Earnings Season Recap #19

This issue includes topics such as the current economy and potential future challenges, summarized in Jamie Dimon’s amazing annual shareholder letter, RH’s dream of climbing the luxury ladder and its market opportunity, and Allegro’s strong financial development despite the macro-related headwinds.

How a global leader in financial services has navigated the past challenging years, the effects of AI and the cloud, regulatory challenges, management lessons, and the current economy.

In spite of the unsettling landscape, 2022 was somewhat surprisingly another strong year for JPMorgan Chase, with the firm generating record revenue for the fifth year in a row, as well as setting numerous records in each of our lines of business. We earned revenue in 2022 of $132.3 billion and net income of $37.7 billion, with return on tangible common equity (ROTCE) of 18%, reflecting strong underlying performance across our businesses. We also maintained our quarterly common dividend of $1.00 per share and continued to reinforce our fortress balance sheet. We grew market share in several of our businesses and continued to make significant investments in products, people and technology while exercising strict credit discipline. In total, we extended credit and raised capital of $2.4 trillion for our consumer and institutional clients around the world. I remain proud of our company’s resiliency and of what our hundreds of thousands of employees around the world have achieved, collectively and individually. Throughout these challenging past few years, we never stopped doing all the things we should be doing to serve our clients and our communities.

As you know, we are champions of banking’s essential role in a community — its potential for bringing people together, for enabling companies and individuals to attain their goals, and for being a source of strength in difficult times. As I often remind our employees, the work we do matters and has impact. We help people and institutions finance and achieve their aspirations, lifting up individuals, homeowners, small businesses, larger corporations, schools, hospitals, cities and countries in all regions of the world.

Our vision is simple and unchanged: We aim to be the most respected financial services firm in the world, serving corporations and individuals. To that end, it is imperative that we run a healthy, vibrant and responsible company. In addition to traditional banking, we do a lot to help the communities in which we operate, which, in turn, provides the foundation for increased opportunity and prosperity for all. And just to note, while we are proud of the good things we do every day, we are also an organization that acknowledges the mistakes we make along the way, which is important to do. And when we do make mistakes, we own up to them, learn from them and then move on.

We recently developed a clearly stated purpose — Make dreams possible for everyone, everywhere, every day — to knit together our values with our everyday business principles and explain how we have done business for years. While our company has a rich history, is proud of the critical role it plays in powering economic growth and has done exceptionally well over the past 200 years, research has shown that purpose-driven companies achieve stronger business results and have greater impact by doing better for their customers, employees and shareholders. Our intention in documenting our purpose for ourselves is to help energize our employees, differentiate our company from our competitors, and push our organization to innovate on behalf of our clients, colleagues and communities.

-> How JPMorgan Chase drives community growth: When JPMorgan Chase does business in a community, we do more than just open branches. We lend to small, midsized and big businesses; we hire, pay well and provide great benefits; and we finance hospitals, schools, grocery stores, homes, automobiles and governments. For more than 200 years, this approach has enabled us to make investments that have a lasting impact on local economies, families and neighborhoods while also supporting them in good and challenging times.

-> Climate complexity: The window for action to avert the costliest impacts of global climate change is closing. At the same time, the ongoing war in Ukraine is roiling trade relations across Europe and Asia and redefining the way countries and companies plan for energy security. The need to provide energy affordably and reliably for today, as well as make the necessary investments to decarbonize for tomorrow, underscores the inextricable links between economic growth, energy security and climate change. We need to do more, and we need to do so immediately. To expedite progress, governments, businesses and non-governmental organizations need to align across a series of practical policy changes that comprehensively address fundamental issues that are holding us back. Massive global investment in clean energy technologies must be done and must continue to grow year-over-year.

Polarization, paralysis and basic lack of analysis cannot keep us from addressing one of the most complex challenges of our time. Diverse stakeholders need to come together, seeking the best answers through engagement around our common interest. Bolstering growth must go hand in hand with both securing an energy future and meeting science-based climate targets for future generations.

