Welcome to the Qurate Retail, Inc. 2023 Q2 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 will be recorded, August 4. I would now like to turn the call over to Shane Kleinstein, Vice President of Investor Relations. Please go ahead.

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 Form 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 this 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 notes in schedules one through three can be found in the earnings press release issued today or our earnings presentation, which are available on our Web site. Today, speaking on the earnings call we have Qurate Retail, President and CEO, David Rawlinson; Qurate Retail Group's CFO, Bill Wafford; and Qurate Retail Executive Chairman, Greg Maffei. Now, I will hand the call over to David Rawlinson.

Thank you, Shane, and good morning, everyone. Thank you for joining us today and for your interest in Qurate Retail. As we've discussed, Project Athens is our strategic multiyear framework to transform Qurate Retail, focused on double-digit growth in OIBDA, free cash flow, and stabilized revenue through 2024 off of the 2022 baseline. We are executing on this plan with a focus on cost and margin initiatives in 2023. Our top line results in the second quarter were largely in line with the discretionary retail industry. Consumers are still mindful of their budgets. Inflation remains a factor, particularly in Europe, and now in Japan. And the home industry continues to be quite promotional, which impacted all of our businesses, most notably Cornerstone. According to the University of Michigan Survey, consumer sentiment in the U.S. declined sequentially in Q2, and remained well below the past decade's average. This contributed to softened top line results against a difficult retail backdrop, offset by moderation, and our adjusted OIBDA decline and improved cash flow. We progressed on our turnaround plan and delivered four important points within the Athens framework through Q2. First, we increased free cash flow $423 million year-over-year in the first six months of 2023. Approximately half of this increase was from the receipt of insurance proceeds, while the other half was a result of our working capital improvements. Consistent with our communication at Investor Day, last November, this cash flow improvement reflects favorable working capital from inventory reduction efforts and the subsequent benefit to our accounts payable. As we look to the second-half of 2023, we expect to generate additional gains in adjusted OIBDA from our Athens work streams, which will continue to benefit cash flow. Second, we divested Zulily, in May. One of the pillars of Athens is to optimize…

Thank you, David, and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the three months ended June 30, 2023 to the same period in 2022. Starting with QxH. Revenue declined 8% primarily on lower unit volume, reflecting fewer customers and reduced shipping and handling revenue. These pressures were partially offset by a 5% growth in average selling price resulting from price increases and an elevated product assortment. From a category perspective, QxH experienced declines in home, electronics, accessories, and apparel. Partially offset by growth in beauty. As David said, QVC U.S. inventory was light in certain categories such as apparel and kitchen electrics. Home revenue declined 11% as we experienced lower demand largely for cookware and seasonal. These headwinds were partially offset by continued growth in food. Apparel was down 4% which was modestly lower than in Q1. In Q2, we experienced softness in classic apparel and swimwear, partially offset by strength in denim and dresses. As I mentioned, we were also light on apparel inventory which impacted category performance. Beauty grew 4% which is the first quarter of growth since Q4 '21. This performance was mainly due to gains in bath and body and colors and nails. At QVC, beauty's rebound was driven by TSVs as well as the successful digital sales event in May. Electronics revenue declined 27%, in part due to category softness in the market. We continue to strategically pull back on electronics airtime as we focused on higher margin fashion categories where our best customers over-index. We were pleased to complete our insurance claim from the Rocky Mount Fire. In late June, we received $225 million of proceeds which is included in QxH operating income, but excluded from adjusted OBIDA. As we have said previously, we intend to use access cash…

Thank you, Bill. I hope, as you can see, Athens' initiatives are benefiting the financial results, and we believe there is more to come. We saw improvements in cash flow year-over-year, largely though due to working capital benefits plus insurance proceeds. But as OIBDA losses moderate consistent with the plan David and team outlined, we expect more OIBDA-related operating cash flow in the second-half. We did divest Zulily, which we think will benefit future liquidity and focus management on our core operations. We do continue to assess incremental opportunities to improve the balance sheet. As was noted, we repaid $192 million of near-term QVC bonds, at 95% of par picking ups in discount there. We settled $94 million of exchanges on the one-and-three-quarter charter bonds. These bonds have an October '23 put call date, which pull the -- exchange was pulled forward in this timing when we settled those recent exchanges. We have $77 million of prints remaining on those, including a $2 million additional exchange which was done subsequent to quarter-end. As was noted, we closed out our insurance claims on our warehouse fire with the $225 million final payment, received in June, and that was applied to our revolver paid out, in July. Our current leverage is running 2.3 times, and that's a sufficient cushion relative to the 4.5 times covenant revolver. We do expect to maintain long-term leverage of 2.5 times. And in the near-term, we expect free cash flow will be applied to debt repayment. And with that, operator, I'd like to open up for questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Hale Holden with Barclays. Please proceed with your question.

