow through the industry. Sure. Thanks, Sandy. I put it – as I think you know and I think we've been fairly, fairly fulsome over the last, I suppose, six to 12 months, in terms of RPA, the robotic side of this, we're moving along a number of opportunities there or around our – within our finance group, within our invoicing group, within our operations group. So that train has kind of left the station. That's not AI. I understand that. But as I look at it, it's kind of the first step along that pathway. We then move into – more on the machine learning side of things where we're starting to apply algorithms to data and we're starting to do that as we select sties. We're doing – we have a number of initiatives in that front and the AI stuff, where we're really taking data and looking at that and making conclusions that that's a world beyond just the sort of a machine-learning-type algorithm. I think – I would certainly say it's several years away in terms of a really practical application. People will talk about it. People would say they're doing it, but I think it's more of an RPA and machine learning sort of approach than it is real AI, Sandy. And so I think we're a little bit away to that. We certainly talk about it with our customers and they talk about what they're doing with it. There's a lot of talk and not a whole lot of action at the moment. We remain open to it and so in some of the partners. In terms of the data companies we're looking at, we're looking at how we're looking at big data and what sort of algorithms we can apply and what sort of machine learning, RPA and AI-type approaches we can use. And it's really around prediction, looking at sites who's going to be able to recruit the best, who's going to be able to contribute the most, what sort of data quality are they and developing. And that's all fairly much in its early stages from our perspective. But we remain anxious to play with it, to look at opportunity because I certainly think that in three to five years' time, there'll be a lot of this around, but we're some way away, I would say, from real, practical application at this point. And the final question today comes from the line of Dan Brennan from UBS. Please go ahead. So Steve, I wanted to go back to – Erin had a question earlier on your data strategy, where you spent a lot of time highlighting the site network and access to data assets and the impact on enrollments and things of that sort. Did you speak to, to what extent you're having success directly with this approach with clients, anything on win rates or anything of the sort? No. We didn't – I didn't, yes, specifically address that, Dan. There were certainly some – a number of our customers who are – who were very engaged in that – in our approach on that front and have bought into that and we have been successful in selling projects and delivering projects, certainly increasing. We're now able to deliver projects in that space. So as I said on my – in my comments, we are getting significant engagement from customers. We've got, I think as you all appreciate, more to do in that area. We've been looking to develop that site network, but we are really, I believe, getting some strong traction on the site network place and then playing – and seeing some metrics come through in terms of performance. And that's really what we have to do because to sell that to customers, we have to provide good metrics. All our customers are smart. They are already entitled people. They understand. It's – we can all talk about this stuff but they want to see performance. They want to see enrollment rates. They want to see screening rates. And we're now increasingly able to provide that sort of information to them. And to that extent, they are really engaging significantly in that. We want to develop our oncology network. That's a very important part of our force. But certainly, in the non-oncology area, we've made – I'd say we have a lot of progress over the last 12 months and the data that we're able to generate now from that network is playing very well with customers. Great. And then maybe just as a follow-up or an unrelated follow-up, I know earlier in the call, there was a question on the trends outside of your top client. And obviously, you kind of want to take a trailing 12-month view just to reduce that inherent volatility. But it has been two quarters in a row that the growth has been kind of – a kind of a step down from high single, low double down to this kind of mid-single-digit growth around that. So is there anything unusual to point out with the two quarters in a row? Or is it just more of the nature to your point that you have taken a long-term view on this? Thank you. Dan, I really think it is more taking the longer-term view on it. The trailing 12 months is around 9%. We see that continuing on that basis. As I said, we're optimistic on the progress of those customers outside our backlog, and our net win rate with those customers has been strong. And so we – and we want to cross the statement. So I do see there's no particular issue there. There's a little bit of quarter-to-quarter fluctuation for two quarters, but I do think if you take a longer view, we'll come out of it. I'm very positive. It's unlikely, of course, that you'll see our top customer continue with that at the rate, but I do think other will come up and fill that gap and we'll be able to continue at the sort of growth rates that we're projecting and that we've outlined in our update guidance. There are no further questions. Please continue. Okay. Well, thank you, everyone, for listening in today. And we're very pleased that quarter 1 was another strong quarter for ICON, and we look forward to building on this progress throughout 2019 as we consolidate our position as the CRO partner of choice in drug development. Thank you, everyone.

