Welcome to the Qurate Retail, Inc. 2023 Q3 Earnings Call. [Operator Instructions] As a reminder, this conference will be recorded, November 3. I would now like to turn the call over to Shane Kleinstein, Vice President, 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 and 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 Curate 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 measures along with required definitions and reconciliations, including preliminary note and schedules 1 through 3, 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 Rollinson; Qurate Retail Group CFO, Bill Wafford; and Qurate Retail, Executive Chairman, Greg Maffei. Now, I'll hand the call over to David.

Thank you, Shay and good morning to everyone. Thank you for joining us today and for your interest in Qurate Retail. We unveiled Project Athens last year as our strategic multiyear framework to transform Qurate Retail focused on double-digit growth in OIBDA and cash flow and stabilized revenue through 2024 out of the 2022 baseline. Our 2023 1st half initiatives were designed to increase operating free cash flow through working capital. And our second half initiatives are primarily margin focused. The transformation plan is playing out as we anticipated with tangible progress in Q3 despite a challenging discretionary retail backdrop. Let me walk through a few of the highlights of the quarter. First, we grew consolidated OIBDA, the first quarterly OIBDA growth since Q2 2021. Total Qurate Retail grew OIBDA 54%. I will remind you that we sold Zulily earlier in the year, in part to benefit total company profitability. Excluding Zulily from prior year results, OIBDA was up 35% in constant currency. Second, we grew OIBDA at all 3 of the businesses. This growth was driven by project assets and other work streams across the organization focused on refreshing our merchandise assortment, enhancing our programming, sharpening our pricing and improving our productivity and lowering our cost to serve. Third, we sustained gross margin improvement at our core video commerce businesses. These gains reflect successful execution on our elevated merchandise and pricing strategies and meaningful improvement and fulfillment operations to reduce costs, improve efficiencies and manage inventory. Fourth, we grew free cash flow $464 million year-over-year in the first 9 months of 2023. This growth was due to improved operating cash flow from higher earnings and working capital gains. Fifth, we substantially moderated the rate of decline in revenue. Qurate Retail revenue, excluding Zulily from prior year results, declined 3%…

Thank you, David and good morning, everyone. Unless otherwise noted, my comments compare financial performance for the 3 months ended September 30, 2023, for the same period in 2022. Starting with QXH. Revenue declined 3%, primarily on lower unit volume. These pressures were partially offset by 1% growth in average selling price and a 6% increase in average spend per customer. From a category perspective, QXH experienced growth in accessories, home and jewellery, offset by declines in electronics, apparel and beauty. As David mentioned, we experienced a turnaround in home, where revenue increased 2%. This growth was mainly due to higher demand for cookware, food and seasonal products. Accessories grew 7%, primarily due to broad-based strength in footwear and higher demand for loungewear. Apparel was down 8%. We experienced softness in classic and contemporary apparel, partially offset by growth in outerwear. BD declined 7%. This performance was mainly due to declines in beauty devices and color, partially offset by higher demand for hair care. The decline in our electronics revenue by 18% was partially driven by the softness of the category in the market. We continue to strategically pull back on electronics airtime as we focus on higher margin home and fashion categories. Adjusted OIBDA margin increased 380 basis points. Looking at the third quarter performance in more detail. Gross profit grew 480 basis points, mainly due to favorable fulfilment, product margins and inventory obsolescence. Fulfilment expenses improved 220 basis points due to Project Assets initiatives, less detention into mirage costs and favorable rates from our new parcel carrier contract that went into effect in late July. Product margins increased 185 basis points, driven by a mix shift to higher-margin products, less clearance due to improved inventory health and initiatives to increase in initial margin. Inventory obsolescence declined, reflecting a…

