Welcome to Qurate Retail 2022 Q3 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 November 4. I would now like to turn the call over to Courtnee Chun, Chief Portfolio Officer. 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 Forms 10-K and 10-Q 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. Please note that we have published slides to accompany the earnings release. On today's call we will discuss certain non-GAAP financial measures, including adjusted OIBDA, adjusted OIBDA margin, free cash flow and constant currency. Information regarding the comparable GAAP metrics along with required definitions and reconciliations including preliminary note and schedules one through four can be found in the earnings press release issued today or our earnings presentation, which are available on our website. Today, speaking on the earnings call we have Qurate Retail, President and CEO, David Rawlinson; Qurate Retail Group's Interim CFO, James Hathaway and Qurate Retail Executive Chairman, Greg Maffei. Now, I will turn the call over to David Rawlinson.

Thank you, Courtnee, and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. Looking at our Q3 results, our performance was the result of several factors, some of these are external, which we are managing through like all are in retail and some are internal for which we are focused on driving better outcomes through improved execution and Project Athens and laying our Project Athens in June, we said we expected fiscal 2022 to be the base line year and that our transformation will not be linear. We made progress in Q3, moving from the assessment phase of Athens to in-depth planning. We expect to start seeing deep execution and impact on results in 2023. In the third quarter, total company revenue declined 9% in constant currency, a modest sequential moderation in the rate of decline from Q2 driven by better execution and the easier compares. Like all the retail, we managed against macro headwinds, including inflation, continued war in Ukraine and rising interest rates that negatively impacted consumer sentiment. In the US, the University of Michigan Consumer Sentiment Index declined 20% year-on-year in September 2022. We also faced several extraordinary events that impacted performance, namely we approach the death of Queen Elizabeth in the UK with respect, keeping our customers, team members and the mood of the nation in mind. We stopped all programing for 2.5 days following her passing and used airtime to pay tribute to the Queen. And we estimate this period, coupled with the 10 days of mourning impact the QVC UK sales by approximately $10 million. We also prioritize the safety of our HSN team members based in Florida during Hurricane Ian. Switching to pre-recorded programing in lieu of live programing for four days that we estimate…

Thank you, David, and good morning everyone. Unless otherwise noted, my comments compare financial performance for the three months ended September 30, 2022 to the same period in 2021. Starting with QxH. Revenue declined 8% primarily on lower unit volume, e-commerce revenue declined 8% in line with the overall revenue performance. Recall, that in Q3 of 2021 we experienced inbound freight delays that impacted our ability to secure product on time last year. In addition, we saw an increase in advanced orders in Q3 of 2021 that shipped in Q4 of last year. This benefited Q3 of 2022 revenue and this dynamic is expected to reverse in Q4 of this year. We like the broader retail industry are facing excess inventory. We made and are making conscious efforts to reduce our inventory through promotions and clearance actions. As David mentioned, we got started on this earlier than others in retail by necessity due to the Rocky Mount tragedy, which has had a longer lasting impact on our project margins, but is leading to improvement in our inventory balances year-over-year. This promotional activity was mostly in the home category in areas such as seasonal decor, storage and organization, cookware, kitchen electronics, home office and gaming, but also in fashion, such as loungewear. Home revenue declined 9%, which was an improvement from the first half of the year in Q3 we experienced lower demand primarily for seasonal, cleaning, heating, air purification bed and bath and garden, partially offset by gains in food. Apparel declined 2% against 8% growth in Q3 of 2021, which demonstrate solid two year performance. Weakness this quarter was primarily in contemporary apparel. Beauty declined 10% primarily due to weaknesses in bath and body and prestige skincare. Accessories declined 10% primarily due to lower demand for handbags and luggage,…

