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AnswerManish Bhatia: Yeah. QuestionAaron Rakers: And that is DRAM and NAND ? Once that is done, it'll bounce back and you can think of it like, like from where we were in the Q3 levels, from that we have volumes come down to almost a third, maybe even more than that into the Q1. So, at some point, there should be a bounce back from that as the inventory is adjusted. QuestionAaron Rakers: Yeah.
We've embraced the realities of a changing We're now in attractive growthoriented end markets and we have a proven formula for how we run the company better through the Eaton Business System.
And maybe a question on BD at this point. I mean, how are you thinking about BD ? But has anything changed at this point now that you are in a good position with the growth coming back ? Is there an updated thought there ?
Thank you, all. We have reached the end of our call, and we do appreciate everybody dial in and ask questions. As always, Chip and I, we'll be available to address your followup calls. Thank you all for joining us today. Bye. That will conclude our conference for today. Thank you for your participation and for using AT&T Executive TeleConference. is a service mark of , Inc.
I'll begin by saying that what we have seen, which is so far mostly United States and a little bit in Europe, is going to be a secondorder impact on us, not a firstorder impact. Let me unpack that and say what I mean. The bulk of the uncertainty is around the smaller banks, they're being the labeled regional banks, but let me acknowledge some of these regional banks are really national banks. But that said, now as they get forced into tightening some of their lending standards, that is largely going to have an impact on SMB, small and medium business clients, who are not our direct clients. Now, let me acknowledge, they are clients, though, of other larger companies who are our clients, but it gets muted as in the impact onus. When we're looking at our large banking clients, whether you think of top 5 or 10 in the United States, you think of the top 20 in Europe, we are seeing pretty consistent demand right now, because that is largely driven by payments, by retail accounts, by capital markets. And as you think about all of those, as long as you have reasonable employmentandreasonableGDPsweexpectthatthatdemandisgoingtocontinueforourfirstorderclientsThe employment and reasonable GDPs, we expect that that demand is going to continue for our firstorder clients. AnswerPatricia Murphy: Very good.
We all seem to be hereit seems like there's been a kind of an awakening, if you like, to ESG issues just in this last past six months, and particularly this year. More headlines this morning about pension funds just divesting out of fossil fuels altogether. How does Chevron compete for the incremental investment dollar ? Well, first of all, we believe in ESG. The E is getting a lot of attention right now, and look, over the history of our industry, we havewe and others have reduced the environmental impact of our operations time and time and time again. We are doing it again today. And we have the scale, the technical capability, the financial capability to be a big part of addressing this challenge. The world needs more energy. The world needs more affordable energy. And we intend to be a part of that solution. We acknowledge that the climate is changing. We acknowledge that human activity and fossil fuels contribute to that. And we acknowledge that we will be part of addressing that as we go forward. And, look, I'man optimist. There's a lot of pessimism that you can hear out there. And as you say, over maybe the last six months that drumbeat is even louder. But we've solved big challenges in the past and I'm optimistic that we will be successful again. AnswerWayne Borduin: Thanks, Doug.
Analyst:Sarah E. James QuestionSarah E. James: Thank you. It's clear the value United and insurers are creating for healthcare affordability and quality, when you look at the historical industry cost trend of 7% to 8% being brought down to 6% range with consumerism. And now you have a peer talking about future trends in the low2% range benchmarked to medical CPI, granted they have some skewing from ASO inclusion. And, Dave, at our conference last month, you mentioned national health expenditures plus or minus is interesting construct to consider medical cost trends. So I was hoping you could elaborate a little bit more on how you think about the right framework for talking about cost trend, whether it's CPI or nHE ? And if it is national health expenditures, which runs in about 5% (49:00), how do you think about United's business model being able to produce longterm trend in line or better than national health expenditure trend ? AnswerDavid Scott Wichmann: That's a really thoughtful question, Sarah. So a couple of things. First, we have begun to look at it more closely and thinking about whether how we are contributing to bringing a greater affordability more broadly across the segments in Medicare, Medicaid and commercial. And I've started to evaluate that against nHE to determine, again, whether we area contributor to a trend or whether we are actually reducing trend. And so, that's something that I think you'll hear more about from us. The other is as we sit here, we oftentimes talk in the commercial trend context in these settings, all the while we have a very robust and large government programsbased business and those obviously have trends inside them as well. So nHE will be important in that respect. It is a complicated metric in many respects. I think I can safely say that we are contributing positively to reducing the nation's healthcare burden; and that healthcare burden has been declining over the course of the more recent past. And we would aim very hard to continue to move that forward, recognizing that the way to get that done is to advance quality, first and foremost, which is really the improvement of outcomes; and then the evaluation of and making sure that we drive efficiency in the use of the nation's healthcare resources in achieving that quality; and then not missing the opportunity to improve the patient's experience as well. So this is a very high priority for this organization, to contribute in a constructive way to reducing the overall healthcare burden in the U.S. And you can see that in some of the remarks thatinforming the health system bythrough the application of the IHR, engaging people and managing their health conditions more proactively through the Rally platform, and aligning their reward system in healthcare to drive that Triple Aim value is essential to achieving that. And that's the essence of the commentary that I began this call with today. And we believe that OptumCare is and UnitedHealthcare Group broadly is creating just that environment. Thank you for the question Sarah.
The quit rate in the United States has never been higher, reflecting confidence of employees.
Our lifetime revenue expectations from these design wins remain in the same range as previously communicated. While we work through the nearterm dynamics in the data center, we remain confident in the growth outlook for this end market. We are seeing data center customers prioritizing key growth areas such as AI and ML with potentially much larger investment over the next few years.
Also, Wearables, where Wearables are doing so great at a company level, they'redoing even better in China, and so lots of positives there. QuestionShannon S. Cross: Thank you. It continues to grow significantly faster than revenue. And then is there a point at which we might just see some leverage ?
Thank you all for joining us for Eaton's Third Quarter 2023 Earning Calls. With me today are Craig Arnold, our Chairman and CEO; and Tom Okray, Executive Vice President and Chief Financial Officer. Our agenda today includes opening remarks by Craig. Then he will turn it over to Tom, who will highlight the company performance in the third quarter. This presentation, including adjusted earning per share, adjusted free cash flow and other nonGAAP measures, they are reconciled in the appendix. With that, I will turn it over to Craig.
So, I guess, I know Andrew (00:33:31) asked about a number of other pipeline programs, but we don't have time to talk about all of them. So, I guess, which other pipeline programs would you highlight, either ones that are, I guess, you feel underappreciated by the Street, or ones that you're just particularly excited about ?
AnswerAlfred F. Kelly: I think in the short term, James, we're seeing many, many of these players use us and use our credentials, whether they're virtual cards or debit or credit cards, to actually payoff these various installments, and so we're getting instead of one transaction, we're getting four transactions, and certainly that's very good for us. The point I was making is that in many ways BNPL is a closedloop capability, somewhat akin to what wallets were three years ago, and closed loops just end up hitting a wall. And so what I think is going to happen is that BNPL players will become issuers who will issue Visa credentials that will have their value proposition for installments embedded within the product itself, so that they can therefore scale very, very quickly by immediately having access to the 100 million merchants (sic) [ merchant locations ] that I referenced in my remarks. And so that's what I believe based on history is going to happen, and that's what I'm referring to when I say BNPL 2.0.
Costs were up yearoveryear, primarily due to increased commodity and logistics expenses; engineering, software development costs; and the absence of a favorable Bolt recovery in the third quarter last year.
As I mentioned, supply chain improvements enabled strongerthanexpected shipments, particularly in Construction Industries and supported an increase in dealer inventories. We saw increases in each of our primary segments and within Construction Industries, dealer inventories are now in their typical historical range of three to four months of projected sales. In Construction Industries, the largest dealer inventory increase came in North America, which had benefited our most constrained region.
The PPACt playbook has five key elements: new system and device architectures, new 3D structures, new materials, new ways to shrink, and heterogenous integration. The transition to the new playbook is positive for Applied in two key ways: First, as the roadmap evolves, it is increasingly enabled by advances in materials engineering where Applied has differentiated capabilities.
Just as a reminder, Visa's Class A, B, and C common stock structure was put in place in connection with our restructuring and IPO. The structure was designed to protect Class A and Class C stockholders from certain liabilities related to preIPO litigation referred to as the US covered litigation.