Thank you. So I'm pleased to say we're on track with Athens and you can see some of the tangible results in the numbers today. OIBDA grew for the first time since the second quarter of '21. And we moderated the revenue decline from the first half of '23. We saw meaningful growth in cash flow year-over-year largely due to higher earnings and working capital benefits. Qurate continued to reduce debt and lowered its revolver balance by $435 million. And we retired or exchange the remaining 1.75% exchangeable debentures during the quarter or right after quarter end. We continue to assess incremental opportunities to improve the balance sheet and you should expect in the near term, we will devote free cash flow to debt repayment. We look forward to seeing many of you at our Annual Investor Day on Thursday, November 9, in New York, additional information is available on our website, John Malone and I will be hosting our annual Q&A session alongside management teams. If you would like to submit questions in advance, you can e-mail investorday@libertymedia.com. And with that, operator, we'll open the line for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from the line of Jason Haas with Bank of America.

So it's good to hear that you're starting to see some signs of stability in the customer count. I was curious if you could talk about what you've seen from spending behaviour from your newer customers as they've entered into the ecosystem, are you seeing them have similarly to prior cohorts? Are you seeing a good chunk of those sort of graduate up into your best customers.

Yes. Thank you, Jason. I appreciate the question. So new customers, as I mentioned, it was the first growth of new customers, really since the pandemic. We tend to look -- we find the best correlation for future behaviour to be repeat purchase behaviour. I would say so far, we've been encouraged by the repeat purchase behaviour, all of the data we have suggests that they're going to graduate into being better and better individually best customers at about the same rate as some of our historical trends. What we've learned through the pandemic, though, is that not all customers behave the same. So we try to measure different time periods to predict behaviour. And like I said, what we've seen so far suggests that this crop of customers is a relatively stable and high-quality crop a customer. So we're both -- we're very encouraged both by the growth of new customers, the continued attractiveness of the platform. We think we're finding -- continuing to find new tools that will be attractive to new and different types of customers within our core customer target groups and we build it there. I would say, in addition to new customers, we also feel really good about the performance of our best customer group. Keep in mind, best customers which we define as in QVC as customers that buy over 20 times a year. They make up about 18% of the account and 75% of the sales. So even though refreshing the product file with new customers is important to the count, the best customers tend to be the most important to the overall performance of the business. And when you look at QVC on a last 12-month trailing basis, we were up 5% -- we were up 9% year-over-year on a 12-month basis in Q3. We had the highest average spend for any quarter in 2023 in Q3. And so our best customers are just continuing to really show up for us. And the rate of decline for those customers are substantially under the rate of decline for the overall count and our retention of those best customers are still in the 90s which I think is fair to say world-class across world-class across retail. So, both on the new win for bringing new customers into the platform but also our most loyal and best customers who drive an awful lot of our results, we feel good about the results of the third quarter.

It's great to hear. And then as a follow-up, I'm curious if you could talk about what you saw in terms of the cadence through the quarter. We've had a number of companies calling out some macro-related headwinds. So I'm curious if that's weighed on top line revenue at all, partially offsetting some of the success you've had with your initiatives.

Yes. It's a fair question. I would say we definitely saw fluidity through the quarter. But certainly, in terms of bottom line results, we saw a pretty good consistency through the quarter. We were a little bit better in July and September than we were in August. But a pretty solid quarter as we went through the quarter. And we saw some different -- we saw some different revenue trends across the businesses. I'd say a little bit of deceleration at QXH but some acceleration and the international businesses as we went through the quarter but none of that looked very sticky. So, I'd call it a pretty even quarter as we went through the quarter.

Next question comes from the line of William Reuter with Bank of America.

This is Rob Rigby [ph] on for Bill. So just a question around the category trends. You guys had some pretty strong sales in some of your more discretionary categories but then you saw softness in sales which had actually been performing okay on an overall market perspective. So can you just kind of discuss like the category trends and what you're seeing?

Yes. So Bill went through some of the dynamics. Do you want to retrace category trends real quick, a bit bill and then I'll give some more color over the top.