News: All Articles on Seeking Alpha
Site: seekingalpha.com

Eloxx Pharmaceuticals, Inc. (NASDAQ:ELOX) Q4 2018 Earnings Conference Call March 8, 2019 8:00 AM ET Good morning, everyone, and welcome to Eloxx Pharmaceuticals' Fourth Quarter and Full Year 2018 Earnings Webcast and Conference Call. Today's call is being recorded. At this time, I would like to turn the call over to Barbara Ryan, Eloxx' Investor Relations Officer. Please begin. Welcome, and thank you for joining us this morning for a review of Eloxx Pharmaceuticals' fourth quarter and full year 2018's financial results and business update. Joining me this morning are Robert Ward, Chairman and Chief Executive Officer of Eloxx Pharmaceuticals; Dr. Greg Williams, our Chief Operating Officer; David Snow, our Chief Business Officer; Greg Weaver, Chief Financial Officer; and Dr. Matthew Goddeeris, Director of Research. Before we begin, I'd like to remind you that any statements made during this call that are not historical are considered to be forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those indicated by these statements as a result of various important factors, including those discussed in the risk factors section in our most recent annual report on Form 10-K filed with the Securities and Exchange Commission and our other reports filed with the SEC. Any forward-looking statements represent our views as of today March 8, 2019, only. A replay of this call will be available on the company's website, www.eloxxpharma.com. I would now like to turn the call over to Robert Ward, Chairman and Chief Executive Officer of Eloxx Pharmaceuticals. Thank you, Barbara, and welcome to Eloxx' Fourth Quarter and Full Year 2018 Earnings Webcast and Conference Call. We've continued to make substantial progress at Eloxx and are pleased to have attracted experienced leaders who ensure that we advance our lead investigational compound, ELX-02, in cystic fibrosis, and our new inherited retinal disease program on budget and on time. Today, we're pleased to report broad progress in cystic fibrosis with new organoid data showing activity for ELX-02 in an expanded range of cystic fibrosis genotypes, provide a discussion of our participation in the cystic fibrosis foundation read-through workshop, share the latest on the European HIT-CF project as well as our plans to expand our clinical development activity to sites in the United States. Please recall that our clinical trial application for ELX-02 for cystic fibrosis has been approved by the Federal Agency for Medicines and Health Products in Belgium, and our Phase II program has been given a high-priority ranking by the European Cystic Fibrosis Society Clinical Trials Network. In January, the results of our single-ascending dose, or SAD study, were published in the Journal of Clinical Pharmacology, and we're pleased that there have been no dose-limiting toxicities or serious adverse events reported in the program to date. We've initiated the sixth cohort of our multiple-ascending dose study and plan to initiate the next and final cohort here in the U.S. We reported at the North American Cystic Fibrosis meeting last year that ELX showed a dose-proportional increase in Messenger RNA and cystic fibrosis patient-derived organoids are studied at the HUB. The consistency of the response of ELX-02 in cystic fibrosis patient-derived organoids has shaped our approach to clinical trial design, where we will focus initially on patients bearing 1 or 2 copies of the G542X nonsense mutation on the CFTR lials. We expect to initiate a Phase II clinical trial in cystic fibrosis patients with the G542X CFTR mutation, which is the second most common mutation globally and accounts for about 5% of the cystic fibrosis patients. We're on track to report top line data from Phase II in 2019. Today, I'm also pleased to announce that we've generated new data which extends the activity of ELX-02 to a range of additional genotypes. We believe that the cystic fibrosis patient-derived organoid translational research model provides key insights for both clinical trial design and for use in personalized medicine. Earlier this year, Eloxx participated in the U.S. Cystic Fibrosis Foundation-sponsored read-through workshop that brought together scientific leaders from around the world to discuss potential solutions for developing treatments for patients with nonsense mutations. We're pleased to be the most advanced company tackling the great challenge of developing new therapies for nonsense mutations. Last week, we announced our participation in HIT-CF, a European Union-funded preclinical and clinical research program, evaluating the efficacy and safety of several disease-modifying drug candidates in cystic fibrosis patients with rare genetic mutations. Our lead investigational drug candidate, ELX-02, will be evaluated in CF patients with nonsense mutations for whom there are few available treatment options. The goal of the HIT-CF European project is to investigate whether a positive response to therapies in patient-derived organoids can be predictive of clinical response in a controlled trial. We believe this project will expand the use of organoid response data to the drug approval, label expansion and both treatment and reimbursement decision-making processes. Later in the call, David Snow, our Chief Business Officer, will discuss HIT-CF in more detail. We're looking forward to the March 2019 European Cystic Fibrosis Basic Science meeting. Eloxx will be presenting for the first time important