-> AI, data, and cloud: Artificial intelligence (AI) is an extraordinary and groundbreaking technology. AI and the raw material that feeds it, data, will be critical to our company’s future success — the importance of implementing new technologies simply cannot be overstated. We already have more than 300 AI use cases in production today for risk, prospecting, marketing, customer experience and fraud prevention, and AI runs throughout our payments processing and money movement systems across the globe. AI has already added significant value to our company. For example, in the last few years, AI has helped us to significantly decrease risk in our retail business (by reducing fraud and illicit activity) and improve trading optimization and portfolio construction (by providing optimal execution strategies, automating forecasting and analytics, and improving client intelligence).

We currently have over 1,000 people involved in data management, more than 900 data scientists (AI and machine learning (ML) experts who create new models) and 600 ML engineers (who write the code to put models in production). This group is focused on AI and ML across natural language processing, time series analysis and reinforcement learning to name a few. We’re imagining new ways to augment and empower employees with AI through human-centered collaborative tools and workflow, leveraging tools like large language models, including ChatGPT.

This journey to the cloud is hard work but necessary. Unlocking the full potential of the cloud and nearly 550 petabytes of data will require replatforming (putting data in a cloud-eligible format) and refactoring (i.e., rewriting) approximately 4,000 applications. This effort will involve not just the 57,000 employees we have in technology but the dedicated time of firmwide management teams to help in the process.

-> Bank turmoil and regulatory goals: The recent failures of Silicon Valley Bank (SVB) in the United States and Credit Suisse in Europe, and the related stress in the banking system, underscore that simply satisfying regulatory requirements is not sufficient. Risks are abundant, and managing those risks requires constant and vigilant scrutiny as the world evolves. Regarding the current disruption in the U.S. banking system, most of the risks were hiding in plain sight. Interest rate exposure, the fair value of held-to-maturity (HTM) portfolios and the amount of SVB’s uninsured deposits were always known – both to regulators and the marketplace. The unknown risk was that SVB’s over 35,000 corporate clients – and activity within them – were controlled by a small number of venture capital companies and moved their deposits in lockstep. It is unlikely that any recent change in regulatory requirements would have made a difference in what followed. Instead, the recent rapid rise of interest rates placed heightened focus on the potential for rapid deterioration of the fair value of HTM portfolios and, in this case, the lack of stickiness of certain uninsured deposits.

The current crisis is not yet over, and even when it is behind us, there will be repercussions from it for years to come. But importantly, recent events are nothing like what occurred during the 2008 global financial crisis (which barely affected regional banks). In 2008, the trigger was a growing recognition that $1 trillion of consumer mortgages were about to go bad – and they were owned by various types of entities around the world. At that time, there was enormous leverage virtually everywhere in the financial system. Major investment banks, Fannie Mae and Freddie Mac, nearly all savings and loan institutions, off-balance sheet vehicles, AIG and banks around the world – all of them failed. This current banking crisis involves far fewer financial players and fewer issues that need to be resolved.

While this crisis will pass, lessons will be learned, which will result in some changes to the regulatory system. However, it is extremely important that we avoid knee-jerk, whack-a-mole or politically motivated responses that often result in achieving the opposite of what people intended. Now is the time to deeply think through and coordinate complex regulations to accomplish the goals we want, eliminating costly inefficiencies and contradictory policies. Very often, rules are put in place in one part of the framework without appreciating their consequences in combination with other regulations. America has had, and continues to have, the best and most dynamic financial system in the world – from various types of investors to its banks, rule of law, investor protections, transparency, exchanges and other features. We do not want to throw the baby out with the bath water.

If done properly, banking regulations could be calibrated — adding virtually no additional risk — to make it easier for banks to make loans, intermediate markets, finance the economy, manage a run on their bank and fail if need be. When it comes to political debate about banking regulations, there is little truth to the notion that regulations have been “loosened”, at least in the context of large banks. [..] The debate should not always be about more or less regulation but about what mix of regulations will keep America’s banking system the best in the world, such as capital and leverage ratios, liquidity and what counts as liquidity, resolution rules, deposit insurance, securitization, stress testing, proper usage of the discount window, tailoring and other requirements (including potential requirements on shadow banks). Because of the recent problems, we can add to this mix the review of concentrated customers, uninsured deposits and potential limitations on the use of HTM portfolios. Ideally, new rules and regulations would also make it easier for banks to provide credit in tougher times.