Next question ? Operator Our next question is from Dominick Gabriele with Oppenheimer. Analyst:Dominick Gabriele QuestionDominick Gabriele: Hey. My previous question was actually just answered, I believe. Is that kind of the way you draw it out a little bit ? AnswerRyan McInerney: No, I wouldn't think about it that way. Point one. Point two, we've made significant progress resolving the US covered litigation. We only have the MDL remaining. We've settled claims representing 90% of the interchange at issue. So, we've made significant progress. We've created a program that createsit maintains economically equivocalequivalent protection for Class A and Class C shareholders, and it enables a programmatic release to the shares. So, in the big picture, economically equivalent protection for Class A and C shareholders, programmatic release, get rid of the overhang risk. All shareholders, we believe, will feel really good about this program. QuestionDominick Gabriele: Makes a lot of sense. AnswerRyan McInerney: Thanks, Dominick. Operator Our next question is from Dan Perlin with RBC Capital Markets. AnswerRyan McInerney: Hey, Dan. Analyst:Daniel R. Perlin QuestionDaniel R. Perlin: Thanks. Hey, how are you ? Just a quick one. I feel like in the original retrospective responsibility plan language, there was also language related to, I guess, what we would have called then copycat cases equivalent. And I'm just wondering, how does this resolve those or once the 90%or the remaining 10% is concluded ? jg g Therefore, an additional copycat case is no longer considered an equivalent. Does that resonate or am I misguiding this one from remembering what the original language said ? AnswerRyan McInerney: The estimates we've given you cover all the covered US litigation.
Wei: Rick, so far as I said TSMC's capacity will be very tight, not enough to support our customer. That all I can share with you. QuestionRick Hsu: Okay. That's very clear. Thank you so much again. Thank you, Rick. Operator NextoneonlineBrettSimpsonfromAreteResearchGoaheadplease Next one online Brett Simpson from Arete Research. Go ahead, please. Analyst:Brett Simpson QuestionBrett Simpson: Yeah.
Good morning, guys. Mike, I wanted to ask on the expenses, the first, in terms of the operating losses, I know it's tough to answer, but should we think of the op loss accrual this quarter as you reassessing what you might have to pay in the future, or you got hit with some stuff that you didn't expect and you've already paid up ? Is there some combination of those ? How should we think about what happened this quarter with the op loss accrual ? AnswerCharles William Scharf: Hey, John.
QuestionVivek Juneja: And how about in terms of liquid assets ? What level should we expect you would bring that down to ? Because those have come down a little bit when you look at them quarteroverquarter, and they're also down some yearoveryear. Is there room for that to comedown further ? What's sort of a run rate for that assuminglet's assume deposits were flat and didn't go down, didn't grow much, grew modestly, where can that be drawn down to ? So, liquidity is down in the quarter. That's largely based on funding the Global Markets business with seasonal. If you look yearoveryear at our liquidity numbers, you'll see our global liquidity sources at $1.1 billion, they're up like a scooch from Q1 of last year.
We don't want to do it alone. But I do even remember when James first presented our work with that waste at the Consumer Goods Forum and you havecompetitionthereaswellasmanufacturersretailerspeoplequicklysignedontotheplasticspartnershipbecause The trends have gone up.
We also had strong bookings results in our insurance and retirement services offerings supported not only by legislative tailwinds, but also by the competitive positioning of our downmarket HCM ecosystem.
What did you say, Scott ? I missed the question. QuestionScott A. Mushkin: Would U.S. EBIT have grown without the discrete items ? AnswerBrett M. Biggs: It would have been roughly flat. QuestionScott A. Mushkin: Roughly flat. Okay, great. Then my second question is regarding just kind of the strategy in the U.S. If I kind of add those things up, it doesn't seem like there is a lot of wiggle room to invest a lot in price in the U.S. Am I missing that or is that how you would frame it as well ? AnswerC. Douglas McMillon: Scott, I think we've got enough room. We, as you know, have been on a multiyear plan to reduce pricing in the U.S. and we're just continuing that. The next question is from the line of Paul Trussell with Deutsche Bank. Analyst:Paul Trussell QuestionPaul Trussell: Good morning and a good quarter. Just wanted to maybe touch on guidance. Certainly commend your reiterating fiscal 2020, just given the moving parts in the business. But maybe just a little bit more detail around the cadence of the guide, specifically I think in 1Q you mentioned operating income to be down 10%. Just to what extent is that Flipkart versus currency ? Or how should we think about the top line headwinds from SNAP or tax refunds ? Paul, this is Brett. So if you look at the cadence, primarily what you're seeing in Q1 is going to be related to Flipkart. There's always going to be timing of other parts of the business that go from one quarter to another based on how expenses are flowing, but that's the biggest part of Q1 and Q2 as well, because it did not come in our results until partway through Q3. There is alwayswe can have things move around between quarters, $50 million here, $60 million there, and it can make a difference in how that number looks from a profitability standpoint, but Flipkart is the biggest part of that next year. QuestionPaul Trussell: Got it. And then just as we look towards fiscal 2020, just your outlook on transportation expenses and the headwind there and what you're seeing also on the wage front ? Douglas McMillon: On the wage side, Paul, we've just been moving up marketbymarket. Our average now is about $17.50 for an hourly associate in the U.S. And I'm comfortable that we've got the appropriate wage investments to get the talent we need baked into the plan. Transportation costs, I'm not really close to what's happening right now. I think that's one of the things that benefited this last year. So, glad to see them where they are. Your next question is from the line of Edward Kelly with Wells Fargo. Analyst:Edward J. Kelly QuestionEdward J. Kelly: Yeah, hi. I just wanted to ask a followup question actually on price investment. And I just was curious as to what your thoughts are on allowing inflation to flow through if it were to continue to strengthen ? Is that something you'd be willing to do ?
Whether it's adopting modern application architectures, shifting to hybrid work and hybrid cloud, securing their enterprise, or meeting their ESG goals, Cisco is helping our customers thrive in a hybrid world.
AnswerGlen Walter: Sure. So Give & Go, there's no question that when we think about their growth algorithm are there some crosscategory opportunities. The biggest opportunity we see with Give & Go right now is just to continue to allow them to expand. We can help them as they look at expanding into different channels. So I feel very, very good about what they've got. And Joel Flatt, their CEO, is just a really talented entrepreneur and executive, and is going to do great things and continue that growth there. Look, Tate'sis a great business and one of ourwe've told the team is that the first, second and third thing that are the holy grails of Tate'sis do absolutely nothing to takeaway from that delicious, crispy special cookie. So, from Kathleen's recipe, to the baking process, absolutely nothing has changed and will change. That's all part of our investment thesis. We're leveraging our customer connects and our DSD system to be able to expand the reach. And as you know and you've mentioned this, living outside the New York City area, we want to make sure that consumers can fall in love with their first Tate's experience the same way a New Yorker might have been or somebody in the Tristate area that has had the chance to go to the bakeshop. And so, the team is doing a great job of how do you replicate that bakeshop experience so that we can still continue to offer Tate's as a premium product that's special and delicious. So, very, very happy with what we're seeing there. QuestionDavid Palmer: Thank you. This has been great. We're coming upon our last five minutes, so may be time for one or two more. Maybe as somebody who sits in executive team and sees US as it pertains to the world and you see the challenges of the US and you compare that to what your peers see in other parts of the Mondelez empire, how do you see the COVIDrelated challenges and opportunities differing for you versus Mondelez around the world ?
AnswerBrian T. Olsavsky: Sure, Brian. Let me start with AWS. We feel it was a really strong quarter. We had a growth year over year in our run rate from $24 billion to $33 billion, so 37% growth. The $9 billion that we increased our run rate by was second only to Q4 of last year as far as our history. So, as you can tell, we've been pretty transparent with our AWS revenue and income numbers. We've been breaking it out since 2015 and we're very happy with the growth in absolute dollar terms that we're seeing the pickup from customers and their usage, their increased pace of enterprise migrations, increased adoption of our services, especially our machine learning services. On your question about oneday, let me update you on that, because obviously that was a big topic of conversation last quarter and you can see that it's starting to show up in our results in Q2. The ops team did a fantastic job here, not only being able to expand oneday selection and delivery capacity, but also preparing for and handling some very high volumes on Prime Day earlier in the month. So, we'rein the middle of a journey here. We expect to see a continued ramp of the oneday selection and availability through the next few quarters both in North America and international. International was up slightly in Q2, but for the most part, the improvement in delivery speeds will be in future quarters there. On the cost side, we talked last time about $800 million estimate of transportation cost to supply oneday, the additional oneday in Q2. We saw some additional transition costs in our warehouses. We saw some lower productivity as we were expanding rather quickly, both local capacity in the FCs and also in our delivery networks. And we've built that, not only that cost structure, but an accelerating cost penalty into our Q3 guidance that was released with our earnings today. And as I said in another setting, we've seen this before. The initial twoday Prime shipping offer that we launched many years ago, the great expansion of our network to include FBA merchants and capacity for them and more recently, the first steps to increase oneday and sameday, although on a much smaller scale. So, it does create a shock to the system. As far as you asked about specific product lines, nothing really to share there. We have seen lower ASP generally in Q2, higher unit growth versus revenue growth in North America and weit could be that we are mixing into some lower ASP items as we launch oneday, but we haven't drawn that total conclusion yet. Our next question comes from Heath Terry with Goldman Sachs. Analyst:Heath P. Terry QuestionHeath P. Terry: Great.
