Greetings, and welcome to the Qurate Retail Earnings Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Shane Kleinstein. You may begin.

Thank you, and good morning. 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 address 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 new CFO, Bill Wafford; and Qurate Retail Executive Chairman, Greg Maffei. I will turn the call over to, David Rawlinson.

Thank you, Shane, and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. We saw meaningful improvement in revenue trends in the first quarter at our largest businesses QVC U.S. And QVC International, both of which declined only low-single-digits even against the challenged retail backdrop. Performance was soft at our smaller businesses, HSN, Cornerstone and Zulily. Volume remains pressured due to our customer file, which I will discuss in more detail shortly. While we have multiple efforts underway to reactivate customer groups, we expect the impact of these initiatives to take several quarters. Against this backdrop, we are intensely focused on near-term factors within our control, most notably cost management and driving increased sales price. We believe we are on track to deliver our objectives for Project Athens, our three year plan to establish revenue stability, margin expansion and incremental free cash flow generation. Our turnaround is well underway, and we are encouraged by early signs of stabilization particularly at QVC U.S. HSN is slightly behind QVC U.S. and to implement similar pricing strategies and their performance was also impacted by promotional shipping offers tested in the quarter that did not drive the expected volume gains and have since been discontinued. They were also impacted by reduced marketing spend. Focusing on QxH, our adjusted OIBDA in the quarter included $35 million of headwind from two specific items. Nearly 60% was transformation costs related to Project Athens that impacted our SG&A, and the remainder was primarily an adjustment related to processing returns in the wake of the December 2021 fire at our Rocky Mount fulfillment center. Rocky Mount was our primary return center for QVC U.S. This represented a true-up related to a backlog and processing returns following the buyer. Despite these headwinds,…

Thank you, David, and good morning, everyone. I'm very pleased to join David and the entire team. I look forward to speaking with many of you over the coming quarters. Unless otherwise noted, my comments compare financial performance for the three months ended March 31, 2023 to the same period in 2022. Starting with QxH. Revenue declined 5% primarily on lower unit volume, reflecting fewer customers and reduced shipping and handling revenue primarily at HSN. These pressures were partially offset by 2% growth in average selling price from a mix of elevated product assortment and price increases. From a category perspective, QxH experienced declines mainly in electronics, beauty and home. We did, however, experienced a moderation in the rate of year-over-year decline for most categories versus Q1 ‘22. This improvement reflects our elevated merchandise strategy and focus to lean into higher price and margin categories and products at QVC and HSN, and our reduced focus on electronics. QVC U.S. is further along in these efforts and topline performance meaningfully approved in the first quarter. HSN is focusing on similar pricing and merchandise strategies there was a higher penetration of electronics, which impacted its relative performance. Home revenue declined 2% which was a material improvement from the mid-teens decline in Q1 2022. In Q1 2023, we experienced lower demand largely for kitchen, electrics and cleaning partially offset by strong growth in food. Apparel was essentially flat on top of low-single-digit growth in Q1 2022. This year's performance was primarily due to strength in denim, dresses and swimwear, partially offset by contemporary apparel. We are rotating airtime into these areas of strength and emphasizing higher price point subcategories in our mix. Beauty declined 6% mainly due to weakness in beauty devices and hair care. Electronics revenue declined 25%, in part due to…

Thank you, David and Bill. We were pleased to see the performance improvement at our two largest businesses, QVC U.S. and QVC International with revenue only down single-digit in a very choppy retail market. This is a significant improvement. I'd also know we took actions to right size costs during the quarter, but will mostly benefit future periods. We were disappointed by the augmented pressure during the quarter, but it's worth reiterating that the improvement in underlying operations at QxH was masked by $14 million related to the revised returns provision and $21 million of transformation related costs incurred during the period. As was noted before, we believe the capital structure we have has runway to get us through our transition, and we have a covenant of 2.5 times currently leverage relative to the 4.5 covenant in the revolver. We do expect upcoming free cash flow will be applied to debt repayment and will manage towards our stated leverage target of 2.5 times. We did repay $214 million of the 2023 maturity in March this year this quarter. And we also settled $153 million of exchanges on the 1.75% charter bonds during the quarter plus $94 million that settled after quarter end. These bonds have an October 23 put call date which was pulled forward in timing with these recent exchanges. I would also note there is no DTL associated with these 1.75% charter bond retirements. We will continue to assess other opportunities to improve our balance sheet. And with that, operator, I'd like to open up the line for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Carla Casella with JPMorgan.