Thank you. As David and the entire [Q] (ph) management team are obviously very focused on stabilizing the business this year, there is a weak macro environment and a highly promotional environment among retailers, and that intensity is clearly impacting Q as well as the broader retail market. But we do also acknowledge many areas where we need to improve the operating performance at several of the businesses. Importantly, we did make progress on inventory reductions in the third quarter and are on track for longer inventory reduction actions. These should lead to working capital improvements and improved free cash flow. David has attracted a top-quality team to support his plans, including the actions under the pillars. Liberty and the Q teams are very focused on driving balance sheet improvements that we made in Q3 and forward. We did pay down the revolver with proceeds from the sale-leaseback that was completed in July. As you heard, we have a European series of sale-leaseback transactions that are signed and will provide additional capital, the estimated gross proceeds of approximately $170 million on current exchange rates. We expect to close that early in the first quarter of '23 and again, intend to use those proceeds to further reduce debt. We do look forward to seeing you at our annual Investor Day on Thursday, November 17, as David mentioned. Please visit the IR calendar on our website for registration details. We will be hosting our annual Q&A session. If you'd like to submit questions in advance, you can e-mail them to [investor@libertymedia.com] (ph). And with that, operator, we'd like to open up for questions.

Thank you. We will now conduct a question-and-answer session. [Operator Instructions] Our first question comes from Oliver Wintermantel with Evercore. Please proceed.

Yeah. Good morning. I had a question regarding working capital. How should we think about that in the fourth quarter, the very important holiday quarter? You said that inventory should get better, so it should be a net positive from that. But maybe you could give us a little bit more details on how you think about working capital into the fourth quarter?

Great. Thank you for that question. As I look to Q3, what we discussed was the exchange between better usage of inventory and a reduction in our inventory levels and higher payables. I don't want to give guidance on Q4. But if you look at the last two years, we had an exchange from turning down our inventory levels disproportionately, and the payables should catch up as we discussed. And one other question.

Yes. And on your -- on page eight in your presentation where it shows customer count. It looks like existing new and reactivated customers are now below pre-pandemic levels. I just wanted to see, in the short term how do you plan to stabilize the customer bleed here? Thank you.

Yes. This is David. Thank you for the question. We did see customer count declines. I think there are a number of drivers. I'll click through them relatively quickly and then talk a little bit about what we're seeing and what we're doing. I think part of it is a need for better merchandise. Obviously, we've not had accessed right time, right product, right value, right host in quite the way we would if we were operating in a normal environment, and that has a particular impact on our business model. And I would say, there are some categories like beauty that have been especially impacted by the fire at Rocky Mount. I would also say, I think we've been particularly weak in attracting new customers over the last few quarters. Some of that's because new customer really center around our ability to attract new customers, really centers around consumer electronics and home product, which were all difficult coming out of the pandemic. And then finally, I would just point out, if you look at our customer count by cohort, we did see a very large crop of large low-quality customers that we attracted during the pandemic, which are still working their way out of our numbers. In terms of what we're doing to address it, really, the first action I talked about in my comments, which was shortening the TS and TS availability, it goes back to the execution of our core business model. We know that when we execute on our Today's Special and Today's Special Value, it increases the attraction of new customers and the stickiness of our best customers. For reference, as a result of some of these actions that we've taken, we did see improvements in the rate of decline. So for our TS and…

Thank you very much and good luck.

Thank you.

Our next question comes from Jason Haas with Bank of America. Please proceed.

Hi. Good morning and thanks for taking my questions. So I had a couple of ones to ask on Zulily and on Cornerstone. So on Zulily, I thought that we maybe would have seen better stabilization in results just given that we had talked about in the last earnings call, I think, it was mentioned as well about the better buying environment out there. So I'm curious if you are seeing better inventory availability. If not now, when would you expect that to -- we should see some benefit from that in top line stabilization?

Yes. On Zulily, it's a great question. We are definitely seeing much better inventory availability. We have signed on a couple of hundred new brands of various types, including 15 to 20 national brands. Those will be launching in November and December. Those 15, 20 Tier 1 national brands are all brands that we haven't had over the last 18 months. So we're seeing a type of availability we haven't seen in some time. And we think this will increase site conversion. We also think it will help to stabilize revenue. It's taken a bit of time for us to get these on the site and start promoting them, to your question, Jason. There's just a lag cycle. The brands have to realize that they need Zulily as an excess inventory outlet. We have to negotiate timing. We have to establish and set up to get the inventory shipped, and then we have to run the promotion on the site. And so it's a three or four cycle. And so we'll just start -- you'll just start to see the difference this month and next month in the level of availability of the brands on site. The other thing I would just point out, which is, it's not only about getting the Tier 1 brands, it's also about the level and depth of the assortment that we have available to us, which we've also seen expanding very substantially. Last thing I'll point out is the leadership at Zulily has been there about eight months now. And I think as you go through the holiday season, you'll see a number of changes, including the new shipping offer, including a real diversifying and away from Facebook into other marketing channels. And we've already seen pretty strong improvements in the unit economics of the business. So I would agree with you, it hasn't -- the numbers haven't come through quite as quickly, I think, as we would all have hoped, but I think we're in a good position now. You had a question, I think, also about Cornerstone?