On the decline in the Networking that you project for the April quarter, I guess, first of all, is April quarter the bottom for Networking as well ? Are they declining sequentially as well ?
I would say a big part of the strategy has been sort of a global practice, i.e., not just been US but deep into Europe and Asia. But it does feel like we'rein a period of globalization. I think you used the word slowbalization or something, that's ajust good phrase (00:28:24). How committed are you to your global footprint in a world of deglobalization ? And then maybe could you talk about your nonUS businesses, how they'redoing, how you see them growing going forward. AnswerEdward N. Pick: I'm glad you asked that. Very focused to become a global investment bank that can't be a US bank with international operations. So we're spending a lot of time outside the US and I've been hitting the road pretty extensively because the reality is we can't just wait for paradigm shift to be resolved. So we need to express our strategic views based on where we're putting chips, not just on the business balance that I described, but on the geographic balance. The US, of course, for all the reasons we know, will continue to have secular tailwinds. I like Continental Europe. Brexit and the invasion were not of Europe's asking, quite the contrary as we know. But in sort of a twist of history here, it has actually galvanized the continent in a way that was unimaginable. Macron has been reelected with a reasonable majority. The French and Germans are working together. And you recall 10 years ago we were talking about Euroexistentialism and now we're talking about Eurocentric growth. Maybe demography is going to start turning around, sure.
Beyond these brand and innovation initiatives, we are deploying our capabilities in revenue growth management and execution to adapt to changing channel dynamics. Providing beverages people desire at a price they can afford is increasingly important, given the macroeconomic pressures could be substantial and enduring. RGM is not just about price, it is about offering a range of solutions to consumers at every part of the value chain and balancing profitability to maintain and grow our consumer base.
That's $0.02 more than what we can get from the other PET. So, with that, maybe I can go ahead and ask Henrique to weigh in and give a little bit more in terms of what he's also seeing. Or, Tim, actually, I don't know if you want to add in yourself since you work on capital allocation yourself as well. AnswerTimothy K. Leveridge: Yeah.
Maybe just on Libtayoagain, you mentioned this is your kind of foundational or anchor molecule. As we think about the next key set of data, I guess, it's from the chemo combo studyall comers study, anything to call out in terms of that trial versus maybe some of the prior trials, or is this essentially just kind of taking the Keytruda playbook and you running a very similar trial ? And then, is there a potential for seeing interim data from that study this year ? AnswerIsrael Lowy: So what weso the study is very much designed to prove that our antiPD1 can perform just as well as Keytruda or others that are proven effective. And we have given guidance that we are planning for an interim analysis in the beginning of 2021 when we think we will have accrued sufficient followup and events in order for us to be confident about havingor have a good chance of success of having a positive readout then. So, we certainly don't expect any surprises that it won't work. I mean nothing is guaranteed until it's done. And one of the other, I think, focal points coming out of ASH was the antiTIGIT data from Roche and you guys talked about this on your ASCO conference call in response to a question. It sounded like you weren't overly convinced or excited about TIGIT at this point. Maybe just give us your perspective on kind of why that is. And then let's say for some reason though the clinical data from some other companies plays out and they continue to see activity, could that bean area where you could pivot to pretty quickly or is it something where you're just further along with LAG3 and GITR and see those as more interesting ? I mean just maybe help us think about the kind of combo opportunities with Libtayo. AnswerIsrael Lowy: Well, so we have many targets in development and obviously we're exploring TIGIT as well. But the ones that push forward are the ones that in our hands seem to give us some compelling data. So, GITR was giving us some compelling data and it's interesting that the GITR pathway actually talks to TIGIT. And so, when you have productive engagement of GITR, it actually down modulates TIGIT. We've published on this in a science paper late last year when we described the work with the GITR antibody. The data presented at ASCO, I think, largely showed some evidence for an effect in patients with high PDL1. Obviously, we'll watch it. But we think actually our GITR antibody may positively affect that pathway as well. And so, the study you'redoing with your GITR, first you're going to look at monotherapy and then you'd move into combo or are you doing combo in parallel ? AnswerIsrael Lowy: We do combo way upfront. So, for example, our costim programs, PSMAxCD28, MUC16xCD28, those are all going to have cemiplimab with them. So, the PSMAxCD28 is enrolling and it's with cemiplimab. The reason for that is although theseI just talked about two different types of bispecifics, the behavior of these bispecifics in animals and we expect in people as well is very different. The CD3 bispecifics by rapidly activating T cells actually results in cytokine release similar to what you see with CAR T cells or other CD3 bispecifics. The CD28 costims don't really do much on their own. They give Signal 2, but in the absence of Signal 1, you can't jump to two. You have to have one plus two. And similarly, we have not yet seen sufficient data on GITR activity as a monotherapy, it markedly augments with PD1.
QuestionPete Skibitski: Tom, can you talk about some of these smaller programs at Missiles that you have going on ? One is this Coyote that you announced, a contract here this quarter for, not huge but not small either. And then this FEAVR radar and this HULK program, can you give us some color on some of those ? And maybe to the extent you can talk about the market size. They just sound pretty interesting. AnswerThomas A. Kennedy: Yeah, I'll talk about the Coyote first. Actually, that's a bright, really bright, super bright star for Missiles. We did an acquisition of a small company back in 2015 and it had this UAV on it. And the main reason we went and did the acquisition, I think it was for about $7 million. So, they had some technology in swarming, UAV swarming technology. We call it now Coyote system and have integrated that with one of our radars, or kind of call it KuRFS radars to create a new system called Howler that was just IOC'd by the United States Army. And the Army's buying these systems for counter UASs. So this UAS actually goes off and attacks other UASs and kills them. And it's actually, it's a very, it's a lowercost system, so it's a way of killing lower cost UASs. And I think the Army's going off and going to be buying quite a few of those.
And again, we'remodeling atypical recession, which in the US is a two to three quarter downdraft of typically 2% to 3% in GDP and then we'remodeling that into our markets, which would be probably more than that. QuestionMicrea Dobre: Sure. No, that's helpful. Aerospace and ESS margins have really stood out. Your incrementals in ESS over the past couple of quarters have been outstanding.
And we're beginning to see some of that in different parts of the world. And finally, refinery rationalization; this is the part that's interesting for us because we've rationalized our portfolio over the past decade, and we're now seeing competitors start to do that.
So, let me just start off by just acknowledging that in this challenging retail landscape, Lowe'sis very fortunate to operate in a sector that serves a resilient DIY homeowner and a Pro customer that'sin high demand. Looking out over the next few years, Lowe'sis focused on growing both Pro and DIY through our continued execution of our Total Home strategy to deliver continued top line and productivity.
Raymond Lo But we also havepeople have some internal error. I recommend you clear the cache, restartnot restart, refresh your browser. Sometime, it may happen. So, we have like a couple of people who have internal... Robert Chesebrough Okay, good. Well, another thing too for those of you that are having trouble... Raymond Lo Yeah. Robert Chesebrough For those of you that are having trouble... Raymond Lo The internalyeah. Robert Chesebrough ...one of the things that you can doand we're sorry about the lag because there's an audio lag. And so, I can'tI'll be talking over Raymond or Raymond over me because there's a two or three second lag.
Appreciate it. John Lawler ExecutiveChief Financial Officer Sorry. About -- no, no, no. Total margin, contribution margin positive, total margin would be -- EBIT margin would be minus 20%. James Picariello AnalystBNP Paribas Got it. Yes. Can you bridge what the benefits are from a materials perspective, scaling in terms of the buckets maybe that you provided at the teachin, what helps get to that minus 20% run rate for the second half ?