Hi. Thanks for taking the question. So you mentioned that your best customers remain that same cohort. Can you just say what percentage of sales came from your best customers and what the retention rate is there? I think last year, it was, like, a 70% of your sales came from those best customers, and they've really high retention.

Yes. Thank you. Appreciate the question. So we'll make a distinction between existing and best. So about 90% of our sales come from existing customers and the majority of that is from our best customers. I don't think we have a specific breakout as best as a percentage of existing for the quarter, but I can get you that number. We've continued to see as to the retention point, we've continued to see very strong retention of our best customers, essentially in line with historical trends in the 90% range.

Okay, great. And then on the debt side, you said $94 million more of the charter exchangeable were put in after quarter end. Was that funded with the cash that's sitting at LINTA or at QVC? And can you just update us on how much cash is sitting at LINTA.

Ben Oren, maybe you should take this.

Yeah. Sure. The $94 million has not yet been exchanged for cash. That's in the process of doing the volume weighted average price period. But that will be serviced from cash at the QVC level that will be sent to Liberty Interactive under the debt service carve out. Liberty Interactive’s, cash balance is still largely close to the number from the prior quarter results.

Okay, great. And I'm just curious why you drew so much on the revolver given that you're sitting so much cash at all the different entities?

Primarily drawing on the revolver was related to paying off the maturity in March that is at the QVC entity. And we repaid a separate portion, the QVC global revolver with the proceeds of the sale leaseback. So it's really just a paydown and then a redraw. We did net less debt for Qurate Retail, Inc. over the quarter.

Okay, great. Thank you. I will give up the floor and then I'll jump back in the queue. Thanks.

Thank you. Our next question comes from Jason Haas with Bank of America.

It’s Jason Haas. Thanks for taking the question. So David, can you just talk about how the -- what the cadence look like through the quarter for the business and any color on what you've seen in the quarter today period in April?

Yes. Thank you, Jason. Good to hear your voice. We saw I'd say moderate levels of improvement as we went through the quarter, pretty consistent performance at QVC U.S. and QI and then some improvement at HSN going through the quarter. April, as you know, we don't give before guidance. And so I don't want to speak too much about April, but I would just say, I think in the larger retail industry, the move of Easter had a real impact both on consumer behaviour and under the comparability of the month. So it's a little bit of a hard month to get a read. But I think April across the industry was reasonably strong maybe a little bit flattish to down if you normalize out all of the timing noise, but we didn't see dramatic changes in trends and sort of by parts of the addressable market in April.

How did results come in versus your internal expectations for 1Q and are you still expecting stable revenue and double-digit OIBDA growth this year?

Yes. So we still feel good about our expectations about Project Athens. I think as Bill pointed out, there are some one-time transformation costs that could be above and below the line. That we're experiencing as we go through. I think after that, we feel very good about hitting the double-digit OIBDA. We feel good about stable revenue and we certainly feel good about our free cash flow expectations and we would reiterate those. And a lot of the margin and profitability improvements in the second half, and we've done a lot already to lay the groundwork for some of that. We've talked about the reductions in force. We've talked about the benefits we're already starting to see in pricing and elevating assortment and how that drove higher average sale prices. We continue to expect some favourable product margin in the second half including product margin that's not pricing related. And then we expect fulfilment to turn favourable due to less detention and demurrage some lower import freight rates and then lapping the increase in fulfilment centre rents from the sale and leaseback that we did last year.

That's great. And the free cash flow expectations are I think its $300 million to $500 million run-rate starting in the second half of this year. Is that still the right framework to think about free cash flow?

Yes.

Okay. Great. Thank you.

Thank you. Our next question comes from William Reuter with Bank of America.

Good morning. The first one, I think you mentioned that there were $225 million of pro form savings that were included in your OIBDA for covenant purposes, how much of that should we see in the financial results during 2023?