Thanks. Yes. On Cornerstone, I'm curious, for the overall business, you called out a lot of macro and external headwinds. And I'm curious why those weren't -- it doesn't seem like they were much of a factor for Cornerstone. The revenue growth has been really strong. It looks like the gross margin was a little bit weaker. I think you called out some freight charges there. But just curious, why haven't those macro challenges affected Cornerstone as much as the rest of the business?

Yes, it's a great question. I'd point to a few things. I think, first, essentially all Cornerstone product is proprietary or private label. And so, because of that it's insulated a bit from some of the discounting pressure and the other things that are going on in retail, that's first. Second, I think a direct marketing skill set, catalogs, paper, customer by customer, category by category is even more valuable in the current environment. I actually think there's some benefit to being catalog focused when you're seeing the type of inflation that we've seen in some of the digital marketing environment. And so, what I think used to look like a weakness, now looks like a bit of a strength. I'd also say we've seen continued increases in investments around home, both indoor and outdoor. I think there was some sense that, that might moderate coming out of the pandemic. But what we've seen is people shifting their wallet more consistently to doing things to upgrade their home, whether that's grills outside or patios outside. We've seen a much longer leg to outdoor furniture than we thought or than we've seen and seen in prior years. And we're also continuing to see really strong dynamic for people to continue to upgrade their home. And so, a lot of those trends look stickier than I think the common wisdom had baked in. And so all of those things make us think that this revenue growth profile of Cornerstone continues to look strong going into next year. And then of course, next year, we've talked about, we're going to continue opening at a deliberate pace stores for the Cornerstone brands, especially valid designs. The stores have continued to perform extremely well, continued to grow and continued to have good profitability. And so we think continuing to open stores at underpenetrated areas should be even an additional positive for the Cornerstone story.

That’s great. That all makes sense. Thank you.

Our next question comes from William Reuter with Bank of America. Please proceed.

[Technical Difficulty] prepared remarks when you discussed timing of shipments and their delay from the third quarter to the fourth quarter of '21, it seems like you were kind of indicating that the challenge -- that the comparisons are going to become more difficult in the fourth quarter. So some of these trends that we've seen in the third quarter could get even more challenging. Was that the message we were supposed to take away from that?

Yes. So we had an exceptional event last year given everything that was happening in supply chain, where we took a lot of advanced orders that didn't ship. So, I think it's fair that they -- in the compare helped a little bit in Q3, hurt a little bit in Q4 just because of when that revenue is recognized. We don't recognize it until it's shipped. So that's there in the numbers. It's not a massive swing in the numbers, but we just wanted to highlight that it was an impact. I would say, we saw improvements in levels of decline in moderation coming into this quarter. I talked about some of the underlying drivers of that. And I think we're going to continue to hit the execution on those. And so we anticipate continuing to be able to make progress.

That's helpful. And then it sounds like you are pleased with the progress you've made on clearance of inventory. It seems like the fourth quarter is going to still have a pretty substantial amount of this. Do you expect you'll be largely done by the end of the fourth quarter? Or this -- should these efforts continue on into the first or second quarter of next year?

Yes. It will depend a little bit on how the fourth quarter performs, of course. We feel very good though about the position we're going to be in coming through the fourth quarter. It's possible that there could be some hangover as we go into Q1, but we feel pretty good. As we look out across the universe, if you look at NPD data, some other industry data, it suggests the market's up about 20% in excess inventory across retail. We're down about 5%. So we're going into this a lot more clean than the overall retail environment, and we think we'll continue to improve on that number as we go through the fourth quarter. So there may be some hangover going into Q1, but we think we'll largely be through getting clean on inventory and getting to a level we're more happy with as we go into Q1.