HBO Max is at the top of those lists, and it's a real credit to the team and I think 2022 is going to be even a better year for that. QuestionMichael I. Rollins: I think this brings us to a good final question ahead of the rapid fire, which is going back to the survey. So we surveyed what the risk is to your pro forma free cash flow target, 19% said confident AT&Twill achieve the target, 15% thought the revenue growth is the risk, 41% thought the EBITDA growth of that midsingle digits is the risk, 22% thought higher capital needs for CapEx spectrum and only 4% thought taxes. So if we look at the highest percentage at the 41%, which is the EBITDA risk, maybe there's just a twopart question, your confidence in the revenue trajectory and your confidence that you can deliver that outsized operating leverage to deliver a midsingle digit EBITDA growth proforma relative to a lowsingledigit revenue growth ? AnswerJohn T. Stankey: Look, we gave guidance that we're confident and Mike and I remain confident in the guidance and we'll do our updates as we hit the latter part of this month, when we come out for fourth quarter and give you the results, that's traditionally when we do it. That's when I intend to do it, not today. And I feel really good about the momentum of the business right now. And as I've said, I think we still have a lot of opportunity and surface area to run our company more effectively. We are going to execute better as a more focused business. I have no question about that. QuestionMichael I. Rollins: That brings us to our rapid fire three questions in three minutes. First, why should investors buy your equity ? AnswerJohn T. Stankey: It's the most undervalued player in the telecom and media space right now. What you can get paid to wait as this transaction takes place, the upside that's going to occur when David executes the integration of those two businesses and takes the directtoconsumer play at Warner Brothers Discovery to the next level and the value accretion that occurs as a result of that in the equity combined with what we just spent a lot of time talking about really sharp execution on the communication side of the business, an opportunity to continue to grow EBITDA because we're going to run this place more efficiently on a base of subscribers that's growing. Obviously, the confidence of the investor base has to attach to the confidence of the management team. I've been talking about that for the better part of 18 months since coming into this job. I keep what we are going to say. We're going to do, reminding you we've done what we're going to do, and I expect that we'll continue that through 2022. QuestionMichael I. Rollins: Second question, is inflation and net opportunity, net neutral and net risk for your business model and financial performance over the next few years ? AnswerJohn T. Stankey: Oh Jeez, I don't really like the question, I think the question is the answer to that question is nobody should like inflation at the levels we're seeing in the United States right now that that approach or policy that ultimately doesn't get that contained quickly is not going to be good for anybody, my company or any other company. It'snot healthy for anything. QuestionMichael I. Rollins: And our final question in Citi's Apps Economy Conference, what application can fundamentally change demand for connectivity and data consumption over the next few years ? You know, it's like sayingwhatapplicationmadeLTEand4GrelevantinsocietyAndI'moldI'mgreyI'vebeenaroundherealongtimeI saying what application made LTE and 4G relevant in society. And Im old, Im grey, Ive been around here along time.
The situation is obviously extremely fluid. So, let's move on, talk a little bit about the macro and you alluded to it earlier. But there I say we're coming out of COVID. Historically, COVID has had an inverse relationship to procedure volumes here in terms of spiking COVID. What are you seeing out there in the field today ? Are you seeing now that COVID is dying down, are you seeing a bit of a lift in procedures ?
It's a continuing evolution of the Morgan Stanley strategy and a nod to the fact that having stronger digital capability across our Wealth Management business is critical and a nod to the fact that we're interested in expanding internationally. AnswerJonathan Pruzan: I will not attempt to make a crystal ball prediction. But given some of the comments that I made in my opening remarks, clearly, we have a differentiated model with Wealth and IM, which is sort of the stability of that model, and those businesses should continue to perform quite well, and then thewhich we referred to historically as the ballast, and then the ISG creates some of the alpha. And I don't think anyone has the ability to predict what that will be. Analyst:Devin Ryan QuestionDevin Ryan: All right, great.
AnswerFrank K. Clyburn: Chris, good morning. For KEYTRUDA, we are very encouraged, especially over the last month. We are seeing new patient starts get back to where they were almost preCOVID. If you look at what happened in the quarter, Chris, April and May new patient starts were down somewhere in the range of about 5% to 10%, depending on the cancer type. That's going to vary by geography. We still are seeing in the US about 80% of the eligible patients receiving KEYTRUDA, but we're also very excited about all the other indications that Roger mentioned. And we're seeing really good growth in head and neck, bladder, adjuvant melanoma, and some of the other newer indications. So all in all, we feel very confident in KEYTRUDA, not only in the near term, but as we've continued to state, long term. With regards to vaccines, you heard from Rob's comments upfront is that April and May wellness visits were down very significantly, in particular in the US market, approximately 70% in the month of April. They started to improve as you got to June, and we really saw some encouraging pickup with wellness visits for our pediatric portfolio and for the pediatric patient population. Adolescents are lagging a little bit behind, which is why we mentioned we're keeping an eye on GARDASIL. But we are seeing encouraging signs therewith wellness visits picking up as well, which gives us the confidence, not only near term for GARDASIL, but as we mentioned, the strong demand that we continue to believe will come through for GARDASIL, not only in the US but clearly outside the US in markets such as China. So we're very confident in that outlook as well, Chris. AnswerPeter Dannenbaum: Great.
It's the only way to do it, really. So, that gives people energy security. And we can also, in working with the utilities, use the Powerwalls to stabilize the overall grid. So, let's say like if there waslike there was in Texas. There's no power in storage, no good form of power storage. However, with a whole bunch of Powerwalls at houses, we can actually buffer the power. This is profound. So basically, this is a prosperous future both for Tesla and for the utilities, becauseand in fact, I think this will be veryif this is note done, utilities will fail to serve their customers. They won't be able to do it. They won't be able to react fast enough. And we're going to see more and more of what we see in California and Texas of people seeing brownouts and blackouts and the utilities not being able to respond because there's a massive change going on with the transition to electric transport. And we're seeing more extreme weather events. This is a recipe for disaster. So.
A quick one for Akhil as a followon. The spin timelines for Otis, Carrier doesn't sound like there's any impact, but does this transaction have any ramifications for the tax structure and the carveouts ?
But where we really see Honeywell differentiating itself is in providing this fully integrated solution, driven by our remote operations software platform to monetize investors' energy storage assets.
Anticipating changes to our customer demand, we have been moving supply from smartphone to service the strength in data center markets, for both DRAM modules as well as SSDs.
Thanks, Manav. QuestionManav Gupta: Thank you. Operator We'll go next to Ryan Todd with Simmons Energy. Analyst:Ryan M. Todd QuestionRyan M. Todd: Sorry about that. My phone call dropped right as you asked me a question. Maybe if I could followup on one of the earlier questions in terms of the restarting of the buyback. You mentioned the nearterm cash goes onto the balance sheet. AnswerPierre R. Breber: It's a bit of both. I mean, it's just how the math works, right ? If you have excess cash and you don't change your capital program, the dividend would just increase, so that'snot going to change. So, I'm not going to give you a hard target. We're going to use judgment because there's judgment on future excess cash generation. This is our first quarter actually with current excess cash generation. We expect the next couple of quarters to be potentially even better because you've got oil prices above $60, refining and chemicals margins much stronger, so it couldbeevenbetterAtthesametimewedon'thaveasustainedglobaleconomicrecoverysoit'sreasonableforusto So, I know that folks want a formula or a trigger. I know some of our competitors have those numbers. We're going to use judgment and we're going to consider what we see in front of us in terms of the likelihood of future excess cash generation. Our balance sheet is very strong right now, but yes, in the short term, excess cash is going to go to the balance sheet. QuestionRyan M. Todd: Thanks. You were mentioned recently in a news article connecting to a potential refinery acquisition in the US Northwest. You did acquire a refinery in recent years.
Just about asset values. I guess, I just wanted to drill on that, if I could, and the idea that you guys have taken market rents to more of a neutral stance this year. You've taken market vacancy outlook higher. And is there any risk to that promote ? And then, maybe just a followup to that. Gene, you had said something earlier that the number of leases that you were doing, I think, was flat on a portfolio size adjusted basis. Did you give the square footage for those and are they smaller deals in the pipeline or larger one ? Any color there would be helpful as well.
And the market's obviously been very dynamic. How has the macro environment today evolved since the second quarter ? What's gotten better ? What's gotten worse ? And how does this compare to the assumptions in your guidance ? AnswerGlenn S. Boehnlein: Sure.
And thenso you have 20% share in Japan. So, just wanted to see how you'rethinking about the pace of market share gain just given the trending dynamics there ? And then I've one quick followup. AnswerScott R. Ward: Yeah. I think we would expect that to continue to grow. And so we have been expecting and forecasting for some time that as we continue to make progress in peertopeer training and the opening of new accounts that we would see continued growth over time. So we're now just kind of coming into the portion of our growth curve where we do expect to see that continue to accelerate. So, we are very confident in our business in Japan, the Japanese Interventional Cardiology Community is a heavy adopter of imaging and they make strong use of atherectomy and orbital atherectomy now to prepare vessels prior to the placement of stents and to remove calcium to modify plaque.
Maybe justcan you bring it down, maybe double down for me a little bit ? Can you give us a couple of examples of specific improvements you've made within the retail search category that have driven this user growth, the merchant spending and the overall more transactions for customers ? AnswerRuth M. Porat: Absolutely. So, we did talk about it quite a bit on the Q4 call. It was an important contributor to results. And when we talk about retail, we obviously talk about ads as well as the broader set of experiences, all that Bill Ready is doing with commerce. And really excited about the effort that he's been leading. It is about building this open ecosystem. So, the way we work as an example with Shopify and Square. And again, it's the open ecosystem that's important, and then using technology in ways to enable user (05:02) search.