Hi, good morning. I had two questions. The first one is, I guess you alluded to it in your final comments there. But as you're thinking about the back-half or a typical seasonal fourth quarter, there isn't any reason to expect that you shouldn't have a more normalized margin and free cash flow profile dropdown this year, like we would have seen historically?

Yes, it's David. Thank you for the question. Yes, we think you've seen some of the gross margin and cost [to work] (ph). And obviously, the fourth quarter last year was relatively exceptional, both because of downstream supply chain impact and because we were working through a fair amount of inventory reduction efforts through clearance. And so, we had some, I would call them, extraordinary margin headwinds in the fourth quarter of last year that we don't expect to repeat. So, we do think there is some margin opportunity as we go through the second-half.

Great. And the second question I had was, on some of the recent weakness in Japan, I was just hoping maybe if you could give us some puts and takes there in terms of what we should be thinking about and how that business performs in QVC International generically?

Yes, we've seen some elevated inflation in Japan that's come a little bit later than it has for the rest. We've had some merchandizing hits and misses that have been perhaps as little consistent than we've seen previously. But we're mostly continuing to see strength in that business, and we don't see any reason, going forward, while we should have -- be off the long-term trend in terms of the strong performance of the Japanese business. And nothing structural or underlying that's very concerning there. And that's historically been one of our strongest performers.

Thank you, David, I appreciate it.

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

Hey, good morning, and thanks for taking my questions. I was curious, David, if you could talk about what pressures continue to weigh on customer count, and when you see that improving?

Yes, thank you. So, a few things, the first is, we reiterate Athens' objectives today. There's nothing I see happening in our customer file that would preclude that. Just a reminder and I know you know this, Jason, the last 12-month data that we report both reflect slower quality customers who came in during the pandemic who were still falling out of the file. The other thing is that it still hasn't, and a lot of the Rocky Mount buyer impact where, I think, we frankly didn't have the capacity to serve some of our customers the way they deserve. What we have seen is a stabilization in the average daily customer counts, which is what we spend most of our time looking at, how many purchasing customers do we have every day. And that's actually been pretty stable as we've gone throughout this year. One way to start to see that in the reported figures is I think if you look at the last quarter versus this quarter, we're just down low-single digits from Q1 to Q2. So, you are starting to see very real stabilization in the customer count as we reset, having shed some of the excess pandemic customers. I would also tell you that 35% to 40% of our new customers we acquire in the fourth quarter. So, we're putting a lot of effort into what the fourth quarter will look at. And then finally, just a reminder about the way our customer file works, right. Our existing customers are half of the count in 90% of the sales. So, how they perform matters a lot more than the total aggregate customer file. And when you look at our existing customers, they've continued to be extraordinarily strong. Their average spend was up to more than $1,500.…

That's great, thank you. And can you talk about the relative performance of HSN versus QVC?

Yes, so HSN, I would say, is if you -- you really have to start the story going back to last year. We started with the inventory efforts. HSN was a much bigger part of that effort than QVC on a percentage basis. And so, that business has had the more significant swings, both in terms of clearance and margin, and in terms of inventory, and getting the right inventory for the right time. And so, I would say, they lagged QVC. We've had some real inventory and merchandise improvements at QVC in the first-half. I think HSN is on a similar path, but tracking a little bit behind because it took them a little bit longer to get clean on inventory, and so to bring in new inventory. And so, we're expecting HSN to have stronger performance in the back-half, both on a margin perspective but also on a sales perspective as we get to the type of merchandise we want. The other thing that's been true about HSN is we've seen bigger positive variation when we do large events. I talked about Wheel of Fortune event, we had a Foodies Fest event, we've had some nice celebrity collaboration, Lionel Richie, Debbie Gibson, that we're going to continue in the second-half. So, we actually feel pretty good. Though it's been a bit weaker than QVC in the first-half, we actually feel pretty good about the momentum going into the second-half of HSN.

Great to hear. Thank you.

Our next question comes from the line of Carla Casella with JPMorgan. Please proceed with your question.

Hi, thank you. So, cash at Liberty Interactive moved up about $67 million in this quarter. Is that from the Zulily sale or was it some other source of cash at that entity?

That was from the sale of our stake in Comscore.

Okay. And then, it sounds like this is the final insurance payment, is that correct?

Correct.

Okay. And then you mentioned you'd use some proceeds after quarter-end to pay down the revolver. Can you give us how much that was, and let us know if you bought back any bonds after the quarter-end?

It was immaterial, Carla.

Okay.

Well, Bill, I'll let you answer on the revolver, but it was the insurance claim proceeds that were applied to the revolver pay-down, Carla.

Okay, but was it -- did you all of the proceeds?

No, we paid the revolver down by; I think it was, in the $177 million range.

Okay, that's great. And then there was some comment about the -- well, on the media rights spend, there was comment about one, I guess, right or agreement that you exited. Can you just give us any more color on that proceeds and/or why exit is the way you think about that media rights changing?

Can you say that again, Carla?