Okay. And then just lastly for me. You're clearly making a lot of efforts to accelerate your streaming business. Do you have a sense for what percentage of your sales are coming from streaming at this point? I know it may be difficult, but maybe you have some sense for where that is and where you think it maybe will go over the next year?

Yes. So we haven't broken that out up until now. We're looking at how to give you some additional visibility into how to think about our streaming and context. I would say it's not a primary driver today, but it has been growing very quickly. It's material, but I wouldn't say it's a primary driver of results yet. What we've seen in terms of customers. As a streaming customer we think is add valuable or potentially more valuable than the linear TV customer. So we've been happy as we've gotten to know the customers even as we've grown the service. But eventually, medium to long term, I think as people continue to move from linear to streaming, it will be an increasingly big and important part of our portfolio. I think in the U.S., streaming reach overall in the broader market has already surpassed linear TV reach. I think we passed that threshold this year, and I think there will be a lag for us. But over time, I would imagine that we will replicate some of those same dynamics. So it's definitely an emphasis.

Great. I’ll pass it on. Thank you.

Our next question comes from Carter Casella with JPMorgan. Please proceed.

Hi. Thanks for taking the question. I'm wondering, did you buy back any of the senior exchangeable debentures in the quarter? I noticed that the balance came down a little bit. I'm not sure if that's just carrying value or if you purchased some.

Hey, Carla, it's Ben Oren. We did purchased some -- we actually purchased -- its $41 million current or adjusted principal amount and $45 million debentures for a cash cost of $24 million.

Okay. Great. And then the sale leasebacks, the two additional ones in Europe, beyond this, do you have -- what are your remaining kind of material owned properties?

We do have several additional material properties. I think the interest in doing additional sale leasebacks will be opportunistic and dependent on market conditions, but we will continue to look at opportunities across the portfolio.

Okay. Great. And then looking at the customer count, I know you got these questions before, but at QVC, it's down 16% year-over-year, 13% from pre-pandemic and 6% since the first quarter. Are you -- are there any -- when do you expect to see potential stabilization in that customer count? Or are you seeing any green shoots yet?

Yes. So I appreciate the question. Say a couple of things. The first is, we sort of look at customers broken out within the business by new occasional returning and our best customers. I would say our best customers have held up better than our total customer file. And so, we're pleased with that. And certainly, the spending behavior of our best customers have been extremely strong growing in the quarter. Our new customers have been a potential source of weakness often being down in the first half, being down in the 30% range. And so that's been a real drag. Now, new customers in our model are not nearly as valuable as best customers. So they account for less. But for the long-term health of the customer file, they're very important. And we've cut that rate of decline for new customers by more than half already, and we're going to continue to hammer away at making our value proposition much more attractive for new customers. On the overall customer file, like I pointed out before, we have seen a moderation in the rate of decline. We think we know why we're driving that moderation, and we think we know the tools we have at our disposal to continue working on getting back to a stabilized growing customer file.

Okay. Great. And then just one on the business interruption, you mentioned that you filed or submitted your claim. Just trying to understand, could the magnitude of that claim be greater? Or is it less than the damage insurance proceeds that you already received?

David, do you want me to take that?

Sure.

Yes, I would say, we filed the claim. There's negotiations going on, I don't know that we're ready to comment at this point whether it's going to be bigger or smaller than the property amounts that we've gotten back.

Okay. But it is material like those property amounts have been? Or is it -- I just don't know that business well.

Yes. We expect it to be material.

Okay. And then just a clarification, you've got plenty of revolver capacity now. You've got some near-term maturities still. Would you use your revolver? Can you use it to take out near-term debt?

We can use the revolver to take out near-term debt. I think we're being prudent with respect to interest expense, current interest rates and relative to our really low coupons on some of the nearer term maturities. So more likely if we were to use the revolver, for example, for the March 2023 maturity, we would just do it just prior to maturity as opposed to proactive repurchase.

