Welcome to the Qurate Retail Inc. 2019 Q4 Earnings Call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. [Operator Instructions] As a reminder, this conference is being recorded, February 26. I would now like to turn the conference over to Courtnee Chun, Chief Portfolio Officer and Senior Vice President of Investor Relations. Please go ahead.

Thank you. Before we begin, we’d like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual events or results could differ materially due to a number of risks and uncertainties, including those mentioned in the most recent Form 10-K filed by our company and QVC with the SEC. These forward-looking statements speak only as of the date of this call, and Qurate Retail expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein to reflect any change in Qurate Retail’s expectations with regard thereto or any change in events, conditions or circumstances, on which any such statement is based. On today’s call, we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, and constant currency. Information regarding the comparable GAAP metrics, along with required definitions and reconciliations including preliminary notes and schedules 1 through 3, can be found in the earnings press release issued today, which is available on our website. Today speaking on the call, we have President and CEO, Mike George; Qurate Retail Group CFO, Jeff Davis; Executive Chairman, Greg Maffei. Please note, we published slides to accompany the earnings release. These slides are available on our website. Now, I’ll hand the call over to Jeff Davis.

Thank you, and good morning, everyone. Beginning with QxH. Full year 2019 net revenue declined 3% on 3% lower unit volume, and ASP essentially flat. Adjusted OIBDA margin declined 50 basis points. As detailed on Slide 7 of our presentation on our website, the margin pressure was primarily due to headwinds from cost of sales, which includes inventory management cost associated with the accelerated exit of our Ingenious Designs and elevated freight and warehouse cost related to our network optimization initiatives and general freight rate increases. These cost of sales pressures were partially offset by improved product mix. Adjusted OIBDA also benefited from reduced TV commissions, partially offset by increased marketing. Fourth quarter performance was largely a continuation of 2019 trends. Net revenue declined 3% on 3% lower volume and flat ASP. Adjusted OIBDA margin declined 100 basis points, primarily due to the same cost of sales headwinds as in the full year. Adjusted OIBDA benefited from lower incentive compensation and reduced TV commissions, partially offset by increased marketing spend. In the fourth quarter, we incurred a $147 million noncash impairment charge related to the fair value of HSN’s trade name. We continue to make progress on our network optimization project, and we have begun shipping product from our new Northeast fulfillment center. We realized $160 million of cumulative growth synergies and $120 million cumulative synergies net of onetime cost through December 31, 2019. The shortfall for our 2019 guidance will be captured in future periods. We reinvested a portion of these synergies into customer acquisition and improved customer experience. Looking forward to years 2020 through 2022, we remain on track to achieve our long-term synergy targets. In 2020, we expect QxH to face several margin headwinds through the majority of the year due to the following factors: one, we…

This is Mike. Yes, I’ll take it. Thank you, Jeff. Thanks, Jeff, and good morning, everyone. 2019 was obviously a challenging year for us for QxH and Zulily, as those disappointing results continued into Q4. However, despite the revenue and OIBDA decline and the accelerated capital investment, we grew free cash flow at Qurate Retail Group for the year. And importantly, we advanced a number of the strategic priorities we outlined at our November Investor Day. While we still have much work in front of us, we’re confident the actions we’re taking will enable us to capitalize on changing industry dynamics to lead at the intersection of retail, media and social, offering a third way to shop that is highly differentiated from both brick-and-mortar and transactional e-commerce. Before reviewing our business segments, let me briefly comment on the coronavirus outbreak. Our first priority has been to take appropriate measures to ensure the health and safety of our team members and partners in the region. Our sourcing and quality assurance teams are now gradually returning to work, and factories are beginning to restart production. While the situation remains fluid, we do anticipate ongoing supply chain disruptions and are actively developing contingency plans to mitigate the impact of any shortfalls in product supply. Across the company, Zulily has been the most affected to-date since it carries minimal inventory and has a large China direct ship business. As a result, we’ve had to remove a number of daily events and product lines from our Zulily offerings, causing a meaningful sales impact. It’s too early to assess potential sales challenges at our other businesses, but we will continue to take actions as developments unfold. Turning now to our QxH business. Our performance challenges in Q4 were largely consistent with the issues we described on…