I thought I heard comments about there was a media -- in your discussion in the media rights, there was one contract, it sounded like you exited and took into proceeds from. Did I misunderstand that? And just wondering if there's any change in how you think about the media business just given the increased move to online spending or online consumer spending?

Yes, I'm not exactly sure what you're referring to. Maybe we can clarify if you send us a note. Our basic go-to-market on the media rights side hasn't change substantially. Our commission structure remains the same. There is some variability now that streaming is becoming a bigger part of that. And we have some variability in the go-to-market now that ecommerce remains a big part of our go-to-market. And so, we have digital marking spend variations, but no big changes to structurally our commission structure with our carriers, and that sort of thing.

Okay, great. That's actually what I was looking for, and my question was very poorly worded. Just one last one, international and the domestic, seems to be a lot of similarities between the business, I'm just wondering how intertwined each of your international businesses are? Do you do all of your programming in each market or are they -- do you use a lot of the shared resources between the U.S. and international markets?

Yes, thank you for that. I'd say it's a mixture. So, we're doing a lot more with how we understand our programming, how we understand our pricing, how we view things like product strategy. Obviously, in the context of Project Athens, we've built substantial amounts of new analytical capability across all of those. And so, we have multiple ways of sharing, learning, both across QVC and HSN in the U.S., and with all of the international businesses. And so, that's why you've seen, I think, some things like gross margins going up and basic concert average sale price going up, and basic concert. Each market has a number of things that make it differentiated. And so, most of the day-to-day operating decisions are made closer to the customer within the market, while we continue on the big structural strategic choices and moves to operate across to make sure we're getting scale across the full franchise, and we're getting best practices spread throughout all of the markets. Only other thing I would say is, one thing we're started doing a lot more of that I think has proven effective, is using some of the smaller market as a test bed, AI is a good example of where we're doing that. And then, as we see success and as we perfect whatever the new disciple is, then scaling that back across the U.S. And so, that's been the other way we've tried to use some of the international markets, especially the U.K.

Great, thank you very much.

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

Good morning. The first is you did some bond repurchases during the quarter. You mentioned opportunities for the balance sheet. Do you expect that you'll continue to complete open-market repurchases of those? Do you have hopes of refinancing those if financial results improve? What are your thoughts for the 2024s?

Ben, do you want to answer that?

Yes, sure. It's Ben Oren. I think we'll be consistent with what we've said in the past which is that we expect to handle those with some mixture of free cash flow and revolver. And as we kind of move forward into 2024, see where rates are and where funding costs are. At this time, we've got very attractive coupons. And so to the extent of cash, can handle those maturities or revolver draw which is our best funding source. We are going to lean towards that. And then, turn around when things get better.

Great. And then, there is clearly some pretty massive diversions of category performance. I guess can you talk a little bit about your lead times and your ability to shift your inventory mix to areas like beauty that are doing better? And away from categories like home that are suffering right now?

Yes. Thank you. It's a great question. General lead times in this business, they are six to nine months. I think we are -- in some categories we are able to do a bit better than that. I think the good thing about where we are going into the second-half is we've actually -- the larger trends are not a surprise. So, beauty has been relatively strong in the broader market all of this year. And so, we've been able to see that as it's developed likewise electronics has been relatively weaker as we've gone through this year. So, while there is variability, it's not -- at this point, it's not unpredictable variability. And differentiation, I think we've seen relative stability in how the categories have performed relative to each other. And so, we think we have a fair amount of insight going into the second-half about what's happening in the broader market. The one other thing I would say is that you probably can't pick up one just by looking at the category performance. There is actually much more variation going in within categories or across categories. So, far as what we are seeing is a trade down to necessities where people care a lot about price. But then, a trade up if people still really want things. It's the hollowing out of the middle within categories. The sort of barbell effect that's probably been the most notable thing we've seen as we've gone throughout the first-half.

All right. And then, just lastly for me, David, you gave some helpful commentary on stabilization of customers and those COVID cohorts starting to roll off. I guess you also talked a little bit about what you are doing in terms of new customer acquisition. Do you expect that we will at a -- is there a date when you believe maybe we will see an increase in the number of actively engaged customers? Do you think that by the end of the year, we could actually see growth?

Yes. It's a good question. I would certainly expect to see moderation over the next quarter or two on the type of [designs] (ph), you are seeing in the 12 months. It makes it little bit hard to get you full detail in the full 12-month trailing because things just have to cycle through. I would say what we have seen is real ability to move the needle across specific initiatives with new customers. Some of those are still relatively small. And so, we are just beginning to scale some of them. But there is no reason to believe based on the data we are seeing and the reaction we are having to some of our early initiative that we can't eventually get to new customer growth. I think in all brands but especially in the QVC and HSN, U.S. brands.

Great. That's all from me. Thank you.

All right, operator, I think we are done with those questions. Thank you investors for your interest in Qurate, and we look forward to speaking with you next quarter if not sooner.

Excellent.

Thank you.

Thank you, everyone.

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