Operator Your next question comes from the line of Vivek Juneja. Allen Parker: Hi, Vivek. QuestionVivek Juneja: I just want to followup on all the regulatory stuff that's been going on. Allen Parker: Sure. QuestionVivek Juneja: The regulators' comments that things have been very slow, given all the hirings you've been doing, is a little bit surprising. I guess, Allen, a question for you. Allen Parker: Yeah. Vivek, thank you very much for your question. I think that it's appropriate to say that there was always a sufficient level of seriousness on the part of our senior management in terms of approaching the Fed consent order. And the other thing that I will say is that when we're going forward with respect to the asset cap now, one of the things that we feel is critical to do is to get the input of our new Chief Technology Officer and our new Chief Auditor, who are going to beone of whom, our Chief Technology Officer, has just arrived and our Chief Auditor will arrive soon. And as I said to you before, we're going to do all that work with what we believe is the appropriate level of urgency, but we're not going to prioritize urgency over getting it right. This is just simply too important for our company going forward. It's work that's going on every day. AnswerJohn R. Shrewsberry: Can I have one followup, and it's also, I think, responsive to Matt's question earlier, but just playing back the last year or so and how this has evolved. This isn't something that just happens in a group called risk. Allen Parker: And Vivek, I would also just comment, because I'm sure it'son your mind. These are leaders who have performed extremely well in various uncertain circumstances. QuestionVivek Juneja: Okay, thanks. QuestionVivek Juneja: I have another question completely different, if I can just shift gears... AnswerC. QuestionVivek Juneja: And this is probably appropriate for John. John, the Business Payroll Services businesses you just sold, you mentioned the gain to us. What is the impact from a revenue and a net income standpoint, any rough numbers ? AnswerJohn R. Shrewsberry: It's negligible... QuestionVivek Juneja: Okay. AnswerJohn R. Shrewsberry: Not discernible. All right, thank you. Allen Parker: Thank you, Vivek. Operator Your next question comes from the line of Saul Martinez with UBS. AnswerJohn R. Shrewsberry: Hi, Saul. Analyst:Saul Martinez QuestionSaul Martinez: Hey.
AnswerJim Baumbick: It's a great looking vehicle. So, we've been very thoughtful. We think of Bronco as having a lot of legs fora whole range of derivatives and that's the opportunity that we want to investigate. But right now, we'refocused on getting that winning product to market. And one other specific product, when we think about the Mustanginspired BEV, which had been rumored to be called the Mach 1, you got pushed back on that. When we think about that coming to market, the positioning has been so far outside of Tesla for the most part in the U.S. is a kind of box EVs, right ? When you think about sort of pricing this, is this going to be priced as a luxury vehicle ? Maybe you can't give exact price points, but maybe $50, 000plus where there's actually a business case for it where it's profitable unto itself, so it'snot a loss leader like a lot of other EVsor not really loss leaderlossmaking product like a lot of other EVs. I mean this is going to be a standalone profitable vehicle. AnswerJim Baumbick: The goal is profitable and contributing. So, our thinking around the battery electric vehicle, the Mustanginspired, as well as we've announced that we're going to have an F150 battery electric vehicle, is playing to our strengths, okay ? So, how can we repurpose the space that's enabled by eliminating an ICE engine and now having a battery electric ? We won't just be another EV, and I think that'sunless you're the lowcost producer, you got to differentiate. And so, that's kind of our approach. As far as the other part of your question, I can't share any of the details of our volume and that type of stuff. I've got one more, but are there any other questions in the room ?
AnswerDerek Idemoto:... (00:30:23) thoughts on how this whole... AnswerMohit Lad: Yeah. SoI thinkso look we had a great experience. We used capabilities that helped us simulate being in person, right ? We used the breakroom sessions and all that and created that experience. You have kids running around. So, in some sense it creates a little bit of entertainment and some change from a routine. So, every time I got on the call with somebody on the Cisco side, they were in their own room, right ? So, it was a different background. AnswerTodd Nightingale: And Mohit sends you special pandemic themed Tshirts. AnswerDerek Idemoto: Mohit, we actually got that question, to be honest. AnswerMohit Lad: Todd has one actually. AnswerDerek Idemoto: Todd has one ?
So, Patrick, thanks for the followup on that. So I would think about it, the following. The timing of the transition and what the longterm demand for COVID there are so many scenarios, it's very hard to say which quarter which year exactly how things play out, right ? Because the capacity is repurposable, we will move that overtime. And in our longterm model that Stephen presented last September, it effectively reflects that, that's all transition by the end of theof that end of the model period, so it was a part of core, it doesn't affect the 7% to 9% long term outlook. As I look to 2023, as a reminder we play a role in both therapies and vaccines, so they are on different cycles and different scenarios which is I think most scenarios have the pandemic existing in some endemic form next year. And therefore therapy demand should exist with some level of consistency. And vaccines, there's a wide range of outcomes. I think the one piece of new information that I think is interesting is one of our customers, not in the top tier of the activity level within COVID, actually just repurposed its own commitments to other therapies and activities, so that was actually made that transition even smoother for a portion of it. And basicallyin the future basically has taken the commitments and say when they don't need COVID capacity they're going to basically use it for other things. QuestionPatrick Bernard Donnelly: Very helpful.
This will leverage his deep expertise in relationship, and when combined with Sunil Garg's additional role as North America Head, is designed to help us capture more of what is a significant business opportunity in our home market.
Analyst:Joe Ritchie QuestionJoe Ritchie: Thanks. QuestionJoe Ritchie: Maybe just following up on John's question from earlier, obviously a big day herein the US. And I know his question was kind of limited to the tax implications. But I'm curious, Craig, just to hear your views on election outcomes and what that could potentially mean for your business over the next 12 to 24 months. We talked about electrification, digitization, energy transition. These things I think are much bigger than what's going on in the US and in the US administration. So, I think there are these secular growth trends that we're experiencing inside of the global economy that are essentially bigger than any administration in the US and I think are going to be positive for us independent of who is in the White House. QuestionJoe Ritchie: Got it.
Your line is now open. Analyst:Darrin Peller QuestionDarrin Peller: Thanks, guys. But if you guys don't mind just honing in on the services pieces, obviously, the other revenue is up. And there's definitely services flowing into the other transaction lines as well, so card not present fraud. I guess how big can this be ? Do you think that's sustainable even beyond the pandemic as well ? And then, can they offset potentially some of the cross border headwinds we see ?
Analyst:Kerry Holford QuestionKerry Holford: Thank you. Just one left for me please, a broader question on cost and promotion in diabetes. So your competitor Novo Nordisk recently confirmed it's reducing its US sales force by around 25% and shifting those marketing costs through to digital routes. I wonder is that a similar trend that Lilly is pursuing here within diabetes, specifically more digital less facetoface promotion, and is that something that we can expect to continue could this ultimately result in lower selling costs going forward ?
So, this is just another way that we think is going to increase interest and demand for ETFs for our investors. AnswerLaurence D. Fink: I'd just add one more thing, Rob said it, and I said, I think, in my prepared talk, having commissionfree for long duration makes ETFs a great alternative to bank deposits, a really good solution towards money market funds.
By leveraging the significant private infrastructure capital that has a strong demand for high quality, longterm contracted clean energy assets, NextEra Energy Partners maintains an attractive additional financing source. In summary, we believe NEP is wellpositioned to execute on accretive acquisitions for LP unitholders going forward.
And Anders, I mean that kind of shift and change, what have you been noticing ? No, but I thinkwhat Casey (01:22:09) just mentioned when he talked about the kind of commodification or sort of turning this into an asset class to the investment side, is I think that the art world feels wary about. I think there is always this sort of tension between money and the art, and has always been in the commercial and noncommercial. I thinkin this case, I think the NFT market has kind of propelled this into an exponential kind of scenario which I think the traditional art world is uncomfortable with. It's just thatand art is probably as well.
They are always looking for great product, innovative product at a great value. And we do, we talk a lot about major technological advances in cordless technology. For several years now, the batteries and the motors and the electronics in these tools are really at the point that you can cut the cord in power tools and many of our customers are. And further development of these tools, you're now not just replacing the cord, you're replacing in many instances a gas iSth thl i it td i t ' il '2024, , Inc. All Rights Reserved.
We believe Booking.com's payment services drive benefits for both our travelers and our supplier partners across hotels, alternative accommodations, cars, flights, and attractions. On the Connected Trip, I think it's a helpful reminder to talk through what we are hoping to achieve with this vision. Our vision for the Connected Trip strives to make booking and experiencing travel easier, more personal, and more enjoyable while delivering better value to our customers and a way to provide marketing opportunities to our supplier partners. First, we are looking to increase the engagement of customers on our platform by solving more of our customers' travel problems by just finding the right accommodation on Booking.comas we've done in the past.
They don't have to deal with having too much.