Thanks, Mike, and I’d slightly flip script. Let’s review our capital allocation for 2019 across the areas we had previously mentioned. First, we are investing in the business for the future. We deployed $325 million in CapEx in 2019. It was a little bit elevated due to some IT and fulfillment center initiatives, which will start to pay back at the end of this year and further ramp in 2021. Part of those were obviously related to our HSN integration. We expect CapEx to be lower in 2020. Second, managing our tax exposure. We repurchased $98 million of MSI exchangeable bonds and hedged our remaining exposure through total return swaps. Lastly, return of capital to shareholders. We repurchased $392 million of QRTEA shares. Given the volatility of the stock and the results, we remain cautious on the buyback. While the business is experiencing some headwinds now, we still note it generates strong free cash flow, and we will prudently and opportunistically allocate it. Please mark your calendars for our Annual Investor Meeting in New York on Thursday, November 19. We appreciate your continued interest in Qurate Retail. And operator, now, I’d like to open the line for questions.

Thank you. [Operator Instructions] We’ll go first to Eric Sheridan at UBS.

Thanks so much for questions lot in there. So maybe two, if I can. On the virus disruption to the inventory and sort of your food chain, is there a way to quantify what you’re seeing of how that might translate into headwinds to revenue, either in Q1 or Q2? Obviously, it’s a moving situation, so nobody has an edge probably much beyond those types of time periods. But is there a way to quantify as to what you’re seeing in real time, so we can translate into what kind of headwinds you’re seeing as potential for the business going forward? And then to Jeff’s part of the commentary, there’s a lot to unpack in there. Just want to know if we can better – get some better granularity on sort of the headwinds and tailwinds without guidance per se. But as you look out to 2020 and you’re lapping against some things there were headwinds and tailwinds in the margin structure in the business, how to better sort of throw some guardrails around that. Thank you so much, guys.

Thanks, Eric. I’ll take the first one, and then Jeff will take the second. On the virus disruption, it is very hard to assess the impact. So today, I would say everyone’s best guess is that we’re looking out to three to four week in production given the time the factories have been closed, maybe another four to six weeks transportation risk given the various bottlenecks that are anticipated, so clearly, a slowdown in getting product to all of our markets. How quickly those factors were able to ramp back up, whether there up, whether there are future outbreaks and then, most importantly, our ability to shift out of the products we were anticipating coming and leaning into other products, all impact the result. So fortunately, with the QVC and HSN models, where we’re making decisions every day as to what items to script on the show, if an item is not available, we can go to something else. So in the short term, we see relatively limited sales impact, if some of our big, today’s special value or other really significant programs were to get materially delayed, we would unlikely be able to adjust enough to fully offset that pressure. But at this point, it’s a little too early to see that. So we expect some impact, very hard to dimensionalize if it will be significant or not, with the exception of Zulily, which, as I mentioned, has seen an immediate sales hit on top of the base sales pressures they’ve been experiencing because they have a more immediate relationship to those supply pressures. And then, Jeff, I’ll let you take the second question.

Mike, I think he’s having some technical difficulties, if you want to take that one.

So I think your question, Eric, was just around kind of headwinds and tailwinds in 2020. So I’ll try to summarize that at a high level. And as Jeff can get back on, he can add to it. The biggest pressure point is network optimization, which is causing a negative impact on both the freight and fulfillment lines. That pressure does get better later in the year, but we do expect two to three quarters of pressure with some improvement as we get late in the year. That ultimately flips to a positive impact on the P&L, but we’ll have pressures through a large part of this year, and then that gets better. The other pressures on the P&L are just the fact that we didn’t pay incentive compensation last year, so we’ve got – we’ll have some incentive cost and build on our fixed costs. As you know, we continue to invest in performance marketing. That’s a little bit more of an evergreen investment. We’ve generally been able to more than offset that through the synergies. So I would say the big variable in the year, we feel pretty good about product margins and the work we’re doing to improve product margins. And so the big variable in the year is both sustaining the investment in performance marketing and getting through this bubble of cost with network optimization, which will be negative in the front half, start to gradually turn more positive as we get later in the year.