-> Competitors: The growing competition to banks from each other, as well as shadow banks, fintechs and large technology companies, is intense and clearly contributing to the diminishing role of banks and public companies in the United States and the global financial system. The pace of change and the size of the competition are extraordinary, and activity is accelerating. Walmart, for example (with over 200 million in-store customers each week), can use new digital technologies to efficiently bring banking-type services to their customers. Apple, already a strong presence in banking-type services with Apple Pay and the Apple Card, is actively moving into other similar services such as payment processing, credit risk assessment, person-to-person payment systems, merchant acquiring and buy-now-pay-later offers. Large tech companies, already 100% digital, have hundreds of millions of customers, as well as enormous resources, in data and proprietary systems — all of which give them an extraordinary competitive advantage. We remain confident that as long as we stay vigilant, hungry, adaptable, fast and disciplined, we will continue to succeed in building this great company.

-> Accounting can distort reality: I have spoken in the past about good and bad revenue and good and bad expenses. Certain expenses, such as opening well-designed and well-located branches, actually are long-term investments of great value. Conversely, poorly underwritten credit creates revenue that you are bound to regret. Further, there are accounting practices that may distort the true value of actions you take. For example, when we create a new credit card account, we recognize origination costs over 12 months, but an average account exists for over eight years. And with the new accounting rules for loan loss reserves — called the current expected credit losses standard — you book the expected life of loan losses on the day you make the loan, while the revenue comes in over multiple years.

Increasingly in the modern world, many valuable things are not reflected on our balance sheet in generally accepted accounting principles — for example, previously expensed intellectual property or extraordinary human capital. At the end of the day, human capital is the most valuable asset. Think of a great athlete, a great lawyer or a great artist. It’s not simply the equipment — it’s the extraordinary training and talent of those involved, as we’ve also seen with the U.S. military. And sometimes it’s not the individual but the highly coordinated activities of the team that deliver the championship.

-> The importance of an outcomes-based outlook: Simply taking interest rate risk (which contributed to the downfall of SVB) is not a business. Nor is simply taking credit risk. One person and a computer will suffice — you do not need 290,000 people circling the globe to do that. [...] Let’s say I build a system with well-designed and well-located branches, staffed by well-trained personnel who can offer customers great products and services and who strive to do every task a little bit better. Then you build a branch system with outdated sites in poor locations (often to save money) that have undertrained and underpaid staff and lower-quality products and services. Between the two, my branch system will win every time. One system will have high franchise value and be self-perpetuating with high returns. The other enterprise is probably on the road to eventual failure. If you study the history of business, you can see this phenomenon play out in grocery stores, car companies, restaurants, retailers and various other enterprises.

-> Balancing customer focus and risk: Most businesses, including banks like us, say they put their customers first. We often go further than that statement to say that we need to be there for them, in good times and in bad. However, banking is a complex industry, and this customer-centric approach requires a little more explanation. In our business, we are essentially a financial partner to a client. While we strive to build great client relationships based on trust over the long run, our role has intricacies. For example, we do not need every transaction to make economic sense – just the overall client relationship, year after year. Whatever the transaction, we need to be properly compensated for the risks we bear, which can be extraordinary. Very often, a client will merely look for the lowest price, which we completely understand; we recognize that sometimes banks are perfectly willing to make a certain transaction for a client at a loss. There are also occasions when we need to tell a client that a specific financial transaction would be imprudent – maybe for us and the client.

-> Promoting open communication with the board: At every board meeting, to ensure open and free discussion, the full board should meet in executive session without the CEO or other members of management. The independent directors should ensure that they have enough time to do this properly. This one act would allow the board to have a completely open conversation and provide candid feedback to the CEO and management team. Good CEOs, who are trying to do the best job they can, should appreciate this important feedback — and should know how difficult it is to gather in a large group. This type of quality discussion among and with board members leads to collaboration and good succession planning since every meeting should include a real conversation around this important topic. Meetings such as these allow the board to nurture the extraordinary value of collaboration and trust.