new data on ELX-02 activity in restoring the CFTR protein. We will be hosting a webcast to discuss this important new data after the scientific conference presentation has taken place. We continue to progress our ocular program and pleased to announce that we have expanded our senior leadership with the addition of Dr. Susan Schneider as our Senior Vice President and Global Leader in ophthalmology. In addition to leading the development team, Dr. Schneider will be responsible for strategic clinical oversight and the advancement of our inherited retinal disease programs across our library of eukaryotic ribosomal selective glycosides or ERSGs. She has extensive experience leading the clinical development and strategic planning efforts from a range of ocular indications at leading companies, including most recently serving as Chief Medical Officer at ThromboGenics; Vice President and Therapeutic Head, Glaucoma and Retina as well as wet AMD at Allergan; as well as leadership roles in ophthalmology at GlaxoSmithKline, Bausch & Lomb and Genentech. We've been advancing several new investigational product candidates from our library into IND-enabling studies in ophthalmology. The currently available data for several of our molecules is already demonstrated positive activity on nonsensitive mutations across different inherited retinal disorders as well as the favorable safety profile. The preservation of the electroretinogram wave function and retinal histology are important safety considerations, and the preclinical data today shows that our investigational agents have acceptable safety profiles. We believe that these data will support the use of these compounds for intravitreal injection, with an initial development focusing on Usher syndrome. On May 2, at the 2019 ARVO Meeting, Eloxx will present a new data on the activity of ELX-03. Late last year, we announced that we've entered into a wide-ranging partnership with Foundation Fighting Blindness. And just this past week, we have the opportunity to present as part of the FFB Investing in Cures Summit, an important meeting that brings together patients, advocates, researchers and treating physicians. Given the estimated 4,000 individuals in the U.S. alone with nonsense mutations as part of their underlying Usher syndrome, the Foundation Fighting Blindness recognizes the urgency in developing new treatments and specific ways that can support our efforts to accelerate these programs. We look forward to our continued engagement with FFB and appreciate their support. In our call today, our Chief Operating Officer, Dr. Greg Williams, will provide further updates on our clinical and manufacturing progress. We ended the year with $48.6 million in cash and cash equivalents, which does not include an additional net proceeds of $14.8 million from a debt financing in January. We're well funded to advance our clinical programs and deliver top line data in cystic fibrosis in 2019. Our talented and highly experienced team is committed to our mission of bringing safe and effective medicines to patients who need them as quickly as possible. You should expect that we'll continue to attract and add key talent to make sure we deliver on our clinical and corporate milestones. At this time, I'd like to ask Dr. Matt Goddeeris to discuss some new data that's been published in Cell Reports generated on patient-derived organoids at the HUB, showing the high correlation between FIS swelling and organoids and measures of FEV1 in the clinic for drugs already approved for use in the treatment of cystic fibrosis. Thank you, Bob. As we previously discussed, Eloxx has been collaborating with the HUB, a nonprofit organization associated with the Hubrecht Institute on a series of studies using CF patient-derived organoids in a swelling assay, which is broadly used in CF as a translational model in understanding how different cystic fibrosis mutations respond to ELX-02. As Bob mentioned, at the North American Cystic Fibrosis Conference in Denver last October, we shared new data in the organoid assay that demonstrated ELX-02-mediated dose-dependent increases in both CFTR function as measured by the FIS assay and an increase in CFTR Messenger RNA as measured by nanoString, restoring it levels equivalent to wild-type controls. This finding is consistent with the reduction in nonsense-mediated decay, which is anticipated to go hand-in-hand with translational read-through. ELX-02 is the first investigational compound to show these beneficial effects in organoids derived from cystic fibrosis patients with nonsense mutations. It is particularly important to highlight the recent publication in Cell Reports authored by the HUB in collaboration with leading academic experts in organoid technology, demonstrating the high correlation of patient-derived organoid FIS responses to both the sweat chloride and FEV1 change observed in the very same cystic fibrosis patients treated in a variety of pivotal trials. This data included trials of approved CF drugs, such as the potentiator ivacaftor alone or in combination with the corrector lumacaftor as well as genistein and curcumin. In the study, the authors demonstrate that a positive FIS response in organs above 2,000 significantly correlates to a positive improvement in FEV1. These data are just the latest report for why the organoid model system is actively being used to evaluate compound responses across the wide landscape of CF genotypes in order to pair the right patients with the best therapeutic