Hey, William. This is Bill. Yes, I think as you run throughout the year and a lot of those David talked about margin expansion throughout the year, I think you'll see all of that roll through our OIBDA line as we get -- as we finalize 2023 coming in – primarily through enhanced gross margin via the different moving parts.

Okay, great. And then the second when you had laid out the Project Athens expectations, you talked about free cash flow. Is there any way to think about what you believe the aggregate OIBDA savings will be over the course of the entire project?

I think we've talked about through the full span the Project Athens, which sort of mostly ends at run-rate 2024 through the $600 million worth of OIBDA margin expansion on top of the 2022 base year is the way we've talked about it and we would reiterate that.

Okay. And then just lastly for me, you mentioned that you've negotiated some better freight contracts. How much of your ocean freight do you pay for versus the ocean freight that is paid for from some of your vendors that may deliver the product directly to the U.S. or whatever country you're being sold in?

It's a good question. I don't have a number for you offhand. I can get that. I will say, keep in mind, we take possession of a lot of our inventory and we also have a fairly large proportion of our sales from proprietary brands. So we certainly have a pretty significant portion of the load from ocean and air.

Great. I'll pass to others. Thank you.

Thank you. Our next question comes from Hale Holden with Barclays.

Good morning. David, I was wondering if you could give us some more color on the price increases that have been successful at QVC U.S. Are those per unit or mix. How is your customer responding them? And how sustainable do you think that is in the face of potentially weaker consumers as you go through the year?

Yes, it's a great question. I'd say a couple of things. First, we didn't -- we weren't in a position to take much price last year when a lot of our competitors took price because we were being relatively aggressive on inventory and so we didn't have some of the freshness and uniqueness that you really need to be able to drive excitement and value and so some of the prices just being able to get clean and having new freshness. But I would also say we've been more deliberate in terms of which subcategories we're emphasizing and so some of it is a mix shift of going towards higher category items. You might think about cloth handbags versus leather handbags and other changes like that. So it's been partially a mix, partially taking some actual price and then partially a lower reliance on promotions and clearance. And we think that continues to be achievable. We have not seen any negative response from customers. We're being very deliberate to do it with a scaffold and not a sledgehammer. We're also being very deliberate to do it in ways that remain very competitive whenever we're doing especially in today's special value relative to the market pricing. One of the things we've worked on this product part of Project Athens is having better market intelligence, having a better sense of where the market competitive price is and what an actual value to that price is. And so we're remaining focused on making sure we're continuing to deliver extraordinary value for our customers even as we think there continue to be opportunities to get more price and to continue to drive up the average spend for existing customers.

Great. Thank you. And I forgot what you guys call this, but the QVC instalment payment that you offer your customers I think its three to six instalments potentially on some items. I was wondering if you have seen any changes in payment activity on that or differences in take rates through the quarter?

Yes. I think you're talking about our -- it’s sort Easy Pay usually, those are three to five payments, usually three to four payments. We've seen similar penetration to as a percentage of total sales to sort of historical levels, we're also continuing to see very strong performance. I will say our performance relative to things like bad debt levels and those instruments or class leading always have been and we're continuing to see class leading performance. Some slight increases in sort of defaults and that sort of thing, but mostly in the noise. And so we continue to build. So good about that offer and what it offers to consumers. We're continuing to see relatively high take rates. I will say as we continue to have a focus on cash, we are looking at ways to be surgical on how we use that tool to make sure we're not overusing it, but the performance of Easy Pay and FlexPay its equivalents at HSN. It's continued to be strong.

Great. Thank you so much. I appreciate it.

Thank you. Our next question comes from Karru Martinson with Jefferies.

Good morning. When we look at the customer count, I was kind of under the impression where we start to see kind of the bottoming of the declines as we cycle through the pandemic cohort. I mean, what's the outlook here as we drop off those longer term or those pandemic customers? And where do you see that going this year?