-> Succession planning: Our board is responsible for succession planning, and it is on the agenda every time board members meet — both when they are with me and when I am not in the room. We already have a “hit-by-the-truck” plan ready to go (not all companies can say this), and we have multiple successor candidates who are well known to the board and to the investor community. The board believes this is one of its paramount priorities. You can rest assured that our board members are on the case and are very comfortable with where we are.

We usually don’t worry about typical economic fluctuations and often compare economic forecasting with weather forecasting: It is extremely complicated, easy to do in the short term and far more difficult to do in the long run. It is particularly hard to forecast true longer-term inflection points in the economy. Although we don’t want to waste time on “normal” fluctuations, we do want to be prepared for economic extremes – we look at multiple possibilities and probabilities and manage our company so that we can handle all of them, whether or not we think they actually will happen. After we spoke last year about storm clouds, some of those storms did, indeed, hit, and, unfortunately, some of those threatening clouds are still here.

2022 was not normal, economically speaking, and, in fact, 2022 witnessed several dramatic events — the Ukraine war began; inflation hit a 40-year high of 9%; the federal funds rate experienced one of its most rapid increases, up 425 basis points, albeit from a low level; stock markets were down 20%; unemployment fell to a 50-year low at 3.5%; and the U.S. economy was bolstered by frequent fiscal stimulus and by high and rising government debt while supply chain issues eased. In addition, work from home began to raise commercial real estate challenges and, finally, long- and short-term interest rates presented a sharply inverted yield curve, which is “eight for eight” in terms of predicting a recession[...]. But, surprisingly, the global economy marched ahead.

-> The current economy: Until the collapse of Silicon Valley Bank, the current economy was performing adequately, both here in the United States and remarkably better than anyone expected in Europe. The “market” was generally forecasting either a soft landing or a mild recession, with interest rates peaking at 5% and then slowly coming down.

There has been a lot of market volatility over the past year, partially, in my opinion, as people over-extrapolate monthly data, which is highly distorted by inflation, supply chain adjustments, consumer substitution, basically poor assumptions about housing costs and other factors. But underlying all this, consumers have been spending 7% to 9% more than in the prior year and 23% more than pre-COVID-19. Similarly, their balance sheets are in great shape as they still have, according to our own analysis, $1.2 trillion more “excess cash” in their checking accounts than before the pandemic (credit card debt is simply normalizing). In addition, unemployment is extremely low, and wages are going up, particularly at the low end. We’ve had 10 years of home and stock price appreciation, and even if we go into a recession, consumers would enter it in far better shape than during the great financial crisis. Finally, supply chains are recovering, businesses are pretty healthy and credit losses are extremely low.

While the current crisis has exposed some weaknesses in the system, it should not be considered, as I pointed out, anything like what we experienced in 2008. Nonetheless, we do have other unique and complicated issues in front of us, which are outlined in the chart below.

-> Fiscal stimulus is still in the system: In the last three years, partially but not entirely due to the pandemic, the federal government had a deficit of $3.1 trillion (2020), $2.8 trillion (2021) and $1.4 trillion (2022). These are extraordinary numbers, which ended up in consumers’ pockets, in states and local municipalities, and even in companies. We pointed out last year that you simply cannot have this level of spending and say that it’s not inflationary. It’s also important to point out that there is a multiplier effect of this stimulus; that is, one person’s spending is another person’s income and so on. The deficit for the next three years is now estimated to be $1.4 trillion to $1.8 trillion per year, which is also an extraordinary number, with no end in sight. In Europe, fiscal deficits are high – even before the enormous subsidies given to consumers to counterbalance higher energy prices. It’s also important to note that borrowing to invest is fundamentally different from borrowing to consume – borrowing to consume can only be inflationary.