Yes. And just kind of refresh your memory and if you look at even on our slide deck, right? So home, we saw a little bit of a turnaround in performance there relative to the prior quarters, right? We were up 2% in home. I'll talk to QXH, right, just to kind of normalize a bit. Electronics, that's continuing to be thought. But if you look, we've seen that trend pretty much all year long, right? We will start to reduce air time and have been reducing airtime kind of throughout. And so that's been a softening kind of category for us throughout the year. Apparel was down. Beauty was down 7%. We've seen a little bit of volatility in that category. We were up in Q2 but down in Q3 and then saw strength within accessories and jewellery. So I think -- I mean I'll let David get into some of the kind of key highlights there. you did see some of this driven really strong TSV and TS performance at both QVC and HSN. I think and new item introduction in both of those businesses or probably the largest driver when you look at a peer over period basis. But relatively consistent across men, I think the only thing you're seeing is a big outlay right now. in terms of the business from just being kind of on an average of that down 3 to electronics, right which continues to be soft for us.

Yes. I would I agree with everything Bill said. I'd maybe lift the level above category to make some general observations that we've seen cut across categories. I think the first is our customer is still willing to spend even on very expensive items, whether it's a Land Rover electric bike or scooter or a leather jacket or lab grown diamonds they're willing to spend on very high price category items. But for things where they don't perceive urgency. They don't perceive an especially strong value, what may have been more throwaway type purchases. She's keeping the credit card in the pocket or in the first. So we're having to be really sharp. When we are sharp -- and I think we've gotten sharper on things like our today's special value, we continue to see a response. But some of the lesser sharp value propositions are -- it's harder to get it's harder to get a purchase. So that's been -- I think that shows what we're seeing in the overall data around consumer sentiment. But that's been one of the trends that I would say we've seen. The other thing we've seen and I think it's related to that trend is that the customer has responded to our special events and that's true across categories. And so we're leaning into that with things like the Foodie Fest. We went pretty big on Christmas and July at QVC. We went pretty big on the HSN birthday anniversary. Right now, we're doing a nice push with Dolly Parton and I talked a little bit about. But those are becoming more important in the business to drive performance across categories. And I would say they've also been really critical to some of our more recent success with new customers.

Okay, great. And then just one follow-up from us. So you talked about focusing on debt repayment moving forward. And I was just wondering if you could give a little bit more around your thoughts on repurchasing the notes due in 2024 and 2025.

Yes. I think you've seen us take some of those actions already and you'll see us continue to look at opportunities to take advantage of attractive opportunities in the debt markets but I'm not going to come out and tell you which ones for buying this week.

Next question comes from the line of Carla Casella with JPMorgan.

Just a couple of clarification and follow-up. So on the new customers, you showed in your slides that your new customers are now 4% of the mix of the sales shift. And I know pre -- well, in 2021, that was as high as 7 and then 22, 5%. I'm wondering how much of a -- how important and how much those new customers are funnelling into that next basket of existing kind of key more longer-term customers? And how do you -- how should we think about that?

Yes, it's a good question. So I don't think we've publicly disclosed this. But we basically know from our historical data how long it takes a new customer to become a best customer? And what present of new customers eventually become best customers. Because our best customers are such a small percentage of our file, of course, it's a relatively smaller percentage, a relatively small percentage of new that end up being best customers. But what we know is that percentage holds relatively consistent. And if we don't have enough just raw count of new that we will not graduate enough best customers down the line, say, 12, 18 months from the time they walk from the time that they walk into the door. So it's not new, very rarely is a driver of in-period results. They're usually a driver of results, 12 to 18 months out once their buying behavior becomes a vital enough for them to be a substantial customer. The other reason they tend not to be as much a driver of present results is we tend to get new customers coming in into lower-margin categories and then they graduate out to higher margin categories. So they might come in on electronics and eventually graduate to being a very good batching customer where we have better margins. So that's a little bit about how we think about the progress of new overtime.

Part of that, Carl, I think also it speaks to just the strength of the existing customer base. We talked about kind of the average spend per customer there and how important that core customer base is to us. And that's why you're seeing such a large index when you're looking at this quarter alone.