We’ll go next to Edward Yruma at KeyBanc Capital Markets.

Hey, guys. Good morning. Thanks for taking the questions. I guess first more of a housekeeping question. Just as we do some math on 2019, how much of a lift was the closure of France to gross margin and just trying to think about in context as you will lap it in March? And then second, I know you had some comments on expanding Easy Pay. I guess, what percent of sales is Easy Pay today, what you wanted to get to? And just help assure us, since you won’t do some of the difficulty issues, I think, with some sloppy pay behavior about two years ago. Thank you.

Let me start with the Easy Pay question. So we do use Easy Pay. We’ve offered it on a substantial number of our products over the years, and I’m just speaking to the U.S. market now. It’s a little different internationally. We did make the decision at the start of the year to offer it on substantially all items. Customers then have a choice as to whether they take that offer or just pay full price, and some do both. So we don’t – when we think about impact on the P&L of expanding these pay offerings, we don’t necessarily see a substantial – we don’t anticipate a substantial impact from that program because it’s largely we’re trying to codify where we’ve been going previously, which is, again, make it broadly available as a consumer benefit of shopping with Q and H. So to me, that’s the new normal. We feel good about that program. We think it just enhances the value offering to the consumer, gives us one more reason to shop and to make the experience easy because you don’t have to worry about which item is going to get Easy Pay. So effectively, kind of universal Easy Pay as a go-forward approach at Q and FlexPay at H. And I don’t know if Jeff is back.

Yes. I’m going to answer the France question.

We can. You can take the France question.

Okay. I did not hear the France question. I was getting redialed back in. Could they ask the question one more time, please?

Yes. I was just trying to understand, I know you cited in the gross margin commentary and the press release that France did – the closure of France, there was a lift to gross margin. Just trying to understand kind of what was this aggregate impact in 2019. And then I know you’re going to begin to lap the closure, I think, in March of this year, so trying to understand the dynamics there. Thank you.

Yes, thank you. About 50% of the margin improvement overall was related to France and the closure that occurred earlier this year.

Thank you.

We’ll move next to Oliver Wintermantel at Evercore ISI.

Yes, thanks very much. I had a question that you mentioned that free cash flow, you expect that to improve in 2020. And I was just wondering to see what the use of that free cash flow would be in 2020.

Well, why don’t you – this is Greg. Mike, why don’t you just – if you want to add anything about the operating free cash flow and how you feel about it, and then I’ll talk about uses.

Yes. I would say we feel really good about our ability to continue to expand free cash flow conversion in 2020 in a number of programs, in addition to all the efforts we’re doing to strengthen OIBDA performance as we move towards the latter part of the year, a number of programs to improve working capital efficiency, some new trade payable terms, among other actions, coupled with just a lower level of capital spend as we move through some of the bubble of our network optimization work as well as somewhat lower payments to our distribution partners. So we think this can be a good year for expanded free cash flow conversion. And then I’ll let Jeff talk – I’ll let Greg talk about use of cash.

So I think we outlined the places where we’re focused: first, investing in the business; and second, managing our tax exposure. So let’s talk about that one for a second. We have, as you know, gone out and repurchased a bunch of the exchangeable bonds. We’ve hedged a bunch. And I think we’ll continue to look at ways to manage that down and potentially including investing in other kinds of tax advantage investments for the so-called green investments that we’ve made to date that, we think, have generated very attractive IRRs and returns on capital. As far as returning capital to shareholders, we remain cautious. There is volatility, both in the business and in the marketplace. And we’ll wait for the year as the year goes through – on, rather, what we do with capital on – in that regard.