-> Quantitative tightening after quantitative easing: QE is now being reversed into quantitative tightening (QT) as the Fed grapples with inflation. So far, the Fed has reduced its securities holdings by approximately $550 billion and is committed to reducing its holdings by almost $100 billion in securities each month or over $1 trillion each year. How all this will unfold is still unknown as the direction and speed of money have changed significantly from prior years. To varying degrees, banks will compete for money, not only among one another but also with money market funds, other investments and the Fed itself. Money market fund total assets under management have increased by $650 billion since April 2022, with a significant portion migrating into the Fed’s reverse repo facility, thereby draining deposits from the banking system. So while the Fed’s balance sheet has come down by approximately $550 billion, deposits at the banks have come down by $1 trillion, largely uninsured deposits. Unfortunately, some banks invested much of these excess deposits in “safe” Treasuries, which, of course, went down in value as rates rose faster than most people expected.

-> A once-in-a-generation sea change coming up? Of course, there is always uncertainty. I am often frustrated when people talk about today’s uncertainty as if it were any different from yesterday’s uncertainty. However, in this case, I believe it actually is. Less-predictable geopolitics, in general, and a complex adjustment to relationships with China are probably leading to higher military spending and a realignment of global economic and military alliances. Higher fiscal spending, higher debt to gross domestic product (GDP), higher investment spend in general (including climate spending), higher energy costs and the inflationary effect of trade adjustments all lead me to believe that we may have gone from a savings glut to scarce capital and may be headed to higher inflation and higher interest rates than in the immediate past. Essentially, we may be moving, as I read somewhere, from a virtuous cycle to a vicious cycle.

-> The extreme importance of interest rates: Interest rates are extraordinarily important – they are the cosmological constant, or the mathematical certainty, that affect all things economic. [...] When you analyze a stock, you look at many factors: earnings, cash flow, competition, margins, scenarios, consumer preferences, new technologies and so on. But the math [below] is immovable and affects all. In a rapidly rising rate environment, any investment where the cash flows were expected in the out years would have been dramatically affected – think venture capital or real estate development, for example. Any form of carry trade (effectively borrowing short and investing long) would be sorely disappointed. Carry trade exists not just in banks but is embedded and is silently present in companies, investment vehicles and others, including situations that require recurring refinancing.

About the dream of climbing the luxury ladder, the current economic environment, a massive market opportunity, and how we’re in a time of dislocation.

-> Another outstanding year for the RH brand, but will things get worse? Fiscal 2022 was another outstanding year for the RH brand. While revenues of $3.59 billion were below the pandemic peak of 2021, we finished the year with an adjusted operating margin of 22% and adjusted EBITDA margin of 25.9%, the most profitable business model in our industry. It's clear that the stay-at-home restrictions of the pandemic created an exponential lift for home-related businesses, and it's also clear the lift, like the pandemic, was a temporal isolated event versus something structural or systemic. We believe the questions are, what if anything has permanently changed? What brands and businesses are positioned to win over the next decade? And what data is important to determine who those winners will be? Those are not easy questions to answer in light of the massive backlog relief and a return to discounting at most home furnishings retailers, which distort short-term results. Additionally, inflation that was thought to be transitory is now deemed persistent by the Federal Reserve, resulting in a record rise in interest rates triggering a dramatic decline of the housing market, with luxury home sales down 45% in the most recent quarter versus a year ago. Add to that an underperforming stock market and a banking crisis no one saw coming and the data points to business in our sector likely getting worse before it gets better. – Gary Friedman, Chairman & CEO (02:13)

-> Pursuing their own unique path: It's times like these that businesses tend to move in herds, pursuing broadly adopted short-term plans that lead to mostly similar outcomes. It's also times like these that present opportunities to pursue long-term strategies that can result in strategic separation and significant value creation for those teams willing to take road less traveled and pursue their own unique path. That unique path for RH is our climb up the luxury mountain and our long-term strategies of product elevation, platform expansion and cash generation. Product elevation. Our strategy to elevate the design and quality of our products is central to our strategy of positioning RH as the first fully integrated luxury home brand in the world. It is also the most difficult part of our climb as it requires attracting higher value, more discerning customers by offering higher quality, more desirable designs. While it's a climb that becomes more difficult as we reach new heights, it's also one we've navigated successfully over the past 22 years, so don't expect us to waiver from our vision anytime soon. – Gary Friedman, Chairman & CEO (03:49)