Okay, great. And then -- so are we back to about the same level of like your typical new customers as a percentage of the mix from pre pandemic? I only have the numbers from '21 on.

I would have to take a look at that. I don't have it right in front of me. We can get back to you on that. I think we're probably we're probably a little bit lighter on a percentage basis of new in terms of the total customer file but getting back to what the mix was pre-pandemic but we can get back to you with specific numbers.

Great. And then just a couple of other questions. One on the product margin favorability. We love seeing that it helps gross margins 180 basis points this quarter. I'm wondering, seasonally, should we think about a similar improvement in fourth quarter or just fourth quarter being more promotional across the industry, should we see less gains in the fourth quarter?

I think we feel really good about kind of where we're going to be from product margins and overall gross margins in the fourth quarter. When you look -- I mean, there's a couple of elements to that, right? One, we had -- we were highly promotional as we were clearing inventory last year. And so you kind of deflated margins associated with that. We were still working through high detention [ph] costs, high ocean freight rates. And so as you've seen those things come down from a fulfillment perspective, we still feel really good, even though there's going to be like-for-like promotional activity in the quarter. We still feel really good about kind of the trajectory of where gross margin is at relative to where we were this year and should continue to see kind of year-over-year build there.

That's great. So year-over-year but probably not quarter-over-quarter. Is that for most retail IC?

I think depending on -- because of the last year being anomaly, I think you're looking at pretty close there

And then one last question. The cost reductions, a lot of it seems to be you're taking out the excess freight. But I'm wondering just the sustainability of them. And then can you scale these even if we don't see tremendous revenue gains but just the stability, can you -- is there other further cost reduction opportunities?

Bob is going to let me take that one, right? I think when you look at -- I mean when you look at kind of where we are on cost, we feel really good about the progress today, right? It took some time to get kind of some of this through the system, right? When you look at the supply chain cost of kind of retention to mirrors, ocean freight, all that stuff. -- right, kind of coming down to get to what we would call a normalized level. When you look at everything else in terms of a cost to serve, I mean we're -- part of Athens is kind of continuous improvement and we look at lowering our cost per unit from a fulfillment perspective. how do we think about customer acquisition costs. We feel good about the ability to continue to maintain kind of strong OIBDA margin growth. We know that it's a challenged top line environment and that's a key focus for us but that was a lot of the work that we've been doing and continue to do with Athens.

I'd say a couple of things. One, some of the cost work that we're doing in some of the international markets, you haven't had an opportunity to really see those show up yet because they layered in more as sort of 2024 actions. And I'd say there are discrete places where because of the delay, some of the work we've done hasn't quite shown up in the numbers. And so that's a bit of a -- the other thing I'd say is a lot of our work is not just cost reduction. I think of it more as efficiency increases. And so I think there are a number of places in the business where we can continue to get more efficient. And in fact, we have a number of places that we are working on now where we can get more efficient. And then finally, we do have some pretty exceptional onetime costs that have been headwinds this year that are not there next year. We have Athens transformation costs that include some things like third-party and consulting fees that don't repeat. We had the sale of leaseback rents that will cycle next year. And so we do have both some opportunities to continue leaning into efficiency. -- and some cost type actions that haven't shown up in the numbers yet. And we have some tailwinds from costs that will fall out as we go into 2024.

Next question comes from the line of Karru [ph] with Jefferies.

Just following up on Carla's margin question. So if I heard it correctly, Parsing come through that we'll see that continued improvement we'll see product margin, we'll see freight rate or fulfillment costs coming down but just not at the same pace that we saw in the third quarter. Is that the correct way to translate that?

I mean, I think over time -- I mean, third quarter, obviously, on fulfillment piece, there was a lot we worked through there and a lot on a year-over-year basis. We still feel kind of that we've still got room to go, especially on the balance of the year, right? And then as you get into kind of this time next year, hopefully, we've kind of normalized at a lower kind of cost per unit basis. So we feel good about the kind of Q3 rolling into Q4. And then obviously, over time, that's going to work its way through.