for their genotype. When we consider the experimental results of ELX-02 across a variety of nonsense-bearing organoids, we are encouraged by the reproducible and concentration-dependent FIS response above 2,000 for the majority of the organoid data points collected thus far and an FIS response above 4,000 for nearly half the data sets. These data support the potential for ELX-02 to provide a meaningful change in sweat chloride in FEV1. Since our report at the North American Cystic Fibrosis meeting last fall, we have continued basic scientific research to support the ELX-02 program. Next month at the European Cystic Fibrosis Basic Science meeting, we will share our results on the ability of ELX-02 to restore production of this CFTR protein. We believe the consistency of the data demonstrating ELX-02-mediated increases in CFTR and RNA function in animal models and organoids and now the new protein data establish a solid scientific data set demonstrating the ability of ELX-02 to read through premature stop codons in patients with nonsense mutations to restore essential functional protein. After release of our data at the scientific conference, we will host a webcast to discuss these new findings. In identifying patient populations for clinical trial activity, organoids enable us to screen a variety of genotype 3 ELX-02 responsiveness. We are preparing manuscript that compiles our expanding organoid data set. These data follow the organoid response from a growing number of patient-derived organoids, which represent multiple nonsense mutations across a variety of genotypes. For example, today, we can share that we have recently collected promising new data, demonstrating a concentration-dependent response of R553X and E60X nonsense mutations. This is exciting to our team as the data expands our support for ELX-02 activity to the top 5 nonsense mutations in the CF population, which cover over 75% of nonsense-bearing CF patients. We believe that the totality of these data and the substantial response observed in the G542X cystic fibrosis patient organoids derisks our Phase II clinical trial design focusing on patients with G542X mutation and supports our expectation that additional CF nonsense genotype beyond G542X will be responsive to ELX-02. I would now like to turn the call back over to Bob. Thank you, Dr. Goddeeris. I'd now like to ask Dr. Greg Williams to share an update on our clinical program for ELX-02 in cystic fibrosis and our inherited retinal disease development efforts. Thank you, Bob. I'm pleased to have the opportunity to provide you with an update on our development programs for ELX-02 and our pipeline. As Bob mentioned, the results of our completed Phase 1 SAD study were published in the Journal of Clinical Pharmacology in January, and the emerging profiles supports our continuing development program. We previously announced that we were adding additional cohorts to the MAD study to evaluate different drug concentrations. And I'm pleased to report that we've initiated the sixth cohort of the MAD study and expect to complete the final cohort here in the U.S. in the first half of this year. We will then submit the results for scientific presentation or publication in 2019. Following completion of the MAD study, we plan to initiate a Phase II clinical trial in cystic fibrosis and reach top line data this year. Our clinical trial application has been approved, and the ELX-02 has been granted orphan drug designation by the European Medicines Agency. In our phase II CF trial, we will be evaluating changes in sweat chloride at multiple-ascending doses of ELX-02, which is consistent with other successful Phase II programs for approved drugs as the traditional biomarker measuring CFTR activity. Our planned Phase II clinical trial in cystic fibrosis will enroll no more than 24 patients with the most prevalent nonsense CFTR mutation, G542X, on at least 1 lial. Protocol calls for multiple increasing doses of ELX-02 in order to identify an optimal dose to carry into further development, and the study will be posted on clinicaltrials.gov. We expect to report for Phase II top line clinical trial results in cystic fibrosis in 2019. To support our full Phase II clinical trial program, we have completed the manufacturing of our lyophilized clinical drug product. We've also identified a commercial manufacture and are engaged in the process development work to scale up activities required to support Phase III clinical development. Regarding our pipeline. We have 170 compounds in our library and have completed screening on 30 of the most active read-through agents in this series. Eloxx holds global rights and has extensive patent portfolio with long life on composition of matter and used for all these compounds. In the ocular program, we currently have multiple compounds progressing in our IND-enabling studies, and our data demonstrated positive activity on nonsense mutations in inherited retinal disorders with a favorable safety profile. It's important to note that data for 6 different molecules from our library have been published by academic labs and show activity in a variety of ocular disorders, and we are intending to focus on Usher syndrome. We are particularly pleased with the emerging tolerability profile of the Eloxx investigational agents, which have preserved the electroretinogram or ERG waveforms and retinal histology at concentrations where aminoglycosides commonly show ERG wave attenuation or ablation. The ERG measuring electrical activity