-> In a position to capitalize on unique opportunities: Cash generation. We have demonstrated that those with capital in difficult markets are the ones who capitalize. That's why we raised $2.5 billion of long-term debt before the markets tightened and are now in a position to take advantage of the opportunities that may present themselves in times of uncertainty and dislocation. Times like these also require us to have the discipline to say no to the things that are nice to do in order to focus our time and resources on what is truly important. That includes making the difficult decision to graciously say goodbye to team members whose roles are no longer essential in our new view of the future, enabling us to work in a more integrated and collaborative fashion on fewer, more important priorities. Please note, we've treated everyone with respect and dignity and appreciate the contribution all have made to our cause. Approximately 440 roles were eliminated as part of our organizational redesign, and we expect to achieve cost savings of approximately $50 million annually, inclusive of associated benefits and other cost savings. Concurrently, we will be focused on reducing inventories and generating cash, further strengthening our balance sheet to maximize optionality. – Gary Friedman, Chairman & CEO (10:21)

-> Conditions remain challenging: Outlook. As noted in our previous shareholder letter, we expect business conditions to remain challenging for the next several quarters and possibly longer as a result of the accelerating weakness in the housing market, the uncertainty generated by the recent banking crisis, and the cycling of record COVID-driven sales and backlog reductions. Based on current trends, we expect fiscal 2023 revenues in the range of $2.9 billion to $3.1 billion and adjusted operating margin in the range of 15% to 17%, which includes an approximate 150 basis point drag due to the ramp of our global expansion. We estimate the 53rd week will result in revenues of approximately $60 million. For the first quarter of 2023, we are forecasting revenues of $720 million to $735 million and adjusted operating margin in the range of 13% to 14%. – Gary Friedman, Chairman & CEO (11:05)

-> A $10 trillion market opportunity: Our plan to expand the RH ecosystem globally multiplies the market opportunity to $7 trillion to $10 trillion, one of the largest and most valuable addressed by any brand in the world today. A 1% share of the global market represents a $70 billion to $100 billion opportunity. Our ecosystem of products, places, services and spaces inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an emotional connection unlike any other brand in the world. – Gary Friedman, Chairman & CEO (14:50)

-> The dream of climbing the luxury ladder: Taste can be elusive and we believe no one is better positioned than RH to create an ecosystem that makes taste inclusive, and by doing so, elevating and rendering our way of life more valuable. Climbing the luxury mountain and building a brand with no peer. Every luxury brand, from Chanel to Cartier, Louis Vuitton to Loro Piana, Harry Winston to Hermés, was born at the top of the luxury mountain. Never before has a brand attempted to make the climb to the top nor do the other brands want you to. We are not from their neighborhood, nor invited to their parties. We have a deep understanding that our work has to be so extraordinary that it creates a forced reconsideration of who we are and what we are capable of, requiring those at the top of the mountain to tip their hat in respect. We also appreciate that this climb is not for the faint of heart. And as we continue our ascent, the air gets thin and the odds become slim. We believe the level of work we plan to introduce this year, inclusive of our new product collections, new source book design, new gallery designs and the introduction of RH to the U.K. in an innovative and immersive fashion continues to demonstrate the imagination, determination, creativity and courage of this team and the relentless pursuit of our dream. – Gary Friedman, Chairman & CEO (15:40)

-> Hard to be anything but conservative: I think based on the times we're in and the uncertainty we're facing, whether it's the continued rise of interest rates or the next bank or 2 that get seized, it's hard to be anything but conservative right now. And I think it would be foolish to be, not just from a perspective of disappointing investors but disappointing ourselves and possibly making decisions in investments before we can see around the next corner. I can tell you it's someone -- the unsettling feeling being a person on a Saturday afternoon, was watching a Warriors basketball game, have the news cut to a line formed around your local bank, while the banks were sending hourly emails, trying to tell you that they're committed to serving you, it's a very unsettling feeling, okay? And those of you maybe on the East Coast that didn't experience what happened here on the West Coast, maybe aren't as close to it. But I, as a person that was close to it, have never seen anything like it. – Gary Friedman, Chairman & CEO (18:36)