Okay. And just on the customer count here, when I was taking my notes you had talked about the rate of decline had moderated and you've seen the biggest turn from the low end of your customer base, where you're talking about your lower-end customers? Or are you talking to folks who occasionally shop? And I guess in that line, what do you see from your lower-income customers these days?

Yes. So when we said we're seeing the biggest churn from the lower end of our customer file, we were talking about customer frequency. So it's purchase the customers who purchase the least frequently where we see the highest churn. In terms of customer demographic by income, I'd say generally, one, keep in mind, we have a higher-than-average income customer, who is even more different than the average when it comes to wealth because of where they tend to be at the stage in their life when they come into our platform. So that customer is a bit insulated -- and they've also been a little bit insulated by some things like student loan repayments where they're affected in a number of ways, sometimes because they're helping kids sometimes because they're younger and still have certain student loans are probably less affected than the average than the average customer. So we see some of the benefits of the installation from our core customer and their performance. In some of the less wealthy customers we definitely see more impact of the economy.

And just a point of clarification. Paying down the revolver here, that will free that up. That's fungible. You can use that to redeem the loss, correct?

I think it's fair -- it's Ben Oren. I think it's fair to say that the 2024 and '25 notes will be dealt with cash on hand and revolver over time I'm not going to talk about what the pace of that is but that's probably the best expectation.

The last question comes from the line of Hale Holden with Barclays.

I just had 2 questions. it was -- David, it was great to hear you throw that marker out for flat revenue growth in 2 when you set that earlier this year, at least my impression is things have slowed down a little bit. So maybe you could talk about puts and takes on how you keep that flat despite maybe a slower macro environment.

Yes. Thank you for the question. I'd say a couple of things. I don't think I said flat revenue growth for 2024. I think I said stable revenue growth through 2024. The way we think about stable is plus or minus a few points on flat so I would say we got to stability in Q3 on the top line. The reason why that's important is we're doing a lot of cost and margin work and if you see the type of declines in revenue we had in, say, 2022, it's hard to do enough of that work for it to show up on the bottom line. I think given our project Athens transformation in the way it's shaped as long as we have relative stability on the top line, we should still be able to achieve our free cash flow and OIBDA growth objectives which we continue to have continue to have real confidence in.

I would say we've designed this from the beginning to be able to do well in a wide variety of macro environments. We don't need strong growth in our most relevant categories to be able to deliver. In some ways, the macro environment in Q3 wasn't great. We think on a sales basis, we grew better than the discretionary general merchandise data suggests that the categories we play in grew. So we haven't had the benefit of a great macro environment. So far and looking into Q4 and first half of next year, we think we can deliver in anything that's foreseeable if we end up in a deep recession, obviously, that's a different situation. But I think we can continue to execute and have good free cash flow and OIBDA performance and a variety of macro environments. We are not promising this on a substantial improvement, certainly in the overall macro environment.

Great. And then I think one of the -- I'd have to check my notes but one of the other numbers you gave was a 16-minute improvement in viewership on a daily basis. And I was wondering if you could help give us some context on where average length of viewership was versus kind of historical norms because that seems like a really strong improvement metric?

Yes, it was. It was 15% improvement in viewership for the quarter. We think that has a lot to do with some of our -- we think that has a lot to do with some of our programming. We think we're in -- we think we're bringing people into a lot of the special events. I walked through some of them in the context of our script. And so we think it also just shows stability in the file. We think it shows a lot of stability and our ability to continue to bring people back. And keep in mind that also that's a linear channel measurement. And so that's not including some of the growth that we're having in our digital platforms. And so we feel very good about being able to continue increasing viewership.

All right. Thank you for your attendance and interest in today's earnings announcement. We look forward to, as we said, to seeing some of you next week in New York. And with that, operator, I think we'll close the floor.

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