QuestionJeffreyJZekauskas:Sure QuestionJeffrey J. Zekauskas: Sure. White: So, currently what'sin other is our Materials Technology business, formerly called PST. You may recall... QuestionJeffrey J. Zekauskas: Yeah, I do. White:...that's the coatings business. It has what we call wholesale or our interco helium business. Therefore it's more of an intercompanytype pricing structure that we have with that. And then it has all of our global corporate costs to manage Linde Plc as a whole. As you well know, we divested Gist, that used to be in there that is gone. So, that's what'sin there today. And one thing we've always said for many years is, to your exact point, and I would kind of take 2018 with a grain of salt, that was a transition year. That was, as you know, a pro forma number. White: There were some elements that didn't fit, particularly into the segments that needed to go in that section as we did proforma at the time of merger. So, I would use 2019 as the better starting point because that is post the merger when we had, I'd say, more consistency across what was in there. So, that'show to think about that. But we're going to continue to look to create value in the other segment like we do anywhere else in any other segment going forward. QuestionJeffrey J. Zekauskas: Great.
This has raised demand concerns. Can you elaborate on order trends so far this year and how they compare to current production rates ? I think... AnswerElon Reeve Musk: We've already answered that question. AnswerMartin Viecha: Yes.
But the reality is that the form factor is shifting. And so, it'snot just a hardware form factor that we offer any longer. We also offer virtual firewall and have for sometime and we also offer Prisma Access, which is essentially firewall security delivered as a service from the cloud. But what we believe is thatwhat will happen is that the form factors will shift to more of the software form factors. And so, we're seeing significant growth in our Prisma Access product as well as our VMSeries products. We believe that we have a real competitive advantage in terms of being able to offer the three different form factors that we offer. And so, that category as a whole we think will be growing at about 20%. But like I said, that hardware form factor, we think, will decline and we think it's a prudent forecast. And what we see on the other hand is that Prisma Cloud for example, our Cortex products, which consist of the Traps product that we held for sometime, Cortex XDR, which has the EDR capacity that we offer across the entire network as well as Demisto, which is a behavioral analytics company, all of those products, all growing very, very rapidly as well. And then, we have all of those nextgen security products growing very, very rapidly and it winds up with us projecting out the next three years a 20% growth rate, but... QuestionKarl E. Keirstead: Within thosethe nextgen bucket, Kathy, you mentioned Cortex, Prisma Cloud, Demisto, et cetera. Is there one or two that sort of you are relying and that it might be a little bit larger that you're relying on driving the bulk of that, the extraordinary 50pluspercent growth ?
AnswerManish Bhatia: Sure. So I think we also said that on the DRAM side, we'll also update the industry, so I want to make sure we're clear on that. And again, the 1alpha is going very well. But on a sequential basis, when you think about how much cost decline we have from FQ2 to FQ3, that's what we are trying to say that we won't see quite as much cost reduction sequentially because we did better than expected. QuestionRaji Gill: So you saw most of the cost reductions in fiscal 2Q ? AnswerManish Bhatia: I don't want to say most, it's just we did better than expected. QuestionRaji Gill: Got it. AnswerManish Bhatia: But weright. But when you think about it on a yearoveryear basis, we expect at least on the frontend costs, led by both of these 1alpha for DRAM and 176layer for NAND, we feel better about where we are on a FYoverFY basis now than we were projecting last quarter. AnswerSumit Sadana: And just the otherthe only other thing I will add is this is how things just go. I mean, we ramp anode then we start ramping another node and that drives cost reductions. QuestionRaji Gill: Thank you. Our next question comes from Srini Pajjuri of SMBC Nikko. Analyst:Srini Pajjuri QuestionSrini Pajjuri: Thank you. First on the inventory. Sumit, I see why you guys are building raw materials and the workinprogress inventory. Just curious, have you noticed any meaningful change in your customer behavior in terms of how their inventory is being procured after the, I guess, the recent the war started in Russia, Ukraine ? I mean, are you seeing any more interest in terms of building some additional buffers since the war started ? I mean, I think the war is just another example for our customers that we continue to be in an extraordinarily uncertain environment. There are these uncertainties that come from just every different direction, it seems. So there is these geopolitical uncertainties and then there are traderelated uncertainties that are uncertainties related to COVID shutdowns in different parts of the world. So this is just another reminder for our customers that carrying extremely lean inventories is dangerous in an environment where it can start to gate revenue. And so I would not say that this particular event has created any new behavior that we see. It is just reinforcing to them that they cannot let their guard down in terms of how they manage their inventory because of all of the overall uncertainty. QuestionSrini Pajjuri: Okay.
I think that it really plays into this arm's length, moral hazard thing. Theyyou want to have a completely independent, highly compliant, 99% plus audited partner to help you deliver these supercritical services, number one. Number two, I mean, we have the best data asset and the best logistics and routing platform to be able to pull this off at nationwide scale. And they're consistently seeing this. Why wouldn't they just insource themselves ? And so, it's been fantastic. Like, what's more trust than allowing a clinician to come inside your home, right, and spend an hour with you trying to solve some really complex health problems. It's something we've talked a lot about. And so I do think we're going to continue to see an expanded TAM by the moving into, as I mentioned, Medicaid and commercial and touching more and more Medicare Advantage lives, number one. But number two, we see no risk in the foreseeable future of insourcing. Makes a lot of sense. Thanks for all the great detail, Kyle. Thanks, Matt, we appreciate it. Operator As we have no further questions on the call, I will hand back to Kyle to conclude.
And then the other way that we've really transitioned is the way we work with enterprises.
The CNN Business folks chose you as, I think, a special award to acknowledge yourthe execution of your company and your role as a CEO. Quite a bit of competition that was out there. I think Elon Musk was in there, the Goldman Sachs CEO. So quite a notoriety. And I think that so much of what you were able to execute with your team really brought the industry right to the front page and whatnot. So your thoughts about this acknowledgment and particularly from the pivotal role that you play as CEO of Pfizer and at this moment for the industry ? What did the award mean to you ?
Going forward, our capital allocation priorities remain unchanged: first, to invest in new units and opportunities to grow the business, along with reinvesting in existing restaurants; second, to continue growing our dividend; and, third, to repurchase shares.
We are rapidly delivering groundbreaking innovations across Creative Cloud and Document Cloud.
We deepen with combinations with non IO agents, LENVIMA, LYNPARZA, RAAS inhibitors, others, but we also are combining them with other IO agents like TIGIT, Lag3, CTLA4. All of those give us an opportunity to coformulate and that creates an environment where one can think about loss of exclusivity differently than 2028. And so the final thing is that we are doing lots of things in relationship to extending the reach of KEYTRUDA and not just KEYTRUDA, LENVIMA, LYNPARZA for the future, but I will just give basic I was asked this question, do you like dosing changes ? Do you like frequency of coming in ? Do you like devices ? Do you like formulation ? And I sat there and I said, well, why should I choose ? The final thing I would just say is when you look at adjuvants, there's enormous innovation that's going to be required to fill that market or that need. Whenever you see KEYTRUDA plus an oral medicine, the same thing is true. Does that patient really need to go to infusion center ? And the final thing is, as you combine KEYTRUDA with many infusion medicines, you ask yourself, do I really want to infuse KEYTRUDA for 45 minutes when I could give it over 2 minutes ? And I think all of those are meaningful innovations that help providers and patients access important medicines. QuestionChris Shibutani: Okay, that's helpful. Size of potential business development deal. Your CFO, Caroline, has famously said that the company would be willing to take a one notch downgrade. Is that still an accurate characterization ? So, that's the way I'm looking at it. And then from a size of deal, it's less about the dollar size. It's more about is it an area of interesting science ? Do we see an asset or assets that we think bring something unique that when we combine it with our capability and aim at an unmet need, that there is something that we can drive sustainable longterm growth for the business ? QuestionChris Shibutani: And if we were to zoom up a little bit in terms of the larger environment and think about potential external constraints, let'stalk a little bit about the Federal Trade Commission Working Group that they're talking about, addressing issues related to pharma competition as a result of consolidation or deal activity. Given KEYTRUDA and its dominance, and your presence in oncology, how does this factor into your thinking about how you'remaking assessments about potential deals and what you're seeing currently ? Well, the first thing I would say is KEYTRUDA is a great drug, but I actuallyI don't think we can look at KEYTRUDA as dominant in oncology. You have to look at tumor by tumor, at stage of disease, at line of therapy. Oncology is not monolithic. It is very specific and in specific areas, specific tumor types, specific stages of disease, specific lines of therapy, KEYTRUDA does quite well, but there are several areas where it doesn't. And obviously, as we look at what we see from the FTC, there clearly is a focus. But I continue to believe there is a path for good deals that are proinnovation that are going to bring and solve a problem fora patient. There is going to be good justification to continue to drive those forward. And the debate inevitably becomes whether or not the willingness to reach across that table and shake hands, the bid / ask spread, has that mindset adjusted in any way ? QuestionChris Shibutani: Ticktock, we're further along. QuestionChris Shibutani: Where are things right now ? AnswerRobert M. Davis: I would tell you that as of now the world has not meaningfully shifted from where we were. We continue to not see a meaningful change yet. We're going to have to see what happens. So, we'll have to see how it plays out over the rest of the year.