-> It’s a time of dislocation: I think Powell has been very direct and consistent about addressing persistent inflation. All one has to do is Google the history of the federal funds rate and zoom in on the 1970s to 1980s and look how many times the Federal Reserve thought they had inflation under control, lowered the federal funds rate only to have to raise it twice as high, all the way to, I think, 21%. But if you look at those moves and you look closely, zoom into that chart, you realize that we're in uncharted waters today from an economic environment perspective. There's not many people on the planet in levels of authority and responsibility that were old enough to experience those times. And I think that having a conservative view and being prepared, having a strong balance sheet and trying to see the whole Board and all the moves, that we like to say inside, our rates don't move until you see it. And so our view is just to be conservative, be prepared and try to capitalize on the opportunities that may unveil themselves in times like these, in times of dislocation. Because this is the time of dislocation. – Gary Friedman, Chairman & CEO (20:19)

-> A more uncertain time than 2008 and 2009: It's the most exciting time in the history of our company, yet it's the most uncertain time, I'd say, in the history of leading this business. I think it's more uncertain than 2008 and 2009 because you didn't have the inflation problem that we have today. You didn't have some of the political unrest that you have today. And the inflation issue is going to be an interesting one. If the Fed can navigate to the other side of that with a positive outcome, with what I'd call any kind of landing, any kind of landing is good. It's landing the plane on the other side, whether it's hard, whether it's bumpy, just don't completely crash. Because a complete crash would look like the '70s and the '80s. That will take over a decade to recover from. A recession, which people are worried about and afraid of, like don't -- like we have recessions every 7 to 10 years in this country. It's like we've had the longest economic expansion in our history. Don't be afraid of the recession, I'd tell people. Recession is a temporary event. They usually last 12 to 18 months, maybe 24. Pull up the history of the federal funds rate and zoom in to the '70s and '80s. That's what we should be scared of. – Gary Friedman, Chairman & CEO (30:18)

-> Worrying most about inflation: I think whenever things have -- from an economic perspective, get a little normal in the housing market, interest rates and get inflation under control, that's the big thing. Like I worry most right now about inflation. But if we don't get that under control and that changes the whole structural economic environment for so many people, that's the most important thing. If Powell gets this under control, somebody ought to make him president of the United States. Because the people that were here in the '70s completely screwed it up. So right now, I'm betting on Powell. I wasn't happy that he thought it was temporal. They didn't move fast enough. But I'm happy with the stance he's taken. – Gary Friedman, Chairman & CEO (59:45)

Strong financial development despite macro headwinds, the rise of ads and fintech, margin improvement, reduction of CapEx, and strategic initiatives for 2023.

-> Strong results despite macro-related headwinds: I'm very pleased with the overall resilience of Allegro's networks business. We've continued to grow. Our focus on profitability and leverage reduction began to deliver results in the last quarter of last year. We achieved this despite facing a series of challenges, specifically: persistently high inflation, in relatively high double-digit numbers in Poland; the ongoing war next door; and resulting uncertainty that many of us feel. We're also off to a very good start to this year. So we've seen some considerable shifts in Polish consumer shopping habits towards more value-orientated items within the context of overall growth, but I'm pleased to say that within the context. We've been able to grow GMV by 14% year-on-year in Q4 in Poland. Consolidated GMV grew by 25% year-on-year [...]. Polish operating revenue increased by 26%. Consolidated revenue grew by 92%. It's key that revenue grew faster than overall GMV performance. Active buyers also grew by a more modest 4.2% year-on-year, but in absolute terms, that means that there are nearly 600,000 additional consumers who started shopping with Allegro in the last 12 months. – Roy Perticucci, CEO (01:40)