associated with nerve function within the retina and preservation of the ERG waveform is an important safety consideration. Over the past several months, the scientific team at Eloxx has submitted five additional scientific articles for future publication in scientific journals and has received acceptance for two abstracts to be presented at upcoming scientific meetings. We've had our first ophthalmology abstract accepted for presentation at the Association for Research in Vision and Ophthalmology, or ARVO Meeting, which occurs from April 28 through May 2 in Vancouver. The abstract is titled: "ELX-03, a translational nonsense mutation read-through agent demonstrates tolerability and activity for use in inherited retinal disorders." ARVO is the largest meeting of eye and vision researchers in the world with over 11,000 attendees from 75 countries. Another abstract has been accepted for poster presentation at the European Cystic Fibrosis Society Basic Science meeting from March 27 to 30th titled: "CFTR protein detection in organoids from healthy and CF patients with nonsense mutations support using the organoid model to test ELX-02-mediated CFTR read-through restoration." I look forward to keeping you apprised of our continued progress this year as we complete the MAD study and report top line results from our Phase II study for ELX-02 in cystic fibrosis and advance our ocular programs. I'd now like to turn the call back over to Bob. Thank you, Greg. I'd now like to ask David Snow, our Chief Business Officer, to provide an update on our patient advocacy and business development activities. Thank you, Bob. We continue to expand our patient advocacy work across key program areas and just returned from the Foundation Fighting Blindness Investing in Cures Summit, where Bob presented in his session highlighting therapeutic innovation within inherited retinal diseases. We'll provide greater information about FFB collaboration activities and our Usher program after Dr. Schneider joins our team. Next week, I'll be presenting as part of the panel discussion on commercializing rare disease therapeutics at the upcoming Life Sciences Patient Congress in Philadelphia. We're also very pleased to have added Dr. Kristie Kapinas to our advocacy team. Kristie has deep experience in cystic fibrosis working as a medical science liaison and disease educator. We recently participated in a Cystic Fibrosis Foundation sponsored translational read-through workshop, and we're continuing to engage with CFF on our clinical programs. I look forward to providing additional updates on progress with key cystic fibrosis advocacy groups in the near future. We recently announced that Eloxx has joined the HIT-CF project, a European Union-funded preclinical and clinical research program evaluating the efficacy and safety of several disease-modifying drug candidates in cystic fibrosis patients with rare genetic mutations. The goal of the European HIT-CF project is to investigate whether a positive response to therapies in a patient-derived organoid can be predictive of clinical response in a controlled trial. The project represents a new era in cystic fibrosis treatment and personalized medicine as it has the potential to shift therapeutic trials from the patients to the laboratory. The organoid model could be extended to all patients with CF and other rare genetic diseases to identify appropriate therapeutic options. HIT-CF is already received a number of biopsies and will collect data from over 500 cystic fibrosis patients. Our participation means that CF patients with rare nonsense mutations, who often represent the most severe and underserved phenotypes, will also be included. We believe the results of HIT-CF may fundamentally change rare disease treatment by enabling the use of organoid response data as a regulatory path for drug approval or label expansion as well as for reimbursement decisions. Finally, we continue to be actively engaged in the business development discussions focused on expanding opportunities for our library of molecules in multiple areas of unmet need, where nonsense mutations play an important role. I'll now turn the call back over the Bob. Thank you, David. I'd now like to ask Greg Weaver, our Chief Financial Officer, to provide an update of our financial results for the full year and fourth quarter of 2018. Thanks, Bob. As of December 31, 2018, the company had total cash and equivalents of $48.6 million, which does not include $14.8 million in net proceeds received from a debt financing transaction completed in January of 2019. We expect the company's total cash and equivalents, including the net debt proceeds, will fund the company's operations through top line data in cystic fibrosis and into the second quarter of 2020 based on our current operating plans. For the year ended December 31, 2018, the company incurred a net loss of $47.2 million or $1.45 per share as compared to a net loss of $23.6 million or $4.75 per share for the year ended 2017. For your modeling purposes, total fully diluted shares outstanding at December 31, 2018, was 35.9 million. The increase in year-over-year net loss was driven largely by the effect of noncash stock-based compensation expense, which totaled $13.4 million in 2018. R&D expenses were $20.5 million for the year ended December 31, 2018, compared to $16.4 million for the year ended 2017 and an increase of $4.1 million, again, due primarily to noncash compensation of $1.7 million, along with growth in clinical development