It's also when you add in thisthe emphasis on deep space exploration to Mars, I mean today is a historic day, we hope to see the launch today that SpaceX has, and but beyond that, the whole Artemis program that NASA has underway, we're a very important part of that with ourfor the lunar missions and missions to more deep space explorations to Mars with our Orion vehicle as part of Artemis, and so that's a critical element of our business.
Maybe just sticking in UC, as we think that aroundjust bigger picture, when we think about combinations, sort ofwhat are sort of the foundational pieces or thought process that kind of really sort of guide that decisionmaking process ? Our fundamental principle is to look for orthogonal mechanisms, mechanisms that don't overlap in one particular arm of the immune system. Maybe I'll point to our current combination study in rheumatoid arthritis, where we have a firstinclass IRAK4 inhibitor with a first inclass JAK3 / TEC inhibitor. Those are two very distinct mechanisms that one targets the innate immune system, one targets the adaptive immune system. Bringing those together in a very selective way, we think, has the potential to drive greater efficacy while not having the same kind of safety liabilities that may be hitting the same pathway like an IL1, and the TNF historically has been challenging. AnswerMichael Vincent: I mean, it's all going to depend on the kind of the risk profile, as is always the case. AnotherI think another component is the format, to be particularly honest. Maybe turning back to the commercial portfolio for a few minutes, maybe just an update kind of how yousort of Xeljanz and how it sort of has stabilized after, let's say, a colorful 2021. AnswerMike Gladstone: Yeah, no, thank you for the question. 2022 is going to be a transition year for Xeljanz, and the good news is we have a label. We know what we'reworking with. And the other good news is that when we talk to our healthcare providers or key opinion leaders for that matter, when people understand the data and they understand the data, the indication of what patients are appropriate for Xeljanz, there's an adjustment period. But then, almost all of them or the vast majority of them view returning to growth for Xeljanz. So, I think we're going to see some adjustment here during 2022 as the healthcare providers learn and understand which patients are ripe for Xeljanz. And I can tell you that we're really on the front end of this. We're on our front foot. And the fact is the JAKs really have and Xeljanz really has a great place in the treatment paradigm for appropriate patients. QuestionCarter Gould: And then, maybe just a range of scenarios as we think about the regulatory review in Europe and how that might play out. So when we think about the Article 20 in Europe, a couple of things to think about. First, you think about abrocitinib, what would the impact be on abrocitinib, and I can tell you that while we can't predict that EMA has been reviewing 1133 data for quite some time, even before the approval of Cibinqo. And also, you're looking at two very different patient types. The 1133 data, older patients, comorbid, some smoking. These tend to be healthier patients. So, there's a little bit of a difference there. And Mike, I don't know if you want to speak further to Article 20. We've been speaking with PRAC since May of 2019 with Xeljanz, and we've had extensive discussions working very closely with them. All of the analyses we've been doing on Xeljanz have been absolutely consistent with everything that they've been interested in because that was the start of it. In fact, in the Article 20, all we've done is merely update what we have provided in the dossiers themselves. I think PRAC right now, their drive is they see inconsistency in labels across the JAK class, and now, their interest is where do we go from here. They can take the simple approach and do what the US did, which is away to just limit the use or do you optimize the use. And from our perspective, if you look at abrocitinib and Xeljanz, we do know that the majority of risk is in those patients over 65 or whoever smoked. Now, I don't know the data in anyone else's, but if that's consistent, typically, PRAC and CHMP take a very scientific approach to things. If they can take a targeted approach like that, they're more likely. If it is more dispersed, it's more likely that they'll go to a simpler approach. QuestionCarter Gould: Maybe it's a good segue to abro and we think about the launch, which early days. Maybe just talk about sort of initial reactions there and how we should think about access and the pace at which they might open up over the course of 2022. It's exciting. We've just released our field sales force on Cibinqo, and the feedback that we've gotten is very encouraging, both from key opinion leaders and fieldlevel prescribers. It's really, really a So, they've been talking to their physicians. Their physicians have been waiting for Cibinqo, and now, it's here. And qualitatively, we're feeling very good about where we are. Access is going to open up overtime. We think that patients need multiple options.
We are poised to emerge stronger in both channels due to our actions to support customers and to ensure seamless execution from a supply chain perspective.
You have to have compute capability. I mean truly, the Google Vision of a few years ago that everybody laughed about that this becomes the screen, that's feasible. That is truly feasible.
Stephen Tusa: Sorry. So what's the sequential performance for EPS ? Should we think about that as kind of inline with normal seasonality ? Or... AnswerGregory P. Lewis: Yeah, when you look at our... QuestionC. Stephen Tusa:...usually up in the second quarter ? Like, how do we think about the pacing of EPS for the rest of the year ? AnswerGregory P. Lewis: Yeah. When you look at EPS sales, I mean we're going to be roughly in line with our normal kind of percentage of the year in those quarters. This year and last year are a little bit heavier in the back half. This year, a little less so, but it'snot going to lookout of the norm.
AnswerWilliam R. McDermott:...and I always accentuate the plus because we have the desire to be the defining enterprise software company of the 21st century. But in terms of the platform and fast forwarding it, what does it look like ?
And then for John, over the last three quarters, you've had a very steep almost Vshaped recovery in your job openings from almost none back in June / July, to now over 1, 000 and up four months in a row yearoveryear. Could you talk about that in terms of your onboarding and the context of how you were thinking about OpEx growth for the year ? AnswerShantanu Narayen: Jay, maybe I'll take your question and since they haven't been asked many questions yet on Document Cloud, I'll use Document Cloud with the technology lens to answer your question. I mean, first, Liquid Mode, I was on the road. I was traveling on the road last week and the entire preparation for this I was doing on a mobile device with Liquid Mode. And I will tell you, Liquid Mode for me was an absolute lifesaver in terms of being able to look at all these documents and do everything collaboratively on the road. So an unabashed plug for those who haven't tried Liquid Mode or haven't tried Adobe Scan to really see how it changes. We're driving revenue through Search Engine Optimization that we do on PDF because we have a oneclick way of having them do more and more PDF functionality. We have anew revenue monetization model associated with APIs and being able to have people use PDF and embed that in their particular workflows. And we've always hadAcrobat Sign had a great quarter again, I think John may have mention that we grew 50%. And so, I think you'll continue to see that in the innovation roadmap whether it's Summit or MAX. You'll see some really cool things which will not just push the envelope for our Creative pros, but also make it way more accessible, productive and fun for communicators and consumers.
With that, I will turn it back to Dave. David Pahl Thanks, Rafael. Operator, you can now open the lines up for questions. In order to provide as many of you as possible the opportunity to ask a question, please limit yourself to a single question. After our response, we'll provide you an opportunity for an additional followup.
Actual results may differ materially from those expressed or implied as a result of various risks, uncertainties and important factors, including those discussed in the risk factors, MD&A and other sections of our annual report on Form 10K and our other SEC filings.
So there's a couple of points in there. Let'stalk about bloated. So we go after everything all the time. We go after waste. We try very hard to never be bloated and to not waste. That is a constant discipline.
Throughout these times, BlackRock stayed connected with our clients connected across our businesses, and what immediately followed those periods in the past were new records for BlackRock client flows and organic base fee growth at or above 5% target.
An oldline company, 117 years old, struggling with its stock price, while we see new competitors who've never built a product come in and get rewarded to crazy levels. AnswerWilliam Clay Ford: Jim Farley, did you hear that question ? AnswerJames D. Farley: I did, I did. Thanks Bill, and Paul, thanks for your question. Just a couple quick comments. First of all, the highest priority for us is to transition and to execute our fix and accelerate plan in the coming months; so, nothing's changed. But I do want to highlight that we'recommitting to develop a very specific plan for everyone and that will come out in due course. But I try to (28:03) in my comments where we really see growth opportunity for the company, and that is to expand and grow as the industry and as Ford, as a leader, transitions to emobility for commercial vehicles. We see growth opportunities for adding to our products a whole software business and infrastructure business. As far as [ Technical Difficulty ] (28:56) I'm very optimistic.
And our estimated internal rates of return in this category are in excess of 25%.
Michael J. Viola Okay.
This isn't some sort of ethereal idea. This is like, hey, we need to make this real. How are you going to make it real ? How does your industry cloud help us make it real ? And so there's a ton of interest in those industry clouds. I also think it's just the beginning. When we launched those industry clouds, it'snot like we check a box and call it done. We're going to continue to build those out and we're going to continue to make them more specific to customers. And the more specific they get, the more value add they have. But when you can differentiate with the industry clouds, I think it just puts us in a better position as a company and a better position to help customers. But the sustainability cloud, I was shocked at how much interest there is in that. I mean, we knew there would be some interest but there is more than we expected. QuestionPhilip Winslow: Interesting, interesting. Now, commercial bookings continue to grow doubledigit this last quarter, and Amy noted that it was really driven by consistent execution across addon, new and renewal sales motions. So when it comes to new deals, what is the tipping point in your mind, like sort of why Microsoft wins ? AnswerDavid M. O'Hara: Well, I think one is the hybrid story, and we started early with the hybrid story because companies had invested a lot in what Microsoft had to offer and they had a lot of onprem investments and they just said, hey, we don't want to throw all that out.