-> Margin improvement and Allegro Pay: Adjusted EBITDA is a factor that reflects our work on both growth, monetization and cost-reduction initiatives. EBITDA performance in Poland was up 41.2% year-on-year, excluding Mall, which is something that we're very pleased with, given the Polish context of challenging trade conditions and inflation. Consolidated adjusted EBITDA, including Mall, grew by 33% year-on-year, so also there, a considerable acceleration. The Allegro Pay performance exceeded its target and more than doubled its activity over the course of last year and we continue to get ready for the 3P marketplace launch, which is imminent in the Czech Republic. The Mall segment as a whole has met its guidance for the first quarter since acquisition and it's encouraging to see the progress as we continue to double down on efforts. I should also say that leverage is down to 2.9x versus the peak of 3.54x post the Mall acquisition and I think this is a great achievement and reflects solid cash flow generation that we focus on. – Roy Perticucci, CEO (03:42)

-> The three growth and cost improvement initiatives: We have 3 growth initiatives: one, focused on continuing strong position in Poland, focusing particularly in under-index segments, which include health and beauty, ambient, grocery and apparel; scaling up the Allegro Pay operations, particularly in Poland; while having a successful launch in both Czechia and Slovakia of our marketplace model. Those are our 3 growth initiatives. We also have 3 cost improvement initiatives: Number one on our list, of course, and probably our biggest cost block is improving our Smart! and delivery economics; we also are focusing on SG&A expenses as a whole, which you've already seen, begin to see results there in our EBITDA results; and also the improvement of the existing Mall 1P business in anticipation of launch of the 3P. So there's 3 cost initiatives. – Roy Perticucci, CEO (05:26)

-> Superior on price, selection, and convenience: Price competitive, particularly at the moment, a priority given Polish consumers' focus on value. Of the 10 most popular items sold on the Internet, we have the best price for 9 of them and we continue to improve also our price monitoring of everyone trading on the Internet, and we now monitor, on a regular basis, 500,000 new products. All of these measures help consumers save money. We also continue, I think, to move from strength to strength in convenience. We're particularly proud of winning the Star of Customer Service, a Quality Award for the sixth consecutive year. And I think personally, as an ex operator, was very pleased with the performance of the operations team [...]. Of course, I'm also very happy with the ubiquity of our mobile app. It's very convenient to use, one of the most popular e-commerce apps in Poland and is currently serving about 11 million average monthly users. So I think as a whole, it's indicative that customers are happy with our service levels, though obviously, we continue to work to improve. – Roy Perticucci, CEO (07:22)

-> The rise of advertising and fintech: Advertising is a growth opportunity for us. And I'm happy to see that our business in this area has been able to grow twice the rate of GMV with ad revenues currently up 30% year-on-year in the last quarter. Advertising revenues reached 1.4% of GMV, up from 1.2% a year ago, and we have much more ambitious plans in this area. Moving on to priorities 2 and 3, namely our marketplace expansion into other Central European countries and Allegro Pay. The 3P preparations continue to proceed at pace. We are preparing the grounds well. [...] Allegro Pay also continues to go from strength to strength. We originated twice the volume of the previous year using our insights about consumer behavior to do that well and we're extremely pleased with the cooperation with Aion Bank. In Q4, we were also able to extend our successful cooperation, which not only includes the sale of some of our originated loans, but also includes the introduction of Banking-as-a-Service, which would enable us to offer savings and payment accounts. All of this allows us to continue to scale up our fintech offering while reducing working capital to drive that growth. – Roy Perticucci, CEO (08:57)

-> Reducing CapEx: It's nice to be announcing a 14% reduction in capital investment, down to PLN 129 million for the quarter. That's coming from a number of areas. First of all, on our delivery experience rollouts, we're very focused on efficiency and utilization of the investments already made. So the speed of investment is slowing somewhat. The office development projects and leasehold improvements that result from those are now behind us. Really, the last big spending was in Q2 and Q3. The fit-to-grow project is having a big impact in terms of our CapEx policies and our benchmarks or hurdles for making investments, which is also contributing. And the freezing of the headcount means that the tech organization is no longer growing in size, and it means, therefore, that the capitalized development costs are basically flat year-on-year. – Jonathan Eastick, CFO (25:29)