cost, CMC, preclinical development and R&D professional fees. General and administrative expenses were $27.1 million for the year ended December 31, 2018, compared to $4 million for the year ended 2017, an increase of $23.1 million. The increase in G&A expense was related to noncash stock comp of $11.6 million along with increases in G&A salaries, other personnel-related cost, professional services related to becoming publicly listed company. For the three months ended December 31, 2018, the company had a net loss of $14.0 million or $0.40 a share compared to $11.4 million or $0.52 a share for the fourth quarter of 2017. The year-over-year increase in net loss was driven by the effect of the noncash stock-based comp expense, which totaled $3.8 million in the 2018 period. Fourth quarter 2018 R&D expense totaled $6.5 million as compared to $8.2 million for the same period 2017, which includes $0.8 million in noncash stock comp for the 2018 period. Quarter-to-quarter fluctuations were due to normal timing of R&D activities. G&A expense for the fourth quarter 2018 was $7.6 million compared to $2.4 million for the same period 2017. G&A in the fourth quarter 2018 increased due primarily, again, to $2.9 million in noncash stock comp along with salary-related costs and other G&A professional fees. That concludes the financial commentary. I'll now turn the call back to Bob. Thank you, Greg. 2018 was a highly productive year for Eloxx, where we built the base for a strong growth trajectory for the company. 2019 will be a critical year as we accelerate our clinical development efforts and initiate our Phase II clinical trial in cystic fibrosis in the U.S. and Europe and reach top line data this year. Our scientific teams have been very productive, and we anticipate a steady claim of scientific publications and presentations, as we move to the year. On our webcast later this month, we'll update you on our new data presented at the EU CF Basic Science meeting and our progress with the clinical program. We're pleased that our clinical trial application in Belgium for cystic fibrosis is approved and that ELX-02 has been granted an orphan drug designation by the European Medicines Agency. We remain very encouraged by the breadth and consistency of the data we've generated for ELX-02 and by the advance scientific understanding of the basis of its mechanism of action. ELX-02 is the first and only read-through agent to have demonstrated substantial activity in cystic fibrosis patient-derived organoids bearing nonsense mutations. The recent Cell Reports publication demonstrates the high correlation between the FIS swelling assay in organoids and increases in FEV1 shown in clinical trials for the drugs that are currently approved for use in treatment of CF. We believe that the consistency and the positive data we've generated in organoids with FIS swelling increases the Messenger RNA and the soon-to-be released protein data that we'll present at the European Basic Science meeting later this month meaningfully de-risks our planned Phase II studies. We're on track to report top line data from these planned studies in cystic fibrosis in the U.S. and Europe this year. We're pleased to have initiated a new program focusing on inherited retinal diseases and the favorable tolerability profile demonstrated by several compounds from our library. We're currently conducting IND studies with the focus on Usher syndrome in the U.S. this year. And with the addition of Dr. Susan Schneider, we intend to build a complete team supporting inherited retinal disorders and provide our time lines to clinic. We're gratified to have attracted new industry experts to lead the acceleration of these efforts and to partner with Foundation Fighting Blindness as we advance a novel molecule towards ocular clinical development. Monday, we'll be participating the 39th Annual Cowen Conference here in Boston as well as at the Barclays Global Healthcare Conference on Thursday in Miami. On March 20, we'll be in New York City at the Oppenheimer Healthcare Conference. We look forward to meeting you there for one-on-one meetings as well as presentation. Thank you for joining us for our full year and fourth quarter 2018 earnings call. We look forward to continuing to update you on our progress. Thank you very much. Operator, you may now open up the call for questions. [Operator Instructions]. And our first question comes from Ted Tenthoff from Piper Jaffray. Can you hear me okay? Yes. We can, Ted. Two quick questions, if I may. So with respect to the completion of the Phase I multi-ascending dose study, what really needs to happen to kind of get the Phase II in cystic fibrosis up and running? I think, Ted, we have a pretty solid plan in place for execution on time. We had guided previously that we changed the concentration of the drug that was -- the amount of the volume and the concentration of the drug in the injection in the MAD study. Now remember, the whole purpose of doing these early studies is to pick the drug formulation and dose range to take forward in development. And once we've landed on the drug concentration that we want to carry forward, we'll use that through the rest of the drug development program. So we want to make sure when we finish the Phase I studies that we're answering all the questions we want to answer. So as we move forward, it's focused on picking the right dose to carry forward in development. Now Dr. Williams... Yes, we've got to say, Ted, if you'd like. I think