A few minutes of prepared remarks by American Tower, followed by a fireside chat, and then sometime for your Q&A and then down to the breakout session. We're going to call it the virus. Unfortunately, 38% of Americans have been pulled and think you get it from drinking beer, is how you get the coronavirus. And some of the Europeans asked me, is that true ?
QuestionPhilippe Houchois: Very clear, thank you very much. Operator Your next question comes from the line of Chris McNally with Evercore. Analyst:Chris McNally QuestionChris McNally: Good morning, everyone. Mary, I wanted to follow upon the questions on Cruise. And I know you can't be too specific on exactly when a launch would happen or even maybe a more extensive beta testing of a program in San Francisco. But could you at least maybe talk about some of the ambitions to test aggressively in other cities for whenever a commercial launch or a beta launch was to happen ? Could we expect multiple launches sort of in succession on a sort of an annual type basis ? AnswerMary Teresa Barra: I think you will see it. So I think once we launch successfully and demonstrate that the technology is safer than a human driver and we demonstrate to customers, I think that we can really increase the number of cities that we're offering it quite quickly, and that's what we'll focus on doing. QuestionChris McNally: And then finally, the rationale behind the tax deconsolidation of Cruise, it's super interesting. I'm just curious.
Let me walk through, there's several components to the answer. First, I've got to start off with our financial position going into the crisis. And I'm sure we'll get questions on this later, but we do see this. And our customers, so the same with our customers, and we spent a lot of time, partly because we're able to reduce employees' anxiety so they could stay focused on our mission, our patients and our customers. And the dialogue we're having with customers is one I've been wanting to have since I've been here. I hate it when they call us vendors / suppliers. And so we've been developing several programs. So that's another component of it. And then it'sour pipeline. We talked about it on the commentary.
I would say, listen, I think the way we feel about it is our capital levels grew quarteroverquarter even after we purchased the $4 billion of stock, so it just shows our ability to generate capital, if necessary, because of the environment or regulatory changes or things like that.
We previewed this innovation at our Investor Day, which provides clients with the most comprehensive and valuable data and insights in the industry while strengthening our customer value proposition and competitive differentiation.
Good morning, everyone, and congratulations on another strong set of results. I thought maybe we could spend a moment on China and the reopening there, of course, given the importance of that market for you guys, being the second largest market behind only the US. So, up 2% sequential improvement, which is encouraging. We see that in the China retail sales including cosmetics, continues to show sequential progress. You've been consistent about your target of midsingle digit growth for that market longer term. Can you comment a bit more on what you're seeing in China, and then perhaps offer some broader views on the pace of the recovery and how you see that playing out ? AnswerJon R. Moeller: Hey, Kevin, this is Jon. I'll hand it over to Andre to give some more numerical perspective, but I thought it might help just to share briefly a trip that myself and a large contingent of our leadership team were able to make to China in the last three weeks. We spent more than a week there. It was wonderful to reconnect with our organizations who are doing a tremendous job. We spent time in consumer homes. We spent time with our retail partner leaders in their stores and in their offices, and of course, we spent time with various government authorities. As Andre said in his prepared remarks, we expect China to continue to contribute at a meaningful level over the middle to long term, but everything looks reasonably positive and constructive. Andre, do you have any other perspective on that ? AnswerAndre Schulten: No, I think you said it. I think the other component we're not yet seeing is any return of Chinese consumers to travel retail. AnswerJon R. Moeller: Correct. AnswerAndre Schulten: That is a significant negative for us in the SKII business specifically. So that hopefully we see a more positive trend there in the near future. That's the only other upside that I think we have. But as Jon said, I think the recovery at 2% organic sales in the quarter is very consistent with what we would have expected. Operator The next question comes from Robert Ottenstein of Evercore ISI. Analyst:Robert Ottenstein QuestionRobert Ottenstein: Great. So, consumers when they come into our P&G portfolio, tend to trade up into highervalue items. We've seen that actually consistently over the past quarters. So, thatas they trade up into higher unit sales, that's a positive impact from a mix perspective on the top line. When you think about Adult Incontinence, for example, when you think about Fabric Care, singleunit dose versus liquid detergent, gross margin percentage lower, unit sales higher, unit profit higher, so it's a positive effect both from the top line and the bottom line standpoint where the percentage mix is lower. US consumer, I think, is holding up well. As we said, any indication that we see on our business is that the consumer is still choosing P&G brands. We are growing volume share in a market that is still down on volume. We are growing absolute volume. So, 90 basis points volume share growth, 40 basis points value share growth fairly consistently across periods. We also see private label share stable at 16%. Really no movement here over the past one, three, six, nine months, which is a good indication that we don't see any material tradedown, and we're watching this very closely. And we believe that a lot of that is, again, driven by our very intentional strategy to drive superiority. We continue to invest in innovation. We continue to invest in product packaging innovation. We're increasing, as Jon said, communication frequency and reach where we see a good payout and return. So, stable, I think is the characterization, but we're watching carefully. AnswerJon R. Moeller: And just one additional point. The 6% top line organic sales growth that the team delivered in the quarter, and as Andre said, sales sharevalue share growth and volume share growth, we still have a couple of categories where we are not supplying full demand. So, that will be remedied here fairly quickly. But as you consider the strength of the US consumer, if you look at those key measures and realize that therewhile there are both opportunities and risks within the number, there are opportunities as well as risks, which continue to point to a relatively healthy US consumption pattern. Operator The next question comes from Peter Grom of UBS. Analyst:Peter Grom QuestionPeter Grom: Thanks, operator, and good morning, everyone. So I wanted to ask about the changes in the commodity and freight outlook. Second straight quarter that these headwinds have moved lower, which is nice to see. Can you maybe just give a sense what you're seeing within that bucket, where are costs moving lower and where are costs still sticky ? And while I don't expect you to comment on 2024 at this point, but maybe just conceptually how you see inflation evolving as we look out over the next 12 to 18 months.
As Dennis mentioned, we will deal with the impact individually, customer by customer, and we will look at various forms of economic value that we can provide.
Just turning to the SMB initiative, clearly gaining some share there. There's a lot of expense noise in the quarter, but when you put that aside, is the incremental pullthrough from those volumes that you're getting on SMB where you thought they'd be at this point of the investment cycle for you ?
Let's start maybe with the last part of the question, why didn't we do it before. And look, quite honestly, I would say, there were a couple of main reasons. And you look at the 600, 700 basis points of margin improvements we accomplished over the last five years, they come out of gross margin and in overheads / And all that benefits will drop to the bottom line onetoone. There was no much room for additional investments. We had investments, but we didn't grow investments. Now, that strategy clearly worked to a certain extent in the sense that global brands were growing nicely. I would also say that one of the benefits of the new organization, which is Local First, is about having removed intermediate layers between global and regional elements of the organization and the markets where we compete. As you step back, clearly we love our power brands. We were amazed by the growth that we have seen, particularly on Oreo and Cadbury, over the last couple of quarters. I remind that Oreo grew in excess of 10%, and that it is a $3plus billion brand in Q1. So, we are fairly pleased. And we need to keep the focus on those global brands. But now that we are tilting more towards growth and that we have good margins, what we believe are good margins. It is a natural evolution. And local brands, for us, are 65 local brands that range from $1plus billion to a couple of hundred million dollars. So, they are brands that are SKU. And it is not only about investing in agency behind those brands, it is ensuring that end toend execution is appropriate. It's ensuring about the fact that we need to renovate those brands, that we need to have R&D to support, that we need to have sales initiatives. And the results are encouraging. We grew nicely in Q1. Early signs are like we were in China a couple of weeks back. It is remarkable what the brand that is called Pacific is doing. It is a very Chinese local brand. It is a brand that has health and wellness credentials. We invested in innovation, we invested in communication; and results are very good. The other one that, having worked in Brazil, is very close to me is a brand called Bis. And we renovated the brand. We had a proposition which is called Bis Xtra. And I could go on and on, I mean, in this country, clearly, LU and the successful brands we have. So there are multiple examples. I think it is right point in time today to really see even more investments behind those brands that, as I said, are 50% of the portfolio, so... QuestionRob Dickerson: Okay, great.
AnswerVimal M. Kapur: Good morning, Andrew. AnswerGregory P. Lewis: Good morning. QuestionAndrew Obin: Yeah. Just a question on advanced materials. I think it was a little bit weaker than we expected. Just, right, I know it's a highmargin business.