Okay. Great, understood. Thank you.

Our next question comes from Hale Holden with Barclays. Please proceed.

Hi, good morning. Thanks for all the detail this morning. I just had a quick question on the TSV and TS statistics that you gave in the script. I'm surprised that you're still shifting a lot of them, I guess, given what looks like a better inventory flow through than what you had last year. So any color there would help.

Yes. So we have seen some moderation in that. I would say the supply chain is better than it was last year, for sure. The supply chain is not fully healed yet. So we still -- there still is bumpiness in arrivals and availability. And we're still -- some of our vendors are in better position than others in terms of their catch up with their own supply chain. The other piece of it, of course, is as we've gotten through the inventory at Rocky Mount there's some lumps in that inventory, and there's also some changes and what we need to do as we discover what's salable and what's not in the promotional calendar. So all of those things, I think, have continued to make the calendar a little more unstable than we'd like, but it was a lot better in the third quarter than it was in the first half. And I think we feel pretty good about being able to operate much more in line with our normal promotional calendar in Q4.

And then sort of as a follow-up on that. In the EBITDA bridge or margin bridge that you guys provided, I saw the sort of the margin decline for merchandise margins. But I would think on a go-forward basis that there could be a meaningful benefit to shipping costs, just given what we're seeing in ocean freight. And any color you could tell us on what that could look like next year would be helpful.

Thank you for that question. We spend a lot of time reviewing the shipping rates. And what I would offer up is that we do start to see declines in shipping rates in the marketplace. And we have seen stabilization broadly similar to the broader market in our supply chains from oceangoing freight, which is a large portion of our business.

I would just point out, there is -- there are some substantial lags for two reasons. First, it just takes those lower rates time to show up on the P&L from the time that you contracted before it gets on the water, before it gets here and before it flows through the numbers. Second, some of the shipping rates are at spot prices, but a lot of it is also on contract. And so in some of those areas you have to roll off of the contracted rates before you can take advantage of the lower spot in market rates that are in the market. And so, it does look like it will be a good guide going forward, but it will come into the P&L and give us relief over time.

Great. Thanks you. I look forward to checking out the sale this weekend.

Our last question comes from Steve Litt with 4010 Capital. Please proceed.

Yes. Hi. Thanks. Just a two part question. See, I was a little surprised given all the initiatives you've announced and the sales decline that the costs were up so much. Can you -- I imagine there is some temporary costs in there. Can you highlight, I guess, how much was temporary? And then kind of related to that is just you've given EBITDA guidance which on the surface sounds good. It's up double digit, but the base seems to keep going down. So can you be more explicit on what double-digit means and what the base may be so that we have an understanding of what your actual targets may be a few years out? Thanks.

Yes. Great. Let me -- I hit the second part first. I think we tabled it or we established the base year as 2022 intentionally given some of the puts and takes getting through this year. We think we'll have a cleaner base and read going into 2023, 2024. So that's why we stated it like that, but I think we'll be able to give you a little bit more detail as we land 2022 when we're able to talk about what Project Athens looks like going forward. But I don't think we're prepared to announce new targets today. In terms of cost pressures, I'll take a little bit of time with this one because I think it's important. I would really bucket the cost pressures in the four buckets, and it's important to separate them because what we have to do against them is a little bit different. So I would think about fulfillment, other inflationary impacts, our inventory liquidation efforts and then sales deleverage across the P&L. So on fulfillment, fulfillment and supply chain is the largest driver of cost by a lot. This really has two components to it. The first is Rocky Mount. We just had to hire more people because we're more manual. Rocky Mount was one of our largest and most efficient processing facilities. We also have more expensive transportation and routing because we don't have coverage that's as good in that part of the country. The other part of Rocky Mount was we now had capacity constraints. So we had to go out and lease more buildings, we also had to leave more inventory and trailers, so all of those were costs that should be coming out of the P&L. And I would point out that we've made substantial progress. So I talked…

Great. Thank you very much.

So operator, I think we are done for the day. And to our listening audience, thank you for your interest in Qurate. And as we said, we hope to see many of you in a couple of weeks in New York. And that's it for this morning.

Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.