Dr. Williams, maybe you want to provide a little highlight on where we are with Phase II in terms of protocol development and execution on the program. Sure. Thank you, Bob. And Thank you, Ted, for the question. So as you know, we received to the Phase II program a high-priority assessment by the ECFS-CTN, and we have an approved CTA. We're looking forward to getting started promptly with the completion of the MAD study in Europe. We are then hopeful that we will expand the program to include U.S. sites as well. And would that require an IND filing? It would. And as you also may know, we have an open -- we had an open IND for cystinosis in the U.S. The dose range, the CMC, the tox, it's all similar for CF. So while we'll be opening an IND in the U.S., we don't any -- anticipate any issues with the review of that application. Okay, good, helpful and two housekeeping for Greg, if I may. Greg, you said that year-end shares were 35.9 million. Did I hear you correctly? That's right, Ted, 35.9 million outstanding shares at 12/31. And you also mentioned -- and I apologize for not getting this to end quickly. What was the R&D stock comp component? The R&D stock component for the full year? Yes, it would have been -- that would have been... I don't need to hold up the call. Yes, the full number is $13.4 million, and the R&D piece of that is relatively small, $1.7 million. And our next question comes from Joel Beatty from Citi. This is Shawn Egan calling in for Joel. Regarding the new CF data from R553X and I believe you said the E60X genotypes, do these also generate FIS swelling above 2,000? And will this be presented at ECFS this year? Yes, we posted on our website our new corporate deck, which does include a graph of the response for those two genotypes. And Dr. Goddeeris, do you want to mention where we'll next be presenting that data as well. Yes. So the AUC values are above 2,000, and that data won't be a part of the next presentation, which is focused on our protein data. But we'll capture it in -- at our next meeting, which is later on in June. The next major cystic fibrosis meeting will be the European cystic fibrosis general meeting, which would be in June, then the U.S. cystic fibrosis is later in the year, correct. Great. And then regarding the HIT-CF project, can you talk a little bit about how much input Eloxx has into this collaboration? And what types of endpoints will be used of any clinical study that's spun out of the organoid data? Yes. So the HIT-CF program is available online. For anyone who's interested, a quick Google search will take you right to the website. The focus of HIT-CF is broader than just Eloxx and multiple companies are collaborating. And if you said the major focus is to engage with EMA on what role organoids more generally could play within the drug development process. Now specific to us, the EU has provided funding to run 3 clinical trials out of HIT-CF. We do anticipate that as drugs go forward in development and as the genotype response data is collected by HIT-CF, the intent is to shape a trial where there's sufficient individuals with rare disorders that respond to a drug to run the prospective trial. So if all goes according to plan, we would anticipate that we'd be part of running a prospective clinical trial, where individuals who had generated organoid data are then placed into a clinical trial setting that allows the sweat chloride and FEV1 to be collected on a prospective basis. And my final question. Can you provide a brief update on the cystinosis program as well? Absolutely. In fact, Dr. Williams and Mr. Snow just returned from a conversation with Dr. Paul Goodyer this past week. And Dr. Williams, do you want to give some speed on the progress we've made with the cystinosis as well? Yes, so as we previously discussed, we've talked about having a 6-patient cystinosis trial. We are polishing the protocol with Dr. Goodyer. We're looking forward to moving forward with that trial starting in the second half of this year. And will data from that also be in 2019 still? Yes, we have not changed our guide. We had guided before that we'd have top line data from cystinosis this year. Our next question comes from Edward Nash from SunTrust Robinson Humphrey. This is Fang on for Edward Nash. It's really amazing, especially knowing that and the safety and tolerability of ELX-02 is allowing you to move into the next cohort. And just to confirm, so do you mention that the final cohort can be the seventh cohort? That is correct. So the seventh and final cohort we expect to run here in the U.S. Got it. And so besides measuring in the difficulty for HIT-CF safety data, do you have any visibility in terms of what the potential advocacy when you're looking at the MAD study? No, the MAD study and the SAD study are both run in healthy volunteers, and they're focused on safety to establish a dose range that's acceptable for use that then what changes we move to Phase II is the lowest dose picked for Phase II is one that has some expectation of efficacy. Typically multiple doses are included so that we can go to higher doses where the expectation in the trial size -- the final selected dose is likely to be one of the higher doses. But in the Phase I part of the program, it's slightly different because it's safety, we start with very low doses as well to demonstrate that that's safe and then escalate up to what would be the highest dose one might be expected to use in the patient population. So we have a range of safety data. And then