Yes. Appreciate the question. I'd say a number of things. I think a number of things are going on with the customer file. I think you correctly identified one of them, which is these pandemic cohorts and we're now at, I think, the tail end of cycling through some of those. I've talked in my prepared remarks a bit about the Rocky Mount fire. We have more data and analysis now that just shows that that had a big impact on our customer file. We simply disappointed a lot of customers through that period and we're starting to see some stability now that our performance is improving. We have seen real moderation. So if you look at QSH actually, and if you were to look at it on an average daily customer count basis, we're at -- in Q1, we were essentially flat to where we were in Q3. So that takes out a bit of the holiday Q4 noise but in Q1, we're about where we were in Q3. So we have seen very substantial stabilization and then with our -- as I mentioned, the vast majority of our sales are actually with our existing customers even though our customer count tends to move more with new and reactive customers. And so we think we can drive a lot of value with that 90% of sales even as we continue to work on the things that are going to be most attractive to rebuilding and then growing our customer valve from where we have been. The average spend numbers $1500 highest we've seen in a while number of items and frequency highest we've seen in a while, the ability to do that while getting price that makes us very encouraged. And then on the new and reactive, I think a lot of the things I talked about Carla Hall, Christian Siriano, Selma Blair, those all help. Those are all names with people or people that are known, but may not to people who may not know us. The law shows reengaging the TSVs. We've had much better TSV strategies that's helped bring in some new customers. And then of course, I talked about on the streaming side and live streaming side, some of the early efforts we have underway. So we have a very broad pull attack on the customer file issue. We think we'll continue to see improvement as we go throughout the year. But we also think there are pretty large opportunities with our relatively stable existing customer file.

Okay. And then when you talk to the capital structure has the runway to get you through the Project Athens turnaround. When we look at your cash flow generation, I mean, how are you planning on addressing the 24s and 25 maturities here given the Project Athens timeline?

Ben, maybe you could take a cut of that.

Yeah. Sure. For now, 2024 and 2025 will be a combination of cash on hand or borrowings under the revolver, but we do have a number of other alternatives that we look at regularly.

Thank you very much, guys. Appreciate it.

Thank you. Our last question for today comes from Carla Casella with JPMorgan.

Hi. Thanks for getting me back in there. The $50 million of savings that you talked about in the quarter, how much of that was QxH at all?

Carla, just to clarify, are you referencing the run-rate saving from the reduction without the annualized number for this year?

Oh, is that 50 an annualized number? I guess that's what I'm just clarifying. I guess it would almost all be QxH. Right?

You're talking about in in relationship to the reduction of force.

Yes.

Yes. So the reduction in force, we expect $60 million in run-rate savings. We expect about $50 million that to come in this year. That's all QxH. So that doesn't include, for example, the Zulily actions that I talked about and some of the actions we may take in other -- any other businesses as we go throughout the year.

Okay. And then are you looking at any further sale leaseback opportunities? Are there any major properties you can call out, do you still have that are owned, either U.S. and international?

We do have additional properties, we look at our options regularly, nothing planned at this time.

Okay. Great. And then have you disclosed the OIBDA you get from the Japanese joint venture approximately on an LTM basis and then how it's trending in the quarter?

I don't think we've disclosed that previously. We can take a look at what we can say and get back to you.

And in the press release, you mentioned that you are assessing other opportunities to improve the balance sheet. Could that include purchasing bonds in the market? I know in the past you've bought some of the Liberty bonds back in the market, but small amounts. I just thought some debt repayment or bond buyback here at QVC or LINTA.

Carla, we're going to announce the actions that we take with respect to the balance sheet after they're taken.

Okay. Understood. I will try. And then you mentioned I think I got this right. You said that the covenant calculation you're adding it back $225 million of projected cost savings. Is that the amount of the savings over a certain period like one year 18 months or is that currently amount capped by the covenant?

Carla, that's the amount that we expect to realize in 2023.

Okay. That's great. And there's one more. Do you have a forecast for cash taxes or expectations?

Yes, our last guidance on cash, 12% to 14% we're sticking with that guidance at this time.

Okay, great. Okay. Thank you.

Thank you. And I think that's it, operator. Thank you to all of our listening audience for your time and your questions. We hope to speak with you again next quarter if not sooner. And have a great Friday.

Thank you.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for participation.