Okay. Thanks very much.

We’ll take our next question from Heather Balsky of Bank of America.

Hi, thank you for taking that question. I was hoping you could talk a little bit more about your shipping and handling strategy. You spoke a little bit at the November Investor Day. And also it looks like shipping and handling at QxH was down a bit in the fourth quarter just based on my math. So just curious what’s going on there? Thanks.

Thanks, Heather. I would say we just continue to evaluate both at an item level and an event level how we want to deploy shipping and handling. We have gradually reduced shipping and handling revenue and a little more substantially in Q4, as we have focused on making sure that we are competitive. It kind of takes a couple of forms. It takes and some – one form is that we include shipping and handling with the price of the item, where we think that, that’s sort of a market standard to do so. And then we also run events, all day events, flash events where we’ll offer free shipping as a benefit. You expect that to be higher in Q4. We definitely see that. The promotional intensity goes up every Q4. It was high a year ago. It was high this year compounded by the short selling season. And to a little bit more intensity on those key weekends to make sure you’re as competitive as you could be. I would note that even with a pullback in shipping and handling revenue, as we got more aggressive on promotions, you’ll note that our impact of product mix or product margin was about flat. That’s very slightly down, and that shipping and handling cost shows up in product margin. So we were able to offset the shipping and handling investment as improvement in product margin rate. So we felt good about our ability to be pretty competitive in the marketplace, but also offset some of that shipping and handling investment in product margin rate. And so as we move forward front, it’s all about continuing to work with our vendors to make sure we have the most optimized costing we can get and then to make the right surgical choices as to how to bring that item forward and what mix of price promotion and S&H we use to deliver value to the consumer, but also get to the margins that we need.

If I can add to that also, Mike, you bring up the point working with our suppliers and supporting a number of these events. One of the elements that supports us from a product margin also is when the vendor will provide us support for shipping and handling on certain items and/or events, which also helps us to maintain that overall margin rate.

Thank you. And as another question, you talked about 10 brands representing 12% of your sales and all of your decline. Can you talk about the other 88% of your business and what you’re seeing in different categories across that? How do we – is the rest of the business growing then?

So I mean, the math is the rest of the business is growing in aggregate, right, because those 10 are more than 100% of the decline. And again, I want to be a little cautious with that fact because you always have big brands that are in decline. It’s just the nature of this business. It’s all about moving brands up a life cycle and then managing them down a life cycle. But I would say, right now, we’re feeling sort of the double pressure of a little bit greater pressure from that sort of tough brand phenomenon decline, a little bit compounded this year by the fact that a couple of those brands are associated with this Ingenious Designs business that we closed, so they were kind of unanticipated exits. And those are obviously much harder to manage. So a little more pressure from that top brand decline. And while the other brands are, in aggregate, growing, we’re not – they’re just not growing at quite the rate to get us to positive total growth, and that’s where kind of all the actions I’ve described on product curation are all about feeding the top of the funnel with a broader range of brands, getting more creative about how we nurture those brands through the life cycle known that it’s crowded marketplace for brands today and just making sure we’re using the platform in the best way to tell the best stories, to find even more unique offerings like through our Big Find program, more exclusive offerings through our earlier development program, we just are finding that we need to – none of those things are brand new to our arsenal, but we need to use those things at an even higher level of intensity to get to the most moderate declines among the top brands and, more importantly, get all the other brands to be growing at an even faster rate.

Thank you.

We’ll go next to Alex Fuhrman at Craig-Hallum Capital Group.

Great. Thanks very much for taking my question. I wanted to ask about your different product categories. It seems like consumer electronics was up for you guys in 2019 at QxH, whereas the other categories were negative. I know it’s early, but just looking into 2020, do you feel that there is sufficient innovation out there in the consumer electronics landscape for that product segment to continue to grow for you? Or do you think other categories might be taking over as leadership for you this year?

I think – thanks for the question, Alex. I think it is early to tell. I wouldn’t say that it feels that the innovation is so compelling that we’re confident in that business. We tend to – our mindset has always been that we’ll have up years and down years with consumer electronics based on the cycle. And so let’s get everything else growing in a consistent way as we can. And then we can either benefit from electronics or try to mitigate any negative impact. I mean, certainly, in some spaces, audio continues to be – audio trends continue to be hot and new items there and wearables as well. But we have seen a slowdown in smart home as that business just took off very rapidly, and now we’re anniversary-ing those big increases in smart home. And so that is, I would say, for now, moderating. And of course, the places where we are seeing growth do tend to be lower ASP than the classic computer, tablet, the TV market. So I would say it’s this category, we approach cautiously in 2020, not necessarily looking to huge growth, but also not sure we face huge pressure either.

Okay. That’s very helpful. Thank you.

Now we’ll go next to Thomas Forte at D.A. Davidson.

Great. Thank. Thanks, Mike. On the coronavirus, though, I wanted to ask about how should we think about broadly it’s impacting the business from a disruption standpoint, distracting the consumer. And then how should we think about it in geographies that are affected, such as Italy?

Yes. Thanks, Tom. It’s a good question. It is hard for us to read. I would just take a moment to recognize and appreciate all of our team members in Italy. We are headquartered in Milan. So they’re going through a tough time right now, and I’m grateful for that leadership team and all their efforts to make sure our team members and partners in Milan are safe. So far, we’ve been able to operate the Milan business without disruption, but certainly taking it day by day. And certainly, our Japanese team members and China team members have felt the brunt of this as well. I would say that to date, we’re not experiencing any meaningful impact on consumer demand through our markets. So we’re not seeing the kinds of pressures folks would say. Big brick-and-mortar businesses in Asia are folks that are heavily dependent on tourist trade, how they’re seeing it. The wildcard for us is the one you’ve hit on is if it just creates a substantially negative halo on consumer sentiment and obviously connected to the bat. We know our consumers are sensitive to the stock market. And so that intersection of stock market pressures and consumer sentiment pressures certainly could impact demand. We haven’t seen it to date. But depending on how this plays out, we can’t rule out that risk.

Great. Thanks a lot.

And we’ll go next to Jason Bazinet at Citi.

I hate to belabor at this point. Can I just go back to the margin – international margins? In the release, it implies that the France closure was sort of so large and it was offset by a bunch of items, that the aggregate margin expansion we saw was smaller than the impact that the French closure would have had if you didn’t have all those other offsets. Yet in the Q&A, you said the France closure was 50%, if I heard you right, of the overall margin expansion in international. I just got confused. Can you – can we just go back to that and clarify?

Yes. So essentially, the France business, which in 2018 would have had some losses associated with that business, as you were going through 2019, you would not have been incurring those losses as a result of the exit of that market in mid-March. So that was actually a year-over-year sort of tailwind for us as we were going through the course of the year. The other offsets to that, though, were really for the international markets somewhat in fixed cost as they were continuing to take actions with respect to their operating model and, as Mike had mentioned, some of the actions they were taking with respect to centralizing and regionalizing a number of their efforts.

So – but the losses that we were incurring in France must have been quite large. Is that the right takeaway? But we just didn’t see the full benefit because of those offsets. I just want to understand how you got 50% of the overall margin expansion was France related. It’s more than 100%, is it not?

No. No, it’s not.

Okay. I’ll take it offline. All right, thank you, Jeff.

Thank you to all for your interest in Qurate. Thank you for your questions. As always, we look forward to speaking with you on next quarter’s call, if not before. Thanks very much to the team in Seattle, the team in Pennsylvania and here in Colorado. With that operator, I think we’re done.

Thank you. And that does conclude today’s conference. Again, thank you for your participation.