that's the basis for then taking a reduced range of doses into the patient population, where the lowest dose is expected to be efficacious and then as we move higher to ask the question of what's the lowest dose at which you achieve your desired efficacious activity, and then that would go into the pivotal trial. So our dose selection will happen in Phase II. Got it, very helpful. And lastly, so you mentioned, you nominate ELX-03 for Usher syndrome. Can you just briefly talk about comparing 03 and 02, what are the differences? We'll provide more information about the molecules. Remember, there's 4 different generations of molecules. And so all of them were built off of a molecular scaffold of either G418 or paromomycin and then are modified. All the molecules we work with are novel compounds. So they're all NCE compounds. If you said they have a general scaffold relationship, that would be true. And then there are 4 different generations, where different modifications were made and then screened for activity on the target and selectivity to identify molecules that were selective for the cytoplasmic ribosome, reduced affinity at the mitochondrial ribosome, and then we run a series of screening assays both in vitro screen as well as the cellular model and then usually select translational model as well to evaluate compounds for their activity profile. Now we do see differences in terms of activity of different molecules. So when we pick a molecule to carry forward in Usher syndrome, there's 10 different proteins that makeup Usher syndrome. And as you might imagine, each of those proteins has a constellation of genetic changes. So we look for a molecule that has the best activity across the cluster of related molecules. So the presentation at ARVO will be an update. We've screened multiple molecules on the relevant mutational footprint and then our screening molecules as well on the tolerability profile. And so at ARVO, we have opportunity to share that data with the scientific community. And our next question will come from Ben Shim from Canaccord Genuity. Can you hear me? Yes, we can, Ben. Thanks for joining. Great. Many of my questions have been answered. But maybe Bob and Greg, maybe you can answer what are the conditions you'll need to fulfill to fund or drawdown on the term loan B that's available? This is Greg. Thanks, Ben. That will be included in the filing. In the 10-K we'll have an exhibit of the loan agreement. I think in the 8-K, we don't detail that out. So at this point in time, I would just say that it's typical terms that you would see in a venture debt facility of this type. Yes, that in order we are in advance of data. We thought it was a great way to bolster our balance sheet in a way that's nondilutive for our shareholders so that they're able to maximize their opportunity as we're ahead of data and look for an opportunity this year to bring out some new data on the program which we think will be compelling. Of course. Kind of thinking ahead, what is your philosophy, Bob, on maybe potentially partnering out some of these assets in your library since your focus will be on 2 or 3 candidates right now? Yes, Ben, I think that's a great question because when you think about building program, each of them requires the same level of detail and attention. There is no program that's called the light touch program. And so when we think about driving multiple programs, particularly in a small company, we want to make sure that we have enough capability to drive them at the pace that drug development should move. I mean, when we go to patient advocacy meetings, I think the number one question that we're most often asked is how long is it going to take. So when we think about a number of indications that are very attractive in the sense that there's high unmet medical need, there's a large number of individuals affected whether that's primary ciliary dyskinesia or polycystic kidney disorder, we think there can be opportunities for us to identify ways to collaborate with other parties that will help us expand our capabilities at a faster pace. And so we do think that continuing to explore ways to ensure that we are maintaining pace with the programs we're driving and the same time are open to identifying ways to move faster on more programs through partnerships. So that's certainly an area of active expiration for us. And I'm showing no further questions at this time. I would now like to turn the conference back over to Robert Ward for any closing remarks. Well, thank you. So today, on International Women's Day, we are very pleased to have announced the addition of 2 women leaders to the company as we continue to strengthen our capabilities. I wanted to thank everyone for joining us for the call today. And we look forward to seeing you at one of the upcoming investor meetings and keep you apprised on progress on our next call. Thanks so much. Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.

Oldest

Most recent

Loading Barclays PLC Banking and Financial Services collaborators

Name	Type	Ranking(approx.)	Topics	View Docs.

Popeyes Chicken Expects to Have Earnings of 5.25 in 2017

Source: https://www.linknovate.com/affiliation/barclays-plc-banking-and-financial-services-1876595/all/?query=past%2031%20years

Popeyes Chicken Expects to Have Earnings of 5.25 in 2017

0 Response to "Popeyes Chicken Expects to Have Earnings of 5.25 in 2017"

Post a Comment

Iklan Atas Artikel

Iklan Tengah Artikel 1

Iklan Tengah Artikel 2